Sorry for the silence. It's been a busy week!
I have thought a lot about how the markets trades these days. The new Wall St is now dominated by billion dollar backed trading robots that buy or sell stocks in milliseconds when any news hits the wires.
At this point around 70% of the trades on Wall St are done by these amazing machines. I can't help but wonder how intimidating this must be for the average investor.
Cash on the sidelines remains high and I can see why. Everyone has to be asking themselves the same question at this point when it comes to investing in today's markets:
HOW CAN I COMPETE AGAINST THESE HIGH SPEED TERMINATORS????
The answer: You can't. If you are trading the markets I suggest you that you use one of these bots or read an investment newsletter that has one.
These machines all look for similiar trends, and if you are caught on the other side of their trades you risk being taken out to the woodshed and shot. I see more and more individual names that are being shot dead or pumped alive by these algos for no apparent reason. Be careful if you are stock picking and be aware that what you own could become a target.
The police love to say "speed kills". I believe the same saying can now be used when it comes to investing on Wall St. The problem with these machines is it's turned the markets into a casino. Investors are being rewarded on the long side for being the flavor of the day instead of P/E ratios. Just look at stocks like Netflix and Salesforce.com. I haven't seen such idiocy since the tech bubble.
There problem the market now has is there is no fundamental method to the algos madness. Like predators, they scan the markets everyday looking for the next kill long or short. They are in and out of their trades in seconds which means the fundamentals are irrelevant.
The next question we must ask ourselves moving forward is can a market run efficiently without fundamentals?
The answer is of course not, and over time it's going to hurt the markets because I think you are going to see more and more "investors" walk away from the game as long as the robot insanity is allowed to continue.
I mean think about it: When the fundementals no longer matter how can you logically remain in stocks if you invest based on fundamentals?
A "fish" at the poker table eventually learns this after repeatedly getting his teeth caved in day after day. I can't help but think that many investors will eventually come to the same realization.
Case in point:
Bill Gross. The world's most famous bond investor basically announced this week that he is walking away from treasuries because he thinks the government is now a Ponzi scheme.
Here is his conclusion in his most recent letter to his investors:
"Investors should view June 30th, 2011 not as political historians view November 11th, 1918 (Armistice Day – a day of reconciliation and healing) but more like June 6th, 1944 (D-Day – a day fraught with hope for victory, but fueled with immediate uncertainty and fear as to what would happen in the short term). Bond yields and stock prices are resting on an artificial foundation of QE II credit that may or may not lead to a successful private market handoff and stability in currency and financial markets. 15% gratuities may lie ahead, but more than likely there is a negative two-bit or even eight-bit tip lying on the investment table. Like I did 45 years ago, PIMCO’s not sticking around to see the waitress’s reaction"
He is putting his money where his mouth is. His largest fund(PTTRX) has dropped it's treasury holdings down to 12%. I have seen PTTRX hold quadruple this in the past.
Can you blame him? How can anyone after looking at the chart above conclude that this is sustainable?
The Bottom Line
How much more "gamesmenship" will it take before we all pull a "Bill Gross" and walk away from the game?
Let's all just face it: The market now trades on day to day news. You could actually say it now trades second to second at this point!! If bad news from the Middle East hits the wires then stocks plummet. If we get a decent jobs report like today's claims number then the market soars.
It's gotten totally ridiculous!
Watching today's stock market reminds me of watching a young boy that has ADD. The stock market and it's zero attention span spends each day bouncing around like a pinball as the robots react to the various news items of the day.
It's time to give the market a gigantic dose of "Ritalin" in order to slow this train down before it runs itself right off the tracks. This could easily be done by simply increasing the costs of each transaction.
Don't hold your breath waiting for this to happen. The gamblers are all addicted, and the Fed is fueling their "animal spirits" by dumping billions of QE dollars into the markets via helicopters.