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Mark Bern, CFA  

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  • How Low Can This Market Go? [View article]
    Regarding what happened Monday and how it got so low so fast, I have a theory and it also includes ETFs. First, it is important to note that trading was halted momentarily in a lot of stocks on Monday. It is an automated system employed by the NYSE to keep things from getting out of hand. The stock is halted for a few minutes to let traders breath and clear their heads. This happened all over the board from my reading, maybe over 1,000 times total just on Monday.

    Where ETFs come in is that they trade based upon the internal value, or the aggregated value of all the underlying stocks that are held by the ETF. When trading is halted for one of the stocks held by and ETF there is no way to determine the actual value of the ETF. When more than one of the stocks held by the ETF are halted it gets even more dicey.

    The bid and ask prices for an ETF are set by market makers. When they don't know with certainty what the internal value is they tend to guess low on the bid and higher on the ask. Since the market makers are not in the business to lose money, but rather to facilitate liquidity, I suspect that they set the ask price high enough that they knew they would be safe and likewise the bid price where they would not lose money.

    From that perspective it makes perfect sense that the market makers would pick support levels to set their bid prices for safety. It may have had nothing whatsoever to do with the internal value of the ETF, but it made sense from the point of view of the market maker not wanting to get caught buying too high when the halts ended. The problem intensified on Monday and the bigs got exaggerated to the low side because so many stocks were halted at different times. It may have become impossible to calculate the internal value of the ETF for many minutes at a time as one stock got halted and then another and another as the first one started trading again, but then more got halted and so on.

    Just a thought to consider.
    Aug 27, 2015. 11:06 AM | 1 Like Like |Link to Comment
  • Quick Chat 282 July 28 2015 [View instapost]
    Look beautiful, DG! I'm jealous! Have a great time.
    Aug 27, 2015. 12:17 AM | 4 Likes Like |Link to Comment
  • Quick Chat 282 July 28 2015 [View instapost]
    I am exhausted from answering questions and comments on an article I posted yesterday. 259 comments so far and they just keep coming. Anyway, one of the comments suggested that the NY Fed is a major buyer of equities when the market falls. The said it uses GS to make purchases and that the buys are issued as stock buy backs to cover the trail. That would make sense when so much buying is concentrated in a small number of large caps some days. I have no way of confirming, though.

    Has anyone heard or read anything about this sort of activity? I have sent a PM to ask the one who commented what the source of that remark was but have not heard back yet.
    Aug 27, 2015. 12:13 AM | 4 Likes Like |Link to Comment
  • How Low Can This Market Go? [View article]
    Namron - Very good advice. Thank you including your thoughts here.
    Aug 27, 2015. 12:06 AM | Likes Like |Link to Comment
  • How Low Can This Market Go? [View article]
    Mathieu - India can't drive global growth yet, but it could in the future. When depends mostly on the quality and rate of reforms.
    Aug 27, 2015. 12:01 AM | 1 Like Like |Link to Comment
  • How Low Can This Market Go? [View article]
    copywryter - You're making sense, although I think China is in worse shape that you do, but that's not a big deal. Opinions are just that. And disagreeing is fine, too. That is what can happen when people differ in opinion.

    I commend you on your philosophy of not panicking. It will, in fact get better. The best time to panic was indeed earlier. If sweating the losses at this stage a person should be asking if the stock market is the right place for so much of their savings.
    Aug 26, 2015. 11:56 PM | Likes Like |Link to Comment
  • How Low Can This Market Go? [View article]
    Whether it is the central banks or corporations, stock buy back have been the only buyers for weeks. Take a look at the link about BoA Merril Lynch in the article and scroll down to the chart of net buying by client type. All types of clients have been net sellers of stocks except corporate buy backs. That chart is an eye opener!
    Aug 26, 2015. 11:50 PM | Likes Like |Link to Comment
  • How Low Can This Market Go? [View article]
    Franklin - Don't forget the need to learn a whole new set of accounting principals. That is very important when investing overseas, too.
    Aug 26, 2015. 11:47 PM | Likes Like |Link to Comment
  • How Low Can This Market Go? [View article]
    Sleepless - Yes, China is in a great position if demand for its products increases because it has all the tools in place: infrastructure, factories, labor, resources, financing availability. But demand is weak and without robust demand the growth in China does not rise. The key is demand. It is weak and likely to fall in many parts of the world.
    Aug 26, 2015. 11:45 PM | Likes Like |Link to Comment
  • How Low Can This Market Go? [View article]
    Franklin - I wouldn't count on all that new found wealth from savings on energy to go into consumption or equities just yet. A huge generation is in the process of retiring from the workforce, thousand a week, and many are really not financially prepared. A lot of them still haven't retired and are probably going to have to put it off, but they are still preparing for retirement. What that means, and since I retired in 2002 I have a pretty good idea about the process (both before and after), is that a lot of people need to save and pay down debt so that they can retire. This market volatility will be a great big reminder to those who are planning to retire and live off their 401k. It just went down in value, they remember 2008-09 and may be rethinking the situation a bit now. Also, when one retires, unless they are better off than 80% of the population, will need to reduce spending regardless of what happens to the economy or stock market. It is just a fact of life that when one retires one's income drops; how much depends on how well they prepared. The vast majority are not well prepared. So, there are many other priorities for the 90+ million baby boomers, or at least, for most of them (us).

    The next big generation coming along to take over as the consumer engine of the U.S. economy is the millennial generation, but a good portion of those likely to earn the most and, therefore, consume the most are weighted down with student loans which must be paid off in addition to needing a car (another monthly payment) and they have to pay rent, groceries, utilities, phone bills, food. They are starting out in life with dragging an anvil (the student loan) that my generation did not have. We got a much faster start on life and consuming. I don't think it will be as smooth a transition for the young now.

    That creates a void in the consumer space for the next few years. It hasn't been fully felt yet, but it will.
    Aug 26, 2015. 11:40 PM | Likes Like |Link to Comment
  • How Low Can This Market Go? [View article]
    Franklin - Point #3 stands out to me. If the US$ increases in value the price of oil, in dollar terms, will go down. But with the US$ value increasing relative to other currencies the cost of oil could move up or down in local currencies depending upon whether the local currency loses more value against the US$ than the change in the price of oil. It is not always a zero sum game with forex.

    Point #2 is definitely true. A little may hurt in the short term but won't make everything crash to the ground; bigger would be a problem. That is what the Fed is betting on. We will see how this plays out.

    Point #4 is an excellent point.

    Point #1 is sometimes true and sometimes false. Buying back shares is not usually a good thing for most companies because it means that the company can find no better use of its capital. The biggest problem with buy backs is that they usually occur when stock prices are peaking and, therefore, at high valuation. From a efficient capital management perspective this is madness. But there are a few cases where the company has a choice of increasing production with capital investments or buying back shares when the buy back make more sense. If a companies cost of debt is far more than its cost of equity, then share buy backs may be a better use of capital in that it will reduce the long-term cost of capital for the company. If increasing production into a glutted market is not expected to increase revenue or profits then either sitting on cash or reducing the cost of capital becomes the choice management must consider. But, then again, I still don't like do so when the company stock is near all time highs. That is ridiculous and only justified by bigger executive bonuses. So, I don't disagree with you because there are very few instances where it can be justified and it actually happens.
    Aug 26, 2015. 08:50 PM | Likes Like |Link to Comment
  • How Low Can This Market Go? [View article]
    Franklin - I am usually early. I started a low cost hedging strategy last year and continue to remain fully hedged. It is working now, but if the market rebounds I will continue to hedge because I like probabilities. I win at the baccarat table because I know the odds of the "draw" option and only place that bet when it becomes statistically highly probable to happen within a hand or two. Then I just keep increasing my bet until I win. I lose smaller amounts to win bigger amounts. My pile grows slowly.

    I use that analogy to compare with investing by the probabilities. I realize that the game is "fixed" this time relative to the past because the Fed and central banks around the globe have intervened on a massive scale. But I like my odds of being right in the longer run. If my hedge position costs me 1.5% of my portfolio per year I don't mind, because I know that eventually I will protect my portfolio from losing 30% or more. If it takes me five years of 1.5% a year, I have invested a total of 7.5% and my return on that investment is 30% or more. It will happen, I just don't know exactly when.

    This bull market is one of the longest in history since 1929. The average is 97 months, but there were two bulls that ran for much longer which skew the average upward. All the others were shorter in duration that this one. Those others number 13 (no, I am not superstitious). I like the odds of a recession occurring within the next 18 months.

    The disaster that is unfolding in the oil patch leads me to believe that this could be the beginning of something very bad. But, if the stock market recovers, as it would appear it might with today' results, I still believe things will turn much worse before year end.

    Thanks for asking the question. It is good for readers to understand where my conviction comes from.
    Aug 26, 2015. 08:34 PM | 2 Likes Like |Link to Comment
  • How Low Can This Market Go? [View article]
    I agree with Franklin! Good analogy. But, in the future, please try not to be so sexist.

    Just kidding! I had to put in that disclaimer to protect myself. LOL!
    Aug 26, 2015. 08:20 PM | Likes Like |Link to Comment
  • How Low Can This Market Go? [View article]
    Franklin - "IMO, unless more effort is put into creating stable jobs, nobody should be complacent."

    I am afraid we are going to have to wait for another year and a half to get any idea of what might happen on that front. In the mean time the economy languishes and we must remain vigilant.
    Aug 26, 2015. 08:17 PM | Likes Like |Link to Comment
  • How Low Can This Market Go? [View article]
    Comanche - Good advice. I'm almost jealous!
    Aug 26, 2015. 08:13 PM | 2 Likes Like |Link to Comment