WASHINGTON, June 27, 2012 – We were right about the market opening up yesterday and then heading down. But then, for some reason, the algos kicked in and it was off to the races. The market backed off near the close, but it still ended up nicely for the day.
Why this stuff happens is beyond the ken of the Maven. We have read (but have not been able to confirm) that many of these algorithmic trading programs actually fish around the Internet for business and political newsbytes. When they find a word or a phrase that’s double-plus good in their neighborhood, they launch buy programs. If they detect something they don’t like, they launch sell programs.
This observation is at least partially plausible, as it’s generally known that the algos probe for all sorts of information before jumping on their wild trading bandwagon. Interestingly, this also means that, if true, the algos could easily be head-faked by false but well placed rumors that can be made to propagate on the Internet.
What any of this actually has to do with capitalizing new businesses and trading existing ones to punish or reward earning power—the real reason for the existence of capital markets—is again, beyond mortals like us. Perhaps the Masters of the Universe know best as they happily destroy what’s left of an investible market, which Zero Hedge observes this morning is now “the usual Bizarro market which has by now driven out virtually everyone.” You’ve got that right, Zero Dude.
“Bizarro” is a pretty good new metaphor for what (remaining) investors have been forced to deal with lately. The term “bizarro” has adopted many meanings over the decades, ranging from the name of rock groups to the moniker of a long-running absurdist comic strip. But the “Bizarro” to which we refer is a weird character created by DC Comics, circa 1958 as far as we can remember, first appearing in a “Superboy” comic that year.
Bizarro was a character who was essentially a reverse-image of Superman. Oddly drawn to resemble Supes re-imagined as a crystalline, Frankenstein like clone, you could easily recognize Bizarro by his bad hair, ghost-white skin color, and same-only-different Superman costume which featured a backward-S logo.
The original Bizarro was something of a comical figure, although he could create great damage. Bizarro’s problem was that whatever Superman would do, Bizarro’s bizarre-brain would endorse the opposite. The real Superman would save a burning building. Bizarro would finish destroying it. The real Superman would enter a building through, surprise, the entrance. But Bizarro would enter through the exit. Supes might brush his teeth with toothpaste. Bizarro would brush his with black shoe polish. You get the picture.
Bizarro eventually went off and somehow managed to create his own planet, “Bizarro World,” aka, the square-shaped planet Htrae. Which, of course, is “Earth” spelled backward. Yes, indeed, sports fans, you’re beginning to catch on to the Wall Street metaphor here.
Problem is, while the original Silver Age Bizarro was maddening but funny, today’s investment banking world is maddening but not so funny. Up until a just a few years ago, you could examine a company’s fundamentals, track its price movements on point-and-figure or candlestick charts, and make rational investing decisions that, in general, would help you lay away funds for retirement or a rainy day. Following good discipline, buying good stocks and holding them sometimes indefinitely, you could actually make good money most of the time.
This is what the Maven’s dad did starting slowly back in the 1950s. He didn’t make a lot of money at the time, but he salted it away and bought blue-chip stocks when he could, parking them in his regular account (no 401[k]s back then) and putting them on dividend reinvestment plans forever. (He rarely if ever bought stocks that didn’t pay dividends. Good choice.)
Dad’s faves were dominated by the pharmaceuticals. He was particularly devoted to Merck and American Home Products, but was also enamored of the major oils from time to time. His growing portfolio never dominated his time or his life. He just kept buying and reinvesting stock of Dow and Dow-like industrials.
Dad ended up with a pretty tidy portfolio by the time he passed away in 2008, although it had begun to erode around the edges, courtesy of the grim opening days of the Great Recession/Great Depression II. He’d slid into Alzheimers and was no longer paying attention to what had happened. Even if he had known, however, he’d probably still have bought and held and not given a damn since his tortoise-like investing methodology had always worked.
Doing that today would be suicide, just like investing at all seems like suicide, given the kind of Bizarro-markets we endure today—markets that the old man had never seen.
Seriously—today, the algos somehow determine that bad news is good and jack up the price of stocks, like they did yesterday when there was absolutely no good news at all. Contrariwise, when good news hits the tape, selling programs blaze out of control like a nuclear firestorm.
Good news is now bad and bad news is now good. A weak dollar is good, a strong dollar is bad. And so forth. Go figure.
That’s what we’re dealing with right now, and it’s particularly bad this week as we await Thursday’s Obamacare ruling (which could be good-bad or bad-good) and Europe’s final, definitive solution to their meat-grinder of a monetary and sovereign debt crisis. Since they are first-class intellects all, we confidently predict that the Euro-crats will figure out a devilishly clever way to punt again, encasing their cowardice and fecklessness in clever language that will encourage the markets for about ten minutes until investors read the fine print.
Futures point to a tepid open this morning. The market could ultimately go either way. CNBC has just reported that “Durable goods orders increased 1.1 percent, the Commerce Department said on Wednesday, after a revised 0.2 percent decrease the prior month.” So that’s good news, although today’s logic dictates that this is probably bad. (And do note the downward revision by Commerce of the previous month’s numbers—funny how that happens nearly every month, enabling the current month’s figures to somehow look like an improvement.) Where the market goes today is anybody’s guess.
While having pared our portfolios down to a bare bones construct consisting of utilities, REITs, and a couple of regional banks—Fifth Third (FITB) and local regional powerhouse BB&T (BBT), we decided to hedge big time yesterday by picking up shares in the Short MSCI EAFE (EFZ) which is, essentially, a negative bet on world markets excluding the U.S. and Canada. We also put on a small position in SDS. No, that’s not the old 1960s radical organization. It’s the 2x short S&P 500 Index ETF.
We’re prepared to pull off these shorts at a moment’s notice if the market turns viciously against us. (Which is did when we pulled a similar move last week.) But our reasoning is this: if we hold any stocks at all during this treacherous and unbelievably irrational Bizarro market action, we need to hedge them against downside disaster.
A retail investor’s only hope of getting any return at all during this nonsense is to hold high dividend-paying stocks and try to hedge the holdings against a massive downside swoosh. If a retail investor is unwilling or unable to do this, we fall back on our continuing advice: tuck your money into your mattress; keep it in a reputable moneymarket fund earning a swell plus-or-minus .05% interest if you’re lucky; or stick it in CD’s or a passbook savings account (paying 0.1% interest) at an FDIC-insured banks—if they even have passbook savings accounts any more.
The whole situation is pretty discouraging, frankly. But this is the Bizarro world in which we live. And we’re likely to stay here for at least another generation if we don’t start throwing some of the do-nothing elitist political bastards we’ve been sending to Congress for the last thirty years. Europe as we’ve known it is probably a lost cause. But we will have a chance at redemption this November.
Hedge your bets and have an otherwise good day, and we’ll see you tomorrow, which will be roughly T-minus one day and counting to Decisionpoint Obamacare.
Disclaimer: The author of this column maintains several active trading and investment portfolios and owns residential and investment real estate.
Positions mentioned above describe this author’s own investment decisions and should not be construed as either buy or sell recommendations. The current market is highly treacherous and all investors travel at their own risk, so caution should be exercised at all times.
Illustrations, charts, commentary, and analysis are only the author’s view of current or historical market activity and don’t constitute a recommendation to buy or sell any security or contract. Views, indications, and analysis aren’t necessarily predictive of any future market or government action. Rather they indicate the author’s opinion as to a range of possibilities that may occur going forward.
References to other reporters, analysts, pundits, or commentators are illustrative only and do not necessarily represent an endorsement of such individuals’ points of view. If specific investment vehicles are mentioned in any article under this column heading, the author will always fully disclose any active or contemplated investments in said vehicles.