Archive for the ‘Uncategorized’ Category

Good Market Rigging vs. Bad Market Rigging

Friday, April 4th, 2014

“The markets are rigged. … These firms make their money by front-running trades. They’re using their speed advantage to buy shares first and then selling them back at a higher price. The result is higher prices for investors in those shares. That’s rigged.”                                                                                                                                      Michael Lewis

Based on the Federal Reserve Board’s actions of the past five years, you may have thought that “market rigging” was a good thing.  After all, a great deal of wealth has been created from the Fed’s bond buying – although, granted, almost all of it went to those who were already wealthy.

But suddenly, high-frequency trading is being charged with rigging the markets and it’s creating a bit of a furor.  Apparently the Fed is responsible for good rigging and HFT is responsible for bad rigging.  Consider this week’s HFT-related news:

  • Michael Lewis, author of Moneyball, was interviewed by “60 Minutes” in advance of publication of his book, Flash Boys, in which he makes the case that HFT rigs the markets against the small investor.

  • There was the heavy backlash from those who disagree with his conclusion … that is, the people who make money off of high-frequency trading.  Supporters contend that HFT has created liquidity and reduced the cost of trading for small investors.  In other words, the market is rigged against small investors, but it costs them less to make a trade.  Yippee!!
  • Then there’s The Wall Street Journal’s announcement this week that HFT is being investigated by the FBI – not the Securities and Exchange Commission (although it is participating in the investigation), the FBI.  You know, the guys who investigate bank robberies, money laundering, drug cartels and the Mafia.  And now you can add high-frequency trading to that list.  Apparently, insider trading was already taken. (more…)

Define “Forever”

Friday, November 15th, 2013


In May, when Fed Chairman Ben Bernanke said that quantitative easing could not continue forever, the stock market tanked and the word “tapering” became the most feared word on Wall Street.

This past week, during her Congressional hearing as President Obama’s nominee to become the next chair of the Federal Reserve Board, Janet Yellen said, “QE cannot continue forever.”  The market moved higher.

Is it Ben morphing into Janet or Janet morphing into Ben?

Is it Ben morphing into Janet or Janet morphing into Ben?

Both the current Fed chair and his assumed successor assured us that the party’s not over, that there are still plenty of bonds to be bought.

But “forever” seems farther away now that it was back in May.

Ms. Yellen made it clear during her hearing that there’s still plenty of work for QE to do.  Citing high unemployment, she said, “It is important not to remove support, especially when the recovery is fragile and the tools available to monetary policy, should the economy falter, are limited.”

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House of Cards

Friday, July 19th, 2013

The current housing recovery is not a house of brick, but a house of cards.

The cards came tumbling down this week, as the U.S. Commerce Department reported that housing starts in June fell to their lowest level in almost a year.  At June’s pace, new housing starts would total 836,000 for the year, down 9.9% from May’s 928,000 pace.  Multi-family projects plunged 26.2%.

The announcement blunted the stock market rise initiated on Wednesday by Federal Reserve Chairman Ben Bernanke, whose warm-and-fuzzy comments (more fuzzy than warm) can be summarized as “we have no idea when quantitative easing will end and, even if we did, we wouldn’t say.”

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Market Reaction To Comments Reflects Market Efficiency

Friday, June 21st, 2013

It’s worth keeping the efficient market hypothesis in mind when considering the impact of Fed Chairman Ben Bernanke’s announcement this week that bond buying will be coming to an end.

The efficient market hypothesis suggests that share prices always incorporate and reflect all relevant information. While the hypothesis may be flawed, it should be no surprise that markets react to information, and that the announcement itself would have an impact, even though no one knows for certain when quantitative easing (QE) will end or when “tapering” or bond purchases will begin.

The price of a security at any given time reflects not only the performance of a company in the context of overall market conditions, but future expectations. So markets panicked because the Fed chief acknowledged the obvious – that QE will be ending someday.

Today’s Dow Jones Industrial Average.

Other than admitting the obvious, The Fed’s comments were inconclusive, with plenty of “ifs,” “ands” and “buts,” and the market performance has been similarly inconclusive, jumping up and down enough to make investors seasick.

Today’s S&P 500 Index.

That queasy feeling is caused by volatility, which we discussed last week.

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Blame It on Sequestration

Friday, May 3rd, 2013

President Obama and the Federal Aviation Administration blamed recent flight delays on sequestration.  Now the Federal Reserve Board’s Open Market Committee is blaming sequestration for the poor performance of the U.S. economy.

Both claims are equally frivolous.

As The Wall Street Journal noted, “The FAA’s all-hands furloughs managed to convert a less than 4% FAA budget cut into a 10% air-traffic control cut that would delay 40% of flights. The 6,700 flights that the FAA threatened to force off schedule every day is twice as many delays as the single worst travel day of 2012.”

With members of Congress among those affected by the flight delays, Congress acted with uncharacteristic quickness and approved a bill to revoke FAA’s politically motivated furloughs.

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The U.S. Isn’t Greece – Yet

Tuesday, August 9th, 2011

If a “sovereign debt” crisis in Greece (population 10.7 million) can cause stock prices around the world to fall, what will happen to world markets if there is a similar crisis in the United States (population 307 million)?

The questions is relevant, given Standard & Poor’s decision to lower the U.S. credit rating from the perfect AAA it has held since 1917 to AA+. While some of the recent stock market drop – the worst since 2008 – can be attributed to other factors, such as sovereign debt in Europe and the continuing weak economy, the lower credit rating, has had a significant market impact.

The U.S. isn’t Greece – at least not yet – but it seems to be heading in that direction, in spite of the recent debt ceiling agreement, which cut $2.5 trillion from future spending.

Greece’s debt represents 155% of gross domestic product and is expected to reach 170% next year, according to The Wall Street Journal. In other words, the government is spending $1.55 for every dollar’s worth of goods the country produces.

Meanwhile, the U.S. debt-to-GDP ratio is approaching 100% – even though it excludes an estimated $61.6 trillion in unfunded obligations for Medicare, Medicaid and Social Security. In addition, state and local governments have trillions of dollars in unfunded debt obligations.

In addition to running a $1.5 trillion budget deficit, the U.S. government added $5.3 trillion in financial obligations in 2010 for off-budget items, according to USA Today.

Maybe we’re not so far away from Greece after all.

Dodging the “Death Cross”

Monday, August 2nd, 2010

The S&P 500 recaptured 1100 on Friday.  This is a positive short-term development.

Prior to last week’s rally, the S&P 500 was in jeopardy of violating the long-term uptrend.  In early July, the S&P 500’s 50-day moving average crossed below its 200-day moving average.  This is known as the death cross.  The crossing of the two moving averages is a bearish signal and often predicts further market declines.

Thankfully, earnings season kicked off with a slew of strong earnings reports.  The market rebounded and is within striking distance of the 50-day moving average, crossing back above the 200-day moving average.

This is a positive technical signal and should provide a continuation of the uptrend into the 1130 – 1150 price area.

Fixed-Income Investors Weather Sovereign Debt Crisis

Monday, May 10th, 2010

Because of our focus on managing risk, fixed-income clients of Wenning Investments generally fared well during last week’s sovereign debt crisis, even though it created widespread panic in global markets around the world. 

Clients who hold a short bond position (TBT, PST) saw an unfavorable drop in prices, but we believe that the drop is temporary.  The position is held to provide a hedge against rising interest rates.  Interest rates fell last Thursday, but the overall trend is for interest rates to rise.

Other bond holders benefited from a decline in yields, which made the bonds they hold more attractive, since bond prices moved higher during the flight to safety.

During times of uncertainty, investors buy bonds to add protection to their portfolios and to avoid losses from falling stock prices.  When that happens, bond yields are driven lower, because the demand for bonds outweighs the supply.

Thursday, during the flight to safety, the 10-Year Treasury yield fell to 3.24%, down from 4% last month.  Today, though, the yield is inching back and is at 3.56%.

According to The Wall Street Journal, “The European Union agreed on an audacious $955 billion bailout plan in an effort to stanch a burgeoning sovereign debt crisis that began in Greece.”

This agreement has calmed fears around the globe and global stock markets are trending higher on the news.

Baby Boomer Retirement May Be A Bust

Sunday, March 21st, 2010

Unless they take action, many baby boomers are heading for a senior bust.

Many of the boomers we know have not saved sufficiently for retirement.  Spooked by the last two bear markets, they took their money out of the stock market, selling off when the market was near its low point.  Now they’re looking for the high returns necessary to produce the income they’ll need when they retire – yet they also want to avoid risk.

Unfortunately for risk-averse investors, there is an inverse relationship between risk and reward.  Investments that offer the potential for high returns usually also carry high risk.  Many investors who need high returns are keeping their money in money market funds or certificates of deposit, which carry almost no risk, but offer returns that fail to keep pace with inflation, let alone provide a real return.

While the investment outlook is admittedly tough for shell-shocked boomers, there are many reasons doing nothing should not be an option.

Don’t Count On Inheritance

Back in the 1990s, many were predicting that baby boomers would inherit trillions of dollars.  A study by Cornell University, for example, famously predicted that boomers would inherit $10.4 trillion.  And in those days, $1 trillion was still a rarely considered sum of money.

Yet it appears that the reality will be far more modest.  Parents of boomers are living longer, their healthcare costs are more expensive than predicted and they’ve also suffered through the same bear markets as their children.  Their inheritance, in many cases, is gone – and they may even be relying on their children for help.

A recent study by the American Association of Retired Persons (AARP) found that only about one in five boomer households has received an inheritance and only 15 percent of remaining boomers still expect to receive one.  Of those who received an inheritance, the median value has been about $64,000 – nice to have, but not enough to sustain another generation during retirement.

Boomers face other problems, too, which we will discuss in our next article.

Exchange-Traded Funds Have Grown Up

Monday, February 15th, 2010

Not long ago, exchange-traded funds (ETFs) were hardly ever considered as an investment option for retail investors.  While many investors had heard of them, they were generally considered to be just another type of index fund.

Still, led by the popularity of the SPDR (aka, Spider), which is based on the S&P 500 stock index, ETFs grew to $610 billion in assets by May 2008.  By then there were 680 ETFs for every index imaginable.

With last year’s introduction of actively managed ETFs, they are likely to become even more popular.  There are already as many varieties of ETFs as there are of mutual funds and their numbers are growing rapidly.

ETFs, like mutual funds, are professionally managed and each fund represents an index or group of investments with specific characteristics in common.  For example, the first and most famous ETF was the SPDR (aka, Spider), which is based on the S&P 500 stock index.

Like mutual funds, ETFs range from very low risk to very high risk investments.  Unlike mutual funds, though, ETFs are priced continuously, not daily, and are traded on exchanges.  ETFs also provide an opportunity for investors to gain exposure to alternative investments, adding diversification to their portfolio.

Because ETFs are traded like stocks and bonds, they provide the same level of trading flexibility and can be used for hedging strategies.  They also are lower priced than most mutual funds and are more tax efficient, as there is little turnover in their portfolio securities and they don’t have to sell securities to meet investor redemptions.  These advantages may fade somewhat as actively managed ETFs proliferate.

Overall, ETFs offer advantages over mutual funds and cost less – so what’s not to like?