I challenged about 20% of a full professor's answers on one final exam. To support my claim I got a letter from an expert in the field of each question. One letter came from one of the editors of a book titled "The Kidney". He was widely regarded as an expert on the kidney; and I talked to the biggest expert at Stanford too, who agreed with him. Another letter came from a UCSF professor who was doing research on the exact topic of the question. I located him through a highly esteemed full professor in Biochemistry at U.C. Berkeley. In other words some professors at U.C. Berkeley agreed that I deserved to win my challenge. That UCSF professor later became head of the UCSF Biotech Center. It would seem he was really an expert. A third professor did not fully agree with me on another question. However, she did think I had sufficient reason to challenge my grade. She did seem to believe that my grade did not reflect the actual level of my knowledge. I later heard a rumor that she started a research project to investigate my contention. I heard she end up proving me correct. I heard some comments about my advancing medical science to get my grade changed. Much of the rumors about the third case above was just rumor, as I have stated. However, there is probably at least a 75%-80% chance that what I heard happened exactly as I have stated.

I further point out that I did not get my grade changed based on these disagreements. I only got the three professors involved (one especially) to agree that my test was not a fair test of my knowledge or performance. My argument was: the professor could not possibly have taught me how to answer the questions correctly, if he could not answer them correctly himself. I thought then and I think now that this was a fair argument.

I won the right to take another test. I had to wait until the class was taught again to make it a fair situation. I got my grade changed to reflect my performance on that test and on the previous two test in the original class. I ended up with an A-. It was only that low because I didn't realize exactly what the professor was asking for on a large question on the second test. I had actually known all of the things the professor wanted me to write down. However, I did not understand that he was asking for all of that data. I gave what many would consider a stock answer to that question. That's the way it goes sometimes.

At least two of the professors were very amicable throughout this process. They even seemed a bit grateful to me for updating some of their course material, although they were not grateful for all the extra trouble. I would say we were generally on good terms after this was all over.

David White

The GDP (QoQ) data of most EU countries missed today. The table below has the data.

There are currently violent riot/protests in Egypt over what is seen as a corrupt government. The Egyptians want long sought after reforms. The likely deserve them. However, the underlying reasons for the riots/protests seem to be the high unemployment and the rapidly rising food prices. In countries less affluent than the US and Europe, a higher proportion of the average person’s income goes to paying for food. When those prices rise dramatically, people literally starve. When the US talks of unemployed workers, most of those workers have at least a high school education. They can read and understand what is going on in a general sense. Perhaps as few as 51% are literate in Egypt. When you cannot read about world events, you are completely taken in by whatever rabble rousing bunch you happen to listen to. This situation is serious.

The world food situation is serious this year after major crop problems in Russia (and former USSR states), Pakistan (major flooding), China, India, Australia (major flooding and locusts), and Brazil (flooding) in the last year. Egypt has had its problems in this area too -- mostly with drought. I am sure many Egyptians literally do not understand what hit them. These problems have been exacerbated by Dr. Bernanke’s QE2 program, which is leading to still further commodity inflation. This isn’t likely to endear the US to starving countries. We may see anti-US and anti-EU terrorism rise demonstrably in the wake of this. Misery loves company, and the starving need someone to hate. Right now it is Mubarak in Egypt, but this rioting seems to be spreading. It started recently in Tunisia. When it gets to Iran, Iraq, Afghanistan, etc. imagine the anti-US sentiment that can be raised. Dr. Ben may have turned out to be the terrorists’ biggest ally.

Let’s not forget that Australia is in the midst of a cataclysmic flood, which will demonstrably hurt its GDP this year. The EU has a huge credit crisis. Many US states are really in the same boat. China has serious inflation problems and an inverted corporate bonds yield curve, which often presages a coming recession. The credit ratings of Japan and Taiwan were recently downgraded. It goes without saying that Egypt’s credit rating was downgraded on the uncertainty factor induced by this rioting. Those poor, substantially illiterate people are hurting themselves even further.

The above gives a brief glimpse at the sentiment picture that may be falling into place. Let’s look at the short term technical picture now. The US populace has recently been pledged more stimulus via the tax break bill ($800B) and the QE2 program ($600B). That’s $1.4T in new stimulus. A normal expectation would be that the US economy would continue to rebound at least in the short term. The 1 year chart of the SPY below gives a glimpse of the possible short term performance.

The SPY has already broken below its 20-day SMA. It looks to be headed toward its 50-day SMA. It could bounce up slightly on “Mutual Fund Monday”, but it does seem unlikely to completely ignore all of the above negative worldwide data. This likely means that the SPY should retrace to at or near its 50-day SMA in the short term. This is the $125-$126 area of the SPY. The yellow line in the chart above is the 50-day SMA. We could see a bounce here. We did get an effective bounce off the 50-day SMA in Nov. 2010.

Longer term it is unclear how big a retracement the SPY will see. Last April 2010 was the last time so many US stocks (81% before Friday’s pullback) were above their 200-day SMA. At that time we saw an approx. 14% retracement. It is possible we could see such a retracement again. The recent stimulus might argue that it should be less severe. The 5 year chart of the SPY (see below) may provide a little more clarity on the situation.

This chart shows the SPY is at a major resistance point from a peak in 2008. Support on the downside from here seems to be roughly in the $118 to $123 area. Barring a major global meltdown, one would expect these levels to hold in the near term. Further geopolitical trauma could change that outlook. The US is indeed a safe haven at the moment. Let us hope that it remains so.

Many people have said they would like the POMO schedule for the Fed. This is a copy of the recently released schedule. The market tends to go up on POMO days.

Many pundits are now saying it’s Risk On again. I take exception to this. First the economic data from the US, the EU, and China has indicated decelerating growth. The Fed has substantiated this. This means growth will be less than expected. It means downward revisions are coming. This would tend to make one think Risk Off.

More than this the major currencies that can be used for carry trades are not positive for a carry trade that would benefit US stocks. Currently the USD is weakening against both the Yen and the Euro. This means that if you borrow either of these to invest in something else, you could still lose money. If the Yen and Euro are both strengthening, you would likely have to pay back more when pay the money back. In other words the risk trade would be too risky.

If the USD is going down, you might not want to invest in US equities because they would effectively be going downward in foreign currency terms. Since the Fed has indicated that it wants more inflation, it will likely act to weaken the USD. This should scare foreign investors away as long as they think the USD direction is downward. Plus in the near term, the US equities markets are highly over bought. They are due for a retracement. This too should scare investors (even US investors) away until a reasonable retracement has occurred.

Naturally this situation is in perpetual flux. Still it would seem for the near term that it is “Risk Off” rather than “Risk On”. The singing by some that high flying tech stocks are "trading like it's 1999" (the dot com bubble) is a further indicator that there is significant reason to worry. The failure of major DJIA tech stocks to move up significantly with the high flying techs is further evidence that the "tech rally" is more of an HFT mediated short squeeze of highly shorted, over priced, over bought high flying tech stocks than a real tech rally. The major tech stocks (ex. INTC, CSCO, HPQ, MSFT) are normally not shorted appreciably. They have huge market capitalizations. Therefore they are much harder for HFT traders to manipulate upward. They are a good indicator if you are trying to determine the veracity of a purported "tech rally". This one appears to be "fake". Highly shorted, over bought, over priced techs such as BIDU, CRM, OPEN, NFLX all seem likely to fall from their HFT short squeeze induced highs. Financial sector stocks do not seem likely to take up the slack with the re-emergence of the EU credit crisis (Ireland this time), and the big worries about the real estate market. Risk Off.
 

HFT comprises 70+% of all trading in today’s markets. It’s importance is unquestioned. The HFT traders will as Adam Smith said so famously act in their own enlightened self interest. When you realize this, you should ask yourself , “how can the HFT traders make the most money?”

The best opportunity for HFT traders is popular, highly traded, highly shorted, high institutional ownership stocks. Why? HFT traders make great money when they can push a stock up quickly (popular stocks in sector rotations are targets too). They buy it. Then they immediately sell it for slightly more. They can repeat this process thousands, tens of thousands, or hundreds of thousands of times per day. If the stock is going up quickly, they can make several times as much money as they do for a slowly rising stock. This is because the difference between the buy price and the sell price is substantially larger, even when only considering a small fraction of time. If a highly traded stock has high institutional ownership, the actual float -- the amount of the stock people are trading -- may effectively be much lower than the recorded float. Institutions generally trade infrequently. This means that an analyst upgrade of the stock allows the HFT traders to push the stock up quickly, if they trade it in high volume. The HFT traders can simply trade it back and forth among themselves at ever higher prices, with occasional interruption from traders who are actually keeping the stock for more than a fraction of a second. If the stock is highly shorted at this time, some of the shorters will lose faith in their short positions as the stock goes up. They will add to the up volume themselves. Momentum and market emotion traders will add further to the up volume. My belief is that there is not huge collusion among the HFT in these actions. However, they recognize the scenario. They know by convention that it is an HFT setup. They all tend to take the same actions to move the stock up. The same scenario plays out on overall market moves upward. Most of the highly popular, highly traded, highly shorted stocks are high Beta stocks. On an obvious market push upward, HFT traders will act as described above.

The net result of all of this is that stocks become more over valued than they might normally. The HFT traders only own them for a fraction of a second at a time. They simply turn their programs off when they stop making money. The short term traders may benefit or may get hurt by this, but they should be aware of what they are doing. The buy and hold investor is the real victim. Much of the time that investor cannot buy the stock because it is too overpriced. Or if that investor does buy the stock, he or she may get stuck holding it as it crashes soon after the HFT trader walks away from it. The HFT trader does eventually walk away when the stock becomes too top heavy. The buy and hold investor can thank the HFT traders for making the likelihood of big losses even greater. Is it any wonder the individual investor is scared of this market? Even stop losses often fail to work well. The extra volatility induced by the HFT trading makes stop loss results questionable at best for a long term holder.

Still the HFT traders do create some opportunities. If you can identify the approximate top or bottom in one of these cases, you can make a lot of money going along for the ride up or down.