Friday’s Random Thoughts

Re-visiting the Robots

Yesterday I tweeted (or twittered, or whatever) an article from the Financial Times titled “Real Investors Eclipsed by Fast Trading.”  It was later pointed out to me (by both or our followers!) that the article could only be opened by those who were registered with the Financial Times.  So, in order to right that wrong, I thought I’d put a couple of bullet points from the article in the blog:

  • Trading by “real” investors (defined as buy and sell orders from mutual funds, hedge funds, pensions and brokerages) is taking up the smallest share of US stock market volumes in over a decade.  Source:  Morgan Stanley’s Quantitative and Derivative Strategies group.
  • “Real money” trades account for only 16% of buying volume and 13% of selling volume
  • The takeaway, by the authors of the study, is this:  “Matching of ‘real’ buyers and sellers is more challenging in a market where there are fewer of them.”

 Let’s just hope the bots don’t begin to gain a sense of self.  From what I’ve heard, that would be bad.


I really don’t have anything to say about Apple.  It’s just that there is a new law stating that if you’re going to publish, speak, or give hand signals regarding anything about investing, you have to mention Apple.  I think this puts me in compliance.


With the European crisis taking up the bulk of the international headlines, the Bank of Japan has quietly decided to add another 5 – 10 trillion Yen to their asset-purchasing program.  This is in addition to the 65 trillion Yen already in the program.  With this round of quantitative easing, the BOJ re-asserts itself as the central bank with the biggest balance sheet as a percentage of GDP in the world.  Congratulations guys!

With the horrible demographics in Japan, growing their way out of the crisis seems unlikely.  This is something worth watching.


  • Spain’s unemployment rate is now at 24.4%.
  • S&P has cut Spain’s credit rating by two notches on Thursday, setting it at BBB+
  • Spain’s foreign minister Jose’ Garcia-Margallo says, “Spain is undergoing a crisis of enormous proportions.”
  • In France, it appears that socialist Presidential candidate Francois Hollande has a pretty good shot at winning the run-off elections next Sunday.    His platform includes dumping the austerity program, increasing government spending and not ratifying the new European fiscal treaty.  That should do wonders in reducing France’s debt strain.
  • For the second time in two months, Romania’s government has fallen.  This morning, in the wake of the continued collapse of their currency (leu), a vote of no confidence meant that Mihai Ungureanu was getting the boot.  Austerity takes another victim.  As a result, the IMF has decided to not send Romania it’s expected 5 billion Euro aid package until a new government is in place.
  • In the Netherlands, the government quit on April 23, only to pull a “Never Mind” later in the week.  The reason…  the opposition Freedom Party refused to support the proposed austerity and tax hike program.  Later, they agreed to it and are now back in business.  I guess for a few days, you could say they were “In Dutch.”

United States

  • So far in this earnings season, 200 of the S&P 500 companies have reported.  75% have beaten their estimates, 10% have matched, and 15% have missed.
  • Across the S&P 500, the average earnings surprise was +12.1% (just for yucks, that number is 7.5% if you take out Apple).
  •  Apple.
  • Year-to-date, the S&P 500 is up over 11%

While the global scene certainly looks glum, the US remains profitable and growing at an ever-so-slight rate (this morning’s GDP came in at 2.2% versus and expected 2.5%).  $7 trillion in newly created global money, the Bernanke Put, and Apple seem to be buoying the US stock market.

It makes me wonder if we may just be the prettiest horse in the glue factory.

Achtung Baby!

Surprisingly negative news from the German bond market this morning set the stage for yet another day of losses in global equities.  The $6 billion Euro 10-year bond auction failed to find adequate bids, resulting in the Germans being forced to take down over $2 billion Euros of their own bonds.

This was the worst bond auction in Germany since the introduction of the Euro.

The ripple effects were instantaneous, with yields in Italy and Spain rising to the point where the ECB was forced to intervene and lend pricing support.  Further, the Euro fell dramatically versus the USD and the US equity futures tumbled.

Since November 15, the Dow Jones Industrial Average has fallen nearly 7%.

The prevailing school of thought regarding this auction goes something like this:  German bond buyers essentially went “on strike” in order to pressure Germany into allowing the ECB to exercise more power to stem the crisis.  It would be nice if that school of thought turns out to be true.  Otherwise, the word contagion comes to mind.

But, Germany wasn’t alone in pressuring the markets today.  China and Belgium had a hand in the mess as well.  China’s Purchasing Manager’s Index fell to 48 (a number below 50 indicates contraction).  This sent commodities (as well as stocks) broadly lower.  As for Belgium, a rumor began circulating that they will be unable to pay their share of the Dexia bailout.  This would place the burden of the bailout on France — and this is a burden that could result in a French debt downgrade.

As is usual on these “flight to quality” days, US Treasuries were aggressively purchased; with the 10-year yield falling to 1.9%.  This is somewhat ironic, considering the uber-committee managed to squander its opportunity to begin working off the US deficits just a few days ago.

We continue to favor high cash balances and well-hedged income positions in this environment.  Holding cash with a negative real yield is painful… but not nearly as painful as the alternative.