Stocks, bonds hate uncertainty, but uncertainty is on the current menu. Also, why it's impossible to get a decent buy-sell price during most of the trading day, and why the long-term trend could be your friend.
WASHINGTON, May 28, 2015 – Financial news sources this morning agree that the number of U.S. workers filing new unemployment claims last week rose. “Unexpectedly.” That one-word cliché is this century’s latest successor to famous journalistic clichés of old, such as “sprawling industrial complex” (they all are) and “ailing Generalissimo Francisco Franco” for the old-timers in the audience.
To the Maven, all this means is that week after week, no one really has a clue what’s going on with the U.S. employment situation. And the over-employed, overpaid goof-offs who write this meaningless crap don’t have a clue about the real employment situation and could care less.
Example: one source finds this “unexpectedly large” increase in unemployment is occurring “at levels consistent with a strengthening labor market.”
ZeroHedge has its own spin on the spin, recasting the unemployment story this way:
“With the biggest miss to expectations in 6 weeks, initial jobless claims rose to 282k (against 270k exp). For context this means jobless claims have gone nowhere since the end of QE3.”
That’s more like it. Fortunately, neither Zero nor the Maven is alone in his cynicism. This morning’s positive media spin on the unemployment numbers doesn’t seem to have gotten investors very enthused either. Combined with renewed fears of an imminent “Grexit”—or Greek exit from the euro—a newly plunging euro, continuing market nonsense in China, dropping oil prices and weird housing numbers, today’s trading action as of 10 a.m. EDT looks as if it’s eager to erase yesterday’s outsized but equally strange rally.
Now that we’ve established the utter unreliability of statistics and the way they’re presented, let’s take a look at the markets themselves. What we are seeing increasingly is an exhausted uptrend that keeps defying expectations by melting up at the least provocation before flopping back down again and remaining virtually flat week after week.
We may be entering a protracted environment where rapid trading benefits only those HFTs that can play the game by shaving nano-points, manipulating markets with head fakes and avoiding the kinds of commissions that small investors routinely pay.
Further, we seem to be entering an environment where trades occurring after about 10 a.m. EDT but before 3:30 p.m. EDT are operating in a vacuum. The Wall Street Journal has an article today (behind their pay wall) that explains what the Maven has been noticing since around March or April; namely, that the only substantial volume each trading day seems to be occurring during those limited hours we just mentioned.
The reason, apparently, is because that’s the only time HFTs, algos and other big traders are active these days. Like lemmings, first one by one and now collectively, these overpaid barnacles on the hull of capitalism only want to trade when the bid-ask spread is at its narrowest, meaning only when a lot of people are trading. Since that message has spread, the general pattern has created a situation where all the big boys cram themselves into the first and last half-hours of the trading day.
As a smaller investor, the Maven has been discovering that getting a decent price for a trade outside these hours is virtually impossible. Bid-ask spreads in larger stocks are often a lot wider than the penny or two they’re supposed to be. Smaller stocks traditionally have somewhat wider spreads.
But lately, some of the Maven’s smaller stocks have been posting bid-ask spreads of 10-20 cents, a whopping gap, meaning that unless you constantly probe the quotes by entering and reentering bids and asks (buys and sells) by incrementing or decrementing a penny at a time, you can’t find a real live number, meaning you may have gotten hosed, price wise, when volume picks up at the end of the day.
Okay, this is a little esoteric for a daily stock column. For that reason, we’ll try to explain it a bit more clearly in our Prudent Man column, which is where we usually try to explain useful market arcana. But for our current purposes, the bid-ask trading situation indicates there’s virtually zero liquidity during most of each trading day and that is ultimately a very big problem not only for small traders but for efficient markets as well.
Today’s trading tips
Very brief. We just don’t like this market’s tone. But history has also shown that getting out of markets completely until you like them tends to rob you of some nice gains over time.
For that reason, we’re currently about 40-50 percent invested right now, primarily in yield instruments like term-preferred stocks, which are preferred stocks that have a definite maturity date. This protects somewhat against interest rate increases in that, like bonds, when they hit their maturity date, they’re redeemed for face value, which is often though not always $25 per share.
We try to buy our term-preferreds at a discount (less than $25 per share), so no matter where the trading environment takes them while we hold them, we’ll be assured of $25 per share when they call them in. Along, of course, with unusually swell and stable dividends.
We still have some money in the REIT ETF (symbol: REM), which, while slightly down right now, offers a relatively stable, outsized yield. And we’re also, perhaps foolishly, in a pair of offshore liquefied natural gas (LNG) transport master limited partnerships, GasLog Partners LP (GLOP) and Golar LNG Partners LP (GMLP), which currently boast 6.72 and 8.17 percent yields respectively.
Both are down, of course, as energy prices have commenced another short-term decline, with GLOP getting hit the worst. But sooner or later, they’ll recover again. In the meantime, we’ll collect the outsized dividends in an area—liquified natural gas—that’s likely to grow massively in coming years even though no one is paying much attention right now.
To a limited extent, banks—particularly KeyCorp (KEY) and New York Community Bank (NYCB) are on our radar, as smaller regionals have been picking up faster lately than the big boys. These are a long-term, perhaps five-year hold, given how slowly banks usually recover. Plus, if the Grexit should ever actually happen, or if terrorists blow up something big in the U.S., banks could get slaughtered collectively over a week-or-so market blowoff. But these banks and others like them should be nice performers for very patient and not-easy-to-panic investors over time.
Bottom line: While we either have some of these stocks in or out of our portfolios at any given time, both the Maven and all small investors need to do things slowly and quietly and not recommit cash positions all at once. We expect 2015’s markets to remain treacherous and subject to violent corrections.
The easy money has been made over the last five years or so. We may be entering a lengthy period of time when markets remain relatively flat.
After the 2016 electoral contest is decided, it will take the current president’s successor many years to correct the utter economic disaster this administration has created and will own forever. It remains unclear as to whether that successor will even have the power and political will to right our badly leaking economic ship of state.Click here for reuse options!
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