This morning, the Wall Street Journal reported that during the first quarter of 2014 discount brokers reported a large increase in the trading activity of their clients. TD Ameritrade and Charles Schwab Corp., the two largest discount brokers, reported that their average daily volume increased 20% plus to roughly 700,000 shares a day. While a 20% plus increase in activity may sound like a big deal, when you put it in the context of the overall market that’s not even a sneeze. Normal daily volume on the 13 U.S. exchanges runs between 2 and 3 billion shares, so 700,000 shares is not about to propel the raging bull market. This is one further illustration that the individual investor trading their own account has no influence over the direction the market. Institutions rule and the only time mom and pop have any influence over the market is when they move in and out of mutual funds.
Wednesday, April 23, 2014
Recently, I was approached by a lady I know, who shall remain anonymous. She asked me if I would mind looking over here 401(k) and giving her some direction with the investment selection. She works for any large institution and I am guessing that she is a little bit past middle age. I looked at her statement, which had a modest sum of money in 12 different mutual funds. She asked me if I recognize any of them; I did not. Her employer, like many others relies on a very large mutual fund company to provide advice on the investment function of their plan. So, she was given an 800 number and told to contact the fund company. The fund company sent her a list of 200 funds to choose from. I told her to contact the mutual fund representative and see what they said. The response from the fund company was “Pick a couple of US funds, a bond fund and a foreign fund”. This poorly lady had no clue as to what to do next. What troubles me is that I’m pretty sure this story is reputed thousands of times every day.
Tuesday, April 22, 2014
During the first quarter of 2014, investors continued to pour money into hedge funds resulting in an industry wide record of assets under management. Assets under management for the industry now stands at $2.7 trillion, which is almost double the amount the industry experienced in 2008. I think this shows the power of persuasion that the industry has over high net worth individuals. In 2013, the average hedge fund returned 9% while the S&P 500 gained 32 %, dividends included. Last year the average hedge fund charged a 1.54% management fee and 18.27% performance fee. The average index mutual fund charged 0.0 6% for the same period.
Monday, April 21, 2014
The macho guys on Wall Street can’t stand plan vanilla and are always seeking new ideas to push off on the investing public. It has been reported that Blackrock Inc., T. Rowe Price and Fidelity Investments have been taking stakes in high profile startup companies, many of them in Silicon Valley. These are the kind of investments that either pay off big or go broke. Last year these three were involved in 16 private funding deals, up from nine such deals in 2012. So far this year, these three have closed 13 deals, putting the year on track to be the biggest ever. Nothing prevents mutual funds from buying pieces of startups, although the SEC limits them to having less than 15% of their portfolios in illiquid securities. The rules do not require immediate disclosure and the fact that these startups are privately held means that information about their fiscal condition is not available to the public.
Saturday, April 19, 2014
We’re starting to see stories that current Bull Market is long in the tooth and about to burst. It is important to make a distinction between being pricey and being in a bubble. When stocks are pricey it means that future returns are generally lower. A bubble means that stocks no longer have any connection to the real asset prices and the bursting of the bubble can result in price declines of over 50%. Is the stock market currently in bubble? Probably not? While the S&P 500 did gain 32% last year, the S&P 500’s Shiller PE is 25, which is higher than normal, but a long way from its dot com peak.
Friday, April 18, 2014
Virtu Financial Inc. describes themselves as an electronic market making firm. They are in the middle of an Initial Public Offering, but announced yesterday that they are suspending their efforts indefinitely due to the controversy surrounding Michael Lewis “Flash Boys.” The Atty. General of the State of New York has subpoenaed a number of flash trading firms for information on their trading activities and he describes the strategies of some of these firms as “Insider Trading 2.0. I think it is way too early to pronounce a verdict on an operation that is not fully vetted. The rap on high frequency traders is that they have knowledge of market orders before the public does. How does that differ from the way the NYSE specialists operate?
Thursday, April 17, 2014
The Wall Street Journal reported this morning that lending is on the rise at the sixth largest money center banks in the country. Earnings reports show an 8.3% increase in commercial lending for the first quarter over the same period a year earlier. Lending by the big banks has been a drag on economic growth and an indicator of pessimism by the banks and the corporate community. The increasing level of lending could be a change in attitude by both the banks and corporations and it is important because it could lead to increased spending on workers and equipment. The article also hinted it could also be an indication that corporations may be anticipating that interest rates may start to climb from their current rock bottom levels.