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.Read Full Post | Make a Comment ( None so far )
For Tradeworx’s Manoj Narang, High-Frequency Traders are Among the Most Responsible and Risk-Averse Players in the Market
For Manoj Narang, Chief Executive Officer of Tradeworx, one glaring misconception is that high-frequency trading generates massive profits for Wall Street. First of all, he says, Wall Street has very little to do with high-frequency trading, and second, the profits are actually very modest. He adds: “People have the misconception that high-frequency trading practitioners have a kind of ‘cowboy mentality’ and that the markets are like the Wild West as a result. Nothing could be further from the truth. high-frequency trading are among the most responsible and risk-averse players in the market. They have never been implicated in any sort of wild risk-taking behavior, which is quite a contrast from the Wall Street traders who nearly brought the global economy to total collapse in 2008.”
Mr. Narang, one of the leading high-frequency traders featured in Edgar Perez’s The Speed Traders: An Insider’s Look at the New High-Frequency Trading Phenomenon That is Transforming the Investing World, founded Tradeworx in 1999 with the goal to democratize the role of advanced technology in the financial markets. Tradeworx also operates a quantitative hedge fund business that currently manages hundreds of millions of dollars in assets, as well as an in-house proprietary trading business focused on high-frequency trading strategies. Tradeworx trades U.S. equities and will eventually expand to all other electronic markets. As most high-frequency trading firms, Tradeworx doesn’t accept external capital, because the capital requirements are very low. The main use of outside capital in the world of high-frequency trading is to fund R&D and operations, not to actually trade the capital.
Mr. Narang finally adds: “high-frequency trading provides a valuable service to the market, and earns a relatively tiny profit in return. Let’s consider this, when an individual investor executes a 200-share order in their online brokerage account, the investor pays a broker five cents per share to execute the trade. The broker does not risk any of its own capital to do this; all he does is route the order to the exchange or to a market-maker. The player on the other end who actually provides a fill for the trade is a high-frequency trader. The high-frequency trader not only risks his own capital to provide the required liquidity, but in exchange, only receives about 1/50th of the compensation that the broker, who takes no risk whatsoever, makes on the very same trade. If people have a grievance with the financial establishment, they should ask their broker why they need to earn fifty times the amount that the liquidity provider earns, despite the fact that they are not even risking any capital on the trade!”Read Full Post | Make a Comment ( None so far )