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David White
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David White is a software/firmware/marketing professional and a long time investor. He has worked in the networking field, the semiconductor equipment field, the mainframe computer field, and the pharmaceutical/scientific instrumentation field. He has bachelor's degrees in bioresource sciences... More
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  • Risk On Or Risk Off?

    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.
     



    Disclosure: I am short CRM and NFLX.
    Tags: INTC, MSFT, CSCO, HPQ, BIDU, CRM, OPEN, NFLX
    Sep 22 2:02 PM | Link | Comment!
  • Profiling HFT Targets Is An Important Part of Today’s Trading

    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.



    Disclosure: This article is not specifiically aimed at a particular stock.
    Sep 14 1:24 AM | Link | Comment!
  • The Senate Wall Of Shame


    Senators have voted along party lines in general on the Financial Regulation bill. Knowledgeable Senators know that the bill will do far more damage to an already weakened economy than it will do good. Yet they vote along party lines. Some justify this by saying their voter mail/email confirms that FinReg is desired by the majority of their constituents. This is a cop out. If they have bothered to understand the FinReg economic implications, they know it is a bad bill in sum. It may have a few good items, but it will overall be economically destructive. They know most of their constituents do not understand a bill they can barely grasp the implications of themselves. If these “vote the party line” / “appease the voters” Senators vote FinReg into law, they may well be torpedoing their state’s economies. CA and IL are on the top of the Cumulative Probability of Default list for sovereign governments. Other big finance states such as NY, NJ, CT, MA, and TX are troubled too. Some are very troubled. CA, IL, and NY get huge amounts of tax revenues from the financial system. They cannot afford at this time to have their tax revenues cut further.

    FinReg will make some banking operations unprofitable. These jobs will move offshore. It will cut into the profitability of others. Some of these jobs will move offshore. It will require more capital for the same financial operations we do now. This means a big tightening of already tight credit. Tight credit means fewer businesses will be able to grow. It means fewer jobs will be created. FinReg will make banking more cumbersome and less efficient. This is not what we should be aspiring to accomplish.

    The government suspended mark to market accounting because it believed mark to market would lead to a complete failure of the banking system if it was not suspended. Now in their schizophrenic wisdom Congress is acting in direct contradiction to that action. The system is too weak at this time to soak up this kind of histrionic schizophrenia. Many worldwide factors have already been conspiring to send the US economy into a double dip recession. The last thing the US needs is a dose of poison for the banking industry to help it along this path.

    Feinstein and Boxer are both from the SF Bay Area. They should both know how negative FinReg will be for their state. Dodd probably knows best of all. He seems to think he is compromising as best he can. I have no doubt he his trying very hard to craft the bill as best he can. However, he does not control it. He should see the economic harm coming. He probably does. This bill does not protect the financial system. It instead attempts to sterilize the banks. That just moves certain risky functions out into less well regulated entities. It moves some banking functions offshore, resulting in a net loss of jobs and banking income for the US.

    Is getting to punch the banks in the eye worth the cost of a new recession or even a depression? To me it definitely is not. When Ben Bernanke recommends against the Derivatives portion of the bill, in direct opposition to the head man, Obama, you can be sure it is a mistake for the US economy. Dodd has tried to kill a lot of the bad parts, but he has not been successful enough. Instead of listening to the sanity of the top economist Bernanke, the Congress has been listening to bullying populism on the part of its chief executive, Obama. It has been listening to an Agriculture chair from one of the most financially backward states in the Union.

    To counter Bernanke, etc., Obama has brought in an octagenarian in Volcker to back his case. He is so out of touch with reality that he thinks the world still revolves solely around the US and European financial systems. It is just this kind of thinking that is hurrying the demise of those systems.

    Senators should know what I have said above is true. They should act on it with their votes. Below is a list of Democratic Senators who will be betraying their states by voting the party line on FinReg.

    Boxer - D - CA

    Burris - D - IL

    Dodd - D - CT

    Durbin - D - IL

    Feinstein - D - CA

    Gellibrand -D - NY

    Kerry - D - MA

    Lautenberg - D - NJ

    Lieberman -D - CT

    Menendez - D - NJ

    Schumer - D - NY

    And that likely cross over Republican Brown - R - MA

    All of these states derive significant revenues from the banking activities that will be constricted or hurt by FinReg. All of these states already have significant financial problems with their state budgets. When the double dip recession/depression hits in these states at least partially because of FinReg, it would be wise of voters to remember that these people acted to put them there. “I just voted the party line” doesn’t cut it in my book. In difficult times, it is important for the leaders to stand up. If all Senators are sheep, what are they doing in Washington? None of the above Senators will be acting in their constituents best interests, if they vote for FinReg. They should be ashamed of themselves if they do, especially Dodd (perhaps the most knowledgeable). He is retiring at the end of his term. He doesn’t have to worry about re-election. He should “man up”. If it means defying Obama and populism to do what he knows is right, he should still do it!

    I would point out that CA's Senatorial candidate Carly Fiorina, a former CEO of HP, seems to agree with these sentiments. Of course, she wouldn't know anything about economics either, or would she? Oh, she did further mention that she was opposed to the increase in bureaucracy that the FinReg bill would engender. Those following my blog know I did not simply parrot her ideas. People can agree without that.



    Disclosure: No postions at this time
    Tags: SPY, DIA, QQQ, UUP, FXE
    Jul 01 12:55 AM | Link | 1 Comment
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