This Little-Known Indicator Says Stocks Should Double
With the markets breaking all-time highs last week, it begs the question of just how high they can go.
At 1,569 points the bears would say at this point the S&P 500 is completely overdone. With a sluggish economy and a growing federal deficit, you might be prone to believe them.
But there is a little-known indicator that became very fashionable between 1982-2007 that says something else entirely. Noted for its accuracy over that period, it actually suggests that stocks should double.
It's called the "Fed Model."
Berkshire Hathaway Holdings Show Buffett Hunting a Big Elephant
Warren Buffett's Berkshire Hathaway holdings have undergone some major changes in the third quarter, according to the company's latest 13F filing.
Not only did Buffett and Berkshire Hathaway Inc. (NYSE: BRK.A, BRK.B) sell more than $750 million in two American giants, they initiated four new holdings and eliminated three positions entirely. Overall, Berkshire's reported portfolio, which only includes long positions, increased to $75.3 billion for the quarter ended Sept. 30, up from $74.3 billion the previous quarter.
While some think Buffett is taking profits where he can, others think he is building up a stockpile of cash for a major move.
"Buffett may be selling the consumer stocks to provide more funds to his deputies while reserving money for a large acquisition," David Kass, a professor at the University of Maryland's Robert H. Smith School of Business, told Bloomberg News.
"He may be really wanting to keep that aside for his big elephant," said Kass, who is referring to Buffett's quote in a letter to shareholders last year where the 82-year-old investing legend stated, "Our elephant gun has been reloaded, and my trigger finger is itchy."
Only Buffett and Berkshire's new portfolio managers, Todd Combs and Ted Weschler, truly know why they made their latest moves, and so without further speculation, here they are.
Unless We Act, High-Frequency Trading Will Crash the Markets
High-frequency trading isn't illegal. But the way it is practiced today, it should be.
That's because high-frequency trading, or HFT, doesn't add to market liquidity, stability or efficiency — but it could cause a catastrophic market crash.
Here's what's wrong with allowing high-frequency trading, what HFT practitioners say they're doing that's good for the market (which is rubbish), what could happen based on what has already happened, and what to do to fix this black hole.
The problem is HFT is based on a lie.
High-frequency traders send out tens of millions, if not billions, of orders to exchanges that are never meant to be executed. They are fake orders designed to dump manipulative information onto the nation's exchanges.
And while other market participants are not actually forced to adjust their bids and offers or engage in any of these trades, allowing access to the exchanges to manipulate anybody in any way is something that ought to be outlawed.
Exploiting an Unfair Advantage
In the HFT world it's all about speed. Without it, HFT wouldn't be possible.
There's nothing wrong with employing external innovations that speed up computers or the time it takes for information to get from one server to another. But HFT takes it to an entirely different level.
As I write this, chains of fixed microwave towers are being erected to send market data and orders between New York and Chicago because electromagnetic radiation travels only 2/3 as fast in glass fibers as it does through the air. The towers were designed and are being built by a pair of HFT entrepreneurs who already have HFT customers lined up.
And as soon as this winter passes, Hibernia Atlantic's Project Express will be dropping a more direct new generation transmission cable across the Atlantic so data and trade executions can travel faster between New York and London.
The new cable will reduce the 30 milliseconds travel time it takes now by only a few milliseconds, but space has already been leased to the only takers, the HFT crowd.
It may be unfair that some players are able to pay for a speed advantage by employing new technologies, but it's certainly not illegal.
What should be illegal, and is an abomination, is that the SEC allows exchanges to serve high frequency traders by leasing them co-location space next to the exchange's servers.
Not everyone can afford that access. But because it can be bought, HFT players have a significant speed advantage over everybody else who expects the SEC and the nation's regulated exchanges to guarantee equal access to get data and place trades.
Trust Me, It's Not About Liquidity
The HFT crowd argues that they act as market-makers and add liquidity wherever they practice their trades and both markets and investors are better served by their activity.
That's absolute nonsense.
The Truth About High Frequency Trading and The Coming Market Crash
According to high-frequency traders and their backers, the super-fast, computer-driven stock trading desks that employ HFT are a benefit to investors and exchanges here in the U.S. and wherever they ply their trades.
But that's not true.
In fact, if you know exactly what high-frequency traders actually do and how they do it, you'll know what the SEC hasn't figured out, namely what caused the May 2010 Flash Crash.
You'll also realize that it's only a matter of time before these market manipulators cause a real catastrophic market crash.
Today I'll talk about what HFT players do and how they do it. And tomorrow I'll tell you how HFT could destroy our markets and economy.
What High-Frequency Traders Actually Do
High-frequency trading is fundamentally based on how market participants (for this discussion I'm talking about stock markets) place their orders to buy and sell shares and how HFT players act on those orders.
For every stock that's traded there is always (or at least it used to be "always") a "bid" and an "ask" price. Sometimes you'll hear the term "offer" or "offered" price, those terms are interchangeable with the term "ask" or "asking price."
The bid price is the price which someone is "bidding," or willing to pay to own shares. The ask price is the price which someone is willing to sell shares, or is "offering" or "asking" to sell at.
Bids and offers each come with the quantity of shares that the buyer or seller want to trade. There are millions of bids and offers made all day long, every trading day.
In fact, for every stock there are many bids and offers at several different prices.
The best bid, the highest price someone is willing to pay and how many shares they are willing to buy, and the best offered price, the lowest price at which someone is willing to sell their shares, constitutes a stock's current "quote."
In the U.S. we call that quote the NBBO, or national best bid and offer. But there are almost always other bids at lower prices and other offers at higher prices for all stocks.
High frequency traders employ pattern recognition algorithms that look deeply at bids and offers on stocks to determine if the movement on the bid quotes or offered quotes implies a directional tendency.
Computer-driven algorithms are "reading" the quotes, the intentions of buyers and sellers as they put down their orders in real-time, to make a trade that the HFT player expects to profit from if the directional bias their computers pick up is correct.
High-Frequency Trading is a Scam That is Crippling the Markets
Let me make this perfectly simple…
High-frequency trading is a scam. It should be outlawed.
Regulators, namely the pimps and panderers at the Securities and Exchange Commission, and the exchanges, all of them, are in on the game.
The game, known as HFT, isn't arbitrage, isn't fair, isn't consistent with the keeping of "fair and orderly markets," and so should be illegal.
In case you don't know, here are the rules of the game…
- Pay the exchanges to "co-locate" your servers next to their servers, at the locations where they house them (and rent space to you for that explicit purpose).
- Get access to quote information (what stocks are being "bid" for at what price and for how many shares, and what is the "ask" price and number of shares that sellers are trying to unload), and be able to place your own bid and ask quotes as fast as technologically possible.
- Get yourself a bunch of money to trade with. You'll need millions, so maybe form a partnership to raise money or partner with some banks that don't already have their own HFT desks, you know, the ones that want to hide what they do.
- Get yourself a few nuclear physicists, rocket scientists, and computer wizards to write algorithms that can read quotes on both sides of every stock to determine patterns, the depth of markets, and how many shares you can buy or sell and then sell or buy in a matter of less than one-hundredth or one-thousandth of a second.
Stock Market Today: Banks Net Record Profits, But Stocks Slip
The stock market today is trying to end what has been a negative week on a positive note.
Markets have traded down all week on global economic concerns and today are being held back by JPMorgan Chase & Co. (NYSE: JPM) and Wells Fargo & Co. (NYSE: WFC) even though the two financial giants posted record earnings.
Here's what's bringing those stocks down and why consumer sentiment is at a five-year high:
- Banks slide amid record earnings- JPMorgan and Wells Fargo each reported record quarterly profits but neither stock is surging on the results. Wells reported third-quarter net income of $4.94 billion, or 88 cents per share, up from $4.06 billion, or 72 cents a year ago and JPMorgan announced third-quarter earnings of 5.71 billion, or $1.40 a share, up from $4.26 billion, or $1.02 a share a year earlier. The record results were spurred by homeowners taking advantage of lower interest rates in order to refinance their mortgages. "The one big positive is clearly mortgage origination revenues," Richard Staite, an analyst at Atlantic Equities LLP in London, told Bloomberg News in an interview before results were announced. "Rates will remain at this level or potentially drop further and ultimately that will drive a recovery in the housing market."
If You're Worried About Stock Market Crash 2013, Buy These
The market has surged in recent action, but these gains haven't eradicated the chances of a stock market crash in 2013.
Global markets are up on news that central banks will deliver more stimulus measures, such as QE3 in the United States.
Even though stimulus measures trigger market rallies, they're actually admissions that economies are so weak they need government assistance.
As Federal Reserve Chairman Ben Bernanke recently stated, the economic conditions in the United States, particularly high unemployment, should be of "grave concern" to all.
Legendary investor Jim Rogers declared in an interview that, "In America, we have had recessions every 4 to 6 years at the beginning of the republic. 2013 is going to be a mess. It always has been, there's no reason it won't be this time too. Be careful…"
In order to heed Rogers' warning, investors should consider adding the following stocks to their portfolios.
Stock Market Today: This Stock Wins With or Without QE3
The major headlines in the stock market today include the Fed's decision to implement QE3, increased producer prices, and higher jobless claims.
- QE3 a 99% certainty?… Not quite- When the Federal Open Market Committee makes its statement at 12:30 p.m. EDT every investor will be waiting to hear if QE3 has finally arrived. After what seems like two years of speculation since QE2 was announced will we finally get QE3? According to Citigroup Inc. (NYSE: C) a gauge of indicators of market expectations for additional central bank stimulus rose to a record 99% in August. Yet many economists do not expect QE3 to be announced today for many reasons. If the Fed takes action it will be viewed as highly political coming just months before Election 2012. Even if the Fed announces QE3 but says it will delay QE3 purchases until after the election as it did with QE2, the political implications will still be there. Other reasons are the lack of progress the previous rounds of QE have had in turning around the economy – and not just the stock market. "The Fed continues to want the economy to grow faster and specifically, to grow more jobs, but the ability of QE to do that is extraordinarily limited," Catherine Mann, a finance professor at Brandeis and former Federal Reserve economist told CNN. "We know that QE reduced interest rates, but we also know that has not led to more construction, more mortgages, more business investment, or more lending. Since it hasn't done any of that, it probably hasn't created jobs either."
- Producer prices rise most in three years- Wholesale prices, measured by the producer price index, climbed 1.7% in August – the most since June 2009 – due to higher gasoline and natural gas prices. This was a faster increase than the 0.3% reported in July and ahead of the median forecast for a gain of 1.3%. Food prices rose 0.9% due to a rise in dairy and egg prices. The core producer price index which excludes food and energy rose 0.2%, which was in line with expectations. Tomorrow's consumer price index will be a good indicator if higher wholesale prices have translated into increased consumer prices.
Stock Market Today: This Tech Stock Rallies to All-Time High
The major headlines in the stock market today include Europe's latest rescue effort, cautious optimism on U.S. jobs, and these big-name stocks leading the rally:
- ECB unveils unlimited bond buying plan- European Central Bank (ECB) President Mario Draghi announced in Frankfurt today (Thursday) that the ECB will embark on a drastic new bond-buying plan. The new program, called "Outright Monetary Transactions," allows the ECB to buy bonds with maturities between one and three years without announcing any limits in advance, as long as the government in question is under a program approved by the Eurozone. The plan is aimed at stabilizing interest rates in the euro area and will require countries such as Spain and Italy to request aid from the ECB to activate the bond purchases.
"Under appropriate conditions, we will have a fully effective backstop to avoid destructive scenarios with potentially severe challenges for price stability in the euro area," Draghi said at a press conference. "Governments must stand ready to activate the EFSF/ESM in the bond market when exceptional financial-market circumstances and risks to financial stability exist — with strict and effective conditionality. The ECB reserves the right to terminate bond purchases if governments don't fulfill their part of the bargain." The ECB held its benchmark rate at its record low level of 0.75%. Draghi announced that the ECB won't claim the status of a senior creditor if the bonds it buys have to be restructured and that the purchases will be "sterilized" meaning there will be no impact on the monetary supply.