Yes, Virginia, the Markets are Broken
We were talking market volatility yesterday on our show "Street Signs" (CNBC, 2 p.m. ET) and trader Joe Saluzzi of Themis Trading said almost matter-of-factly, "The markets are broken."
He's right, and I'll take it one step further: Until further notice, investing the old fashioned way is dead—maybe forever. Yes, maybe this time it really IS different.
Sure, you can still go out and buy growth and value stocks that, based on solid analysis, will go higher. But anybody who says the same research rigor of 10 years ago will produce the same results with the same relative ease (not that it was ever easy) is either living in a fantasyland or denial.
I've been a business journalist for the better part of 37 years and, exclusively, a stocks columnist/reporter/commentator for 23. Here’s what I know—and I’m not just saying this because what I do (trying to get an edge) is harder than it has ever been: Even the smartest of the smart are having a hard time figuring it out. All you need to do is go to the latest hedge fund loss data for THAT reality check.
Risk on, risk off—whatever that means; call it what you want, but like it or not: It’s almost exclusively a trader’s market. Better yet, a DAY trader’s market.
The reasons—none of which can be quantified with entirely provable hard data, but all of which would appear to be having an undeniably sustained (make that secular) and profound effect:
1)A fixation on the macro. The ultimate unpredictable fool’s game of gamble. This, unfortunately, is the unavoidable result of an artificially inflated economy gone wild. Until things settle out into the new normal—and NOBODY really knows when that will be—the market’s daily moves will tied to the whim of the latest hand-wringing over the European financial crisis, the worldwide economy or, more likely, the latest guessing game on what all the kings horses and all the kings men (otherwise known as the central bankers) will try next to try to fix things.
2) The Internet. Yes, this great disrupter of almost all businesses and industries has also upended investing and Wall Street. Information that once was valued, and helped create inefficiencies, is now generally little more than a commodity. (In the old days of the early 1990s, before I knew him, Jim Cramer used to have his Morgan Stanley broker fax my proprietary column from the San Francisco Chronicle to him in New York—so he’d have my stuff before his competitors.) And thanks to Twitter and social media, the minutia of data and information is disseminated, for better or worse, without filters and faster than any form of traditional media. Free research, some of it exceptional, is EVERYWHERE. You just don’t always know who is writing it, how accurate it is or the writer’s bias—but, sadly, that doesn’t really seem to matter.
3) High-frequency trading. Old school investors blame HFT for everything but world hunger. It’s unclear whether the blame is justified, but this much we know: The speed of trading appears to be based on computer algorithms that trigger trades based on words and/or events and/or technical patterns and/or all of the above. The result is wild volatility that didn’t exist a generation ago. (Hint: When you don’t know why the markets did what they just did, blame it on the algos.)
4) Last but not least: ETFs, or exchange-traded funds, which started as a sound idea but, with Wall Street being Wall Street, have all but turned into a monster. As I noted in a post here last week even the biggest operator of ETFs, BlackRock, is concerned about the direction some ETFs have taken—becoming too complex and confusing, with so-called double- and triple-leveraged ETFs leading the charge. (Imagine what happens when high-frequency traders used levered ETFs, but I digress…)
With most ETFs mindlessly mirroring various indexes of everything from the S&P 500 to the illiquid stocks of makers of lithium batteries, THEY have become the market. (Stats showing that the market has never been more correlated to itself—another way of saying everybody is trading in and out of the same things at the same time—have never been higher.)
More telling, perhaps—as charts created by a friend who runs the investment arm of a large foundation show—while the number of listed stocks in the U.S. is falling, the number of listed ETFs is rising.
Bottom line: Seasoned investors say this, too, shall pass. That the winners, they say, will be the true stock pickers, who they believe will be the last guy standing on the other side of the market’s new inefficiency.
Only trouble is: They’ve been saying that for a few years now.
Maybe I’m wrong. Maybe the market isn’t broken, maybe it’s just evolved to the next level and we’ll just have to live with it.
Questions? Comments? Write to HerbOnTheStreet@cnbc.com
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