The Correction in the US Equities Markets Nobody Wants to Talk About

Posted on March 17, 2013. Filed under: Companies, Debt Ceiling, Economy, Financial Crisis, Fiscal Cliff, Securities | Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , |

Edgar Perez, Author, The Speed Traders, and Knightmare on Wall Street

Edgar Perez, Author, The Speed Traders, and Knightmare on Wall Street

Stocks in the US markets slipped on Friday, ending the Dow Jones Industrial Average’s (DJIA) longest winning streak since 1996, just after snapping a 10-day run. Data from Thomson Reuters’ Lipper service showed that investors in U.S.-based funds had poured $11.26 billion of new cash into stock funds this last week, the most since late January. The DJIA slipped 25.03 points, or 0.17 percent, to 14,514.11 at the close. Meanwhile, it was announced that the fewest workers on record were fired in January and job openings rebounded, showing employers were gaining confidence the U.S. expansion would be sustained.

According to some pundits, recent market activity is essentially driven by positive corporate earnings. The S&P500 Price/Earnings (PE) ratio is currently slightly high at 16.5, if we compare with past indicators. The median S&P500 Trailing Twelve Months (TTM) PE ratio has been about 14.5 over the last 100 years; average is around 16. It was during much of 2009 when the disconnect between price and TTM earnings was so extreme that the P/E ratio was in triple digits, as high as the 120s. Going back to the 1870’s, the average P/E ratio has been about 15; therefore, the US equity markets are not excessively valued, leaving some room for further growth.

Other pundits point to the Federal Reserve’s determination to continue stimulating the economy with increased liquidity. Mohammed Apabhai, head of Asia trading at Citigroup Global Markets, favors this train of thought. He has noted that there is a 70 percent correlation between stock market performance and liquidity, “whether it’s through the promise of lower rates, QE (Quantitative Easing) or promise of more QE.” The Federal Reserve has launched three rounds of Quantitative Easing since the financial crisis hit in 2008.

More likely, both factors are in play, very good corporate earnings and monetary policy that pushes investors to take risks in equities. So is the earnings momentum sustainable? Unfortunately, savings from the smaller share of the pie from labor, government spending and earnings coming from emerging markets (EM) outside the US are all factors that will be curtailed at some moment. Is the Fed eager to continue being the huge player in this equation? Some of its members are increasingly worried about the effectiveness of the continued QE; if the labor market recovers, as the January numbers showed, the Fed most probably might be ending its bond purchases soon.

As pointed out by James Saft, wages in the US have taken a smaller and smaller piece of the pie; now below 44pc of GDP and dropping, down several percentage points since 1999. That is in part the consequence of globalization and the offshoring of jobs. However, the labor which can be offshored largely has already been and the likely trend is for new manufacturing technologies to start pushing jobs back into the US. As has been of national knowledge as well, there is a real danger of declining government spending. A dollar spent by the government is a dollar that supports household income, and consumption, and of course corporate profits; there will be less dollars starting this month thank to the sequester, a series of spending cuts and tax increases aimed at reducing the budget deficit.

Emerging markets are looking overstretched heading into the second quarter, Barclays Capital said in a report dated March 15, pointing out that the cyclical recoveries in EM have slowed down. Consensus growth forecasts (according to Bloomberg) have been revised down by 0.75 percentage points on average since mid-2012.  EM equities have been slow to react to these developments due partly to the continued inflows into the asset class from retail clients. The correction has started recently and the performance by country year to date has been mixed, but the most pronounced selloffs have been associated with the largest revisions to GDP growth forecasts. Adding to this dire situation, the economies of emerging markets grew at a slower pace in February than the month before, according to HSBC’s monthly purchasing managers’ index. The PMI recorded a level of 52.3, down from 53.8 in January, its lowest since August. The index covers 16 leading emerging markets, including India, Brazil and China, which all saw their rate of growth fall. Investors had been questioning whether emerging markets, whose growth depends in part on exports to mature markets, could continue to expand at fast rates of almost 10% in some cases.

What the equity markets want indeed is stable and/or predictably increasing US profits and the Fed to stay in the bond markets. Saft ironically suggested that markets’ best hope might be a cut in government spending deep enough to kill job growth and indefinitely extend QE, something that nobody else would agree with. Instead, markets would be happy with a bit of positive news today followed by another bit of negative news tomorrow. Unfortunately for the markets, profits will start showing stagnation starting with first quarter results. Federal Reserve said in September 2012, when QE3 was announced, that it would start pumping $40 billion a month to purchase agency mortgage-backed securities (MBS) until the labor market improves substantially. When will the Fed determine that the job market has made enough progress to reduce stimulus? The numbers for February will prove paramount in this regard. As these two important factors converge in a nightmarish scenario, equities markets should beware of the ensuing correction, coming as early as in the second quarter.

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For Edgar Perez, Author, The Speed Traders, Increased Volumes and Volatility to Feed High-Frequency Trading on Monday

Posted on August 6, 2011. Filed under: Economy, Exchanges, Financial Crisis, Fixed Income, Securities | Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , |

For Edgar Perez, Author, The Speed Traders, S&P Debt Downgrade Wake-Up Call to Get Serious about U.S. EconomyMr. Edgar Perez, author of The Speed Traders, An Insider’s Look at the New High-Frequency Trading Phenomenon That is Transforming the Investing World (http://www.thespeedtraders.com), wrote on Modern Finance Report (http://www.modernfinancereport.com) that a short-term stock plunge (increase of volume) and a spike in volatility on Monday are reasonably expected given S&P’s downgrade of the U.S. debt rating; the U.S. stock market was coming off its worst week since the financial crisis. “So we have here two of the main requirements for high-frequency trading, volume and volatility. Therefore, it will be reasonable to expect Monday to be a busy day for speed traders, as they provide the liquidity long-term investors will need to survive the day.”
Mr. Perez indicated that he would not be inclined to kill the messenger and instead see S&P’s decision in a positive light as it should serve as an effective wake-up call to get Washington’s warring players to the negotiating table again. He gave the example of S&P’s past decision to put the UK’s AAA-rating on negative outlook in May 2009, which fueled a debate on the need for significant fiscal tightening, and tough decisions taken by the new coalition government, which were eventually rewarded by S&P with the UK’s outlook being revised back up to stable in October last year.

Mr. Perez wrote: “We cannot deny the significant psychological impact of S&P’s decision on the markets and the view of foreign governments and investors of the U.S. economy. However, I expect Monday’ stock plunge to be a short-term event that will lose steam quickly. In fact, investors can be tempted to use it as reason to snatch value plays, as there would have not been a fundamental change from where we were last Friday. At the end of the day, S&P’s main theme, that U.S. finances are in bad shape, is not news to investors and traders; for instance, Pimco, the world’s largest bond fund, had stepped away from US government debt back in March; in addition, savvy money managers had already positioned themselves for a potential rating downgrade.”

For Edgar Perez, Author, The Speed Traders, S&P Debt Downgrade Wake-Up Call to Get Serious about U.S. EconomyFinally, he summarized: “I agree with experts who sustain that the downgrade will not lead to sharp rises of lending rates to the corporate sector or households in the U.S., as Fitch and Moody’s still maintain their top rating for U.S. debt. Also, a sudden sell off of U.S. Treasury instruments looks unlikely, as there are still not many safe assets to replace them. Once the dust settles, attention will turn back to the economic fundamentals. Disregarding the S&P downgrade comes with high risk for the U.S. economy, particularly if Washington prioritizes electoral concerns over the long-term health of this great nation, the United States of America.”

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