June 17, 2016
What We’re Reading this Week
Cash is King
The Wall Street Journal reports that fund managers are stockpiling cash. Hardly breaking news but slightly surprising given the market’s slow march upward. According to a Bank of America Merrill Lynch survey money managers are averaging 5.7% cash holdings in portfolios, up from 5.5% just last month. This comes on the heels of Goldman Sachs advice to increase cash positions to mitigate a possible downturn in the market. Combined with current investor sentiment this could be viewed as a strong indicator of recessionary fears. The Journal suggests this isn’t the case and the increased cash positions are actually portfolio managers’ attempt to prepare for dips in the coming months. The biggest issues on the radar is Britain’s possible exit from the EU which could trigger selloffs in the market. Investor attitudes toward “Brexit” range from denial to outright terror and it is certainly receiving lots of press right now. This is exactly why “Brexit” is the least likely catalyst to push the market lower. Historically, declines in the market are driven by outside factors like this but very rarely are they caused by the apocalypse de jure. The efficient market hypothesis explains this phenomenon. The idea behind “efficient markets” is that all public information is already priced into securities and new information will not affect prices substantially. What typically happens is that when investors are worried about “A” they talk about it a lot and affect trading before it even happens. Then “B” happens and every one was so worried about “A” that they freak out and “B” triggers a sell off. Sure the market will go down at some point but we can be relatively certain that we have no idea what will cause the slide.
I know I always say that I try not to write about politics but Donald Trump is hard to avoid. In April, Steven Hoffenberg (convicted of running a Ponzi scheme and defrauding investors of $475 million in 1995) filed paperwork to form a super PAC in support of Trump. Interestingly the PAC hasn’t disclosed that it has ever received any money. They have been given a donation of services though, from software company Statware Inc. The services are worth about $50 million according to the filed document, and they will be used to launch a “digital media marketing” campaign and something ominously called “revenue sharing.” First, here is how a Ponzi scheme works, investor 1 invests money with an advisor, usually based on promises of an outlandish return. Investor 2 also invests money and said advisor pockets some money then uses investor 2’s money to make investor 1 feel like they are getting rich. The “investment” keeps growing while the advisor continues to siphon it out to themselves. Eventually it becomes too unwieldy and they get caught, but you get the idea. I also think “revenue sharing” might be the least offensive way to describe it. It’s hard to say whether this PAC is the political donation version of Ponzi scheming but it’s also really hard to not say it. I guess one of the fundamental attributes of a Ponzi scheme is that investors who give “x” amount of money get virtually nothing back with the expectation that they will. When you are dealing with political contributions, people give to Super PACs with the idea that the benefited candidate will be sensitive to their business and commercial interests. They may or may not receive those benefits and there is no legal recourse if they don’t. The economy of a Ponzi scheme can still be applied though. I don’t want to imply that this particular PAC is engaged in fraud, but if they were, this is what it would look like: Statware (a company that works with financial advisors) would “donate” “marketing services” to Donald Trump through a Super PAC run by Steven Hoffenberg. The super PAC would then raise money through outside investors and business interests, which would then be invested with Statware clients or used to entice advisors to become Statware clients. Steven Hoffenberg could then take his fees/compensation off the top while making dubious promises to both “investors” about what their potential return on investment would be. It doesn’t really matter if Trump provides any tangible benefit to any of the parties, the PAC is just the method used to carry out the transaction. I mean that’s just one way. Steven Hoffenberg could also be the Mother Teresa of super PACs.
High Frequency Trading
In the past I have written about high frequency trading and, well, high frequency trading. The latest development is the approval of IEX as an exchange (http://www.wsj.com/articles/sec-staff-recommends-full-approval-of-iex-ex…). So who are they and what does this mean? Simply put, IEX has issues with the disparate price feeds that other exchanges like Citadel use when executing trades. IEX proposes to “slow” trading feeds in order to prevent potential “front running” and to make trading fair for investors by introducing a “speed” bump in the fiber optic line. Primarily, opposition (large high frequency trading firms) is focused on how the speed bump will add additional complexity to the market and make it harder to trade (not proven) and proponents (mutual fund managers and individual investors) are focused on how the speed bump will add additional complexity to the market and make it easier to trade (not proven).
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