To market, to market to buy a fat pig. Whilst one is always searching for a reason for why markets go up and down on a daily basis, and I can promise you that it is not my favourite thing, I do often feel sorry for people who have to find a reason why markets go up and down. More on High frequency trading and the machines a little later in the message, and how that has had a positive impact on liquidity. Because all we are looking for is the correct price. How you get to that price of a security or debt instrument is part of the day to day machinations in markets, ideally we would like that to happen overnight. Equally a rerating of a stock is something that can give you, as an investor a massive uplift. That is what we have seen in this market over the last few years, stocks have simply rerated to a level that does not reflect either a US double dip, or a Euro zone falling apart. And some people have become less relevant, they will have their day in the sun soon.
There was another point that I was trying to make yesterday, and that is the market is not a strange and mythical beast of any sort. The question that many are asked in financial media is, where will the market go next? As if a) there is a path and a map and b) the market takes on a form that we can associate with. The market, to use the term loosely, is a collective of company share prices weighted according to their market capitalisations. Most indices are weighted like this, with the exceptions being that liquidity is also factored in. To make provisions for the importance of a security in the index. So the market is essentially someone else's calculation, based on factors that are relevant.
The market does not take on a life of its own, nor can it feed on itself in any way. To be clear, the overall market, or a specific index (the Dow Jones is very closely followed) is quite simply a collective of companies. Companies have share prices attached to them and those are afforded to the businesses from market participants (investors and traders) and as such trade at a premium or discount to their peer grouping and the rest of the market. So obviously you want to be owning the sector that shows the most potential in terms of increasing their overall sales and profits, but inside of that sector you want to own the company that is perceived to be the best. So it is people making investment/trading decisions daily and by the second (lots of different people) who determine the level of the index.
There is of course robot trading, algorithms on the fastest computers that are designed to look for something specific and then trade the market all day long. But both the algorithms and the computers were invented by people and have significantly improved the liquidity of stock prices. I can promise you that nothing is more irritating than not being able to execute a trade on what you perceive as a big ticket stock. A big company by market cap that has limited tradability is an irritation. But at the same time, you know how I get mad when talking about how the entire market cap of Apple turns over in less than a year.
It is this high frequency trading that affords people like us, who are not plugged into the Matrix, the liquidity, but for them it has become a really tough old business. See here, an old article (middle of last year), but well worth the read: How the Robots Lost: High-Frequency Trading's Rise and Fall. It is not as easy as it once was to trade the market with your supercomputer and your trading rules, written by someone with a math doctorate.
To think that the person trading on a machine in their garage (or study) has a chance spotting an irregularity (and then monetising it) in a huge and liquid market is supposing that the under nine leftback would dribble past Manchester City's back four and pip Joe Hart. Be it Kompany, Richards, Zabaleta, Lescott, Kolarov or Clichy, they have you covered. It is hard to compete against the machines, perhaps that is why smaller scale traders are lured to penny stocks, more chance of a pricing miss match there. In a smaller and less liquid market such as our own, the same applies, we have our own algorithms trading in the market. Providing liquidity of course, but every now and again, such as with the flash crash, things can go wrong.
The 2010 flash crash, that lasted all of a few minutes was a sight to behold. I thought that an atomic bomb had gone off somewhere, such was the fierceness of the selling, with the Dow Jones down nearly 1000 points at the worst. Nine odd percent. According to Wikipedia, the SEC report spoke of a hot potato effect:
"The combined selling pressure from the sell algorithm, HFTs, and other traders drove the price of the E-Mini S&P 500 down approximately 3% in just four minutes from the beginning of 2:41 pm through the end of 2:44 pm. During this same time cross-market arbitrageurs who did buy the E-Mini S&P 500, simultaneously sold equivalent amounts in the equities markets, driving the price of SPY (an exchange-traded fund which represents the S&P 500 index) also down approximately 3%.
Still lacking sufficient demand from fundamental buyers or cross-market arbitrageurs, HFTs began to quickly buy and then resell contracts to each other - generating a "hot-potato" volume effect as the same positions were rapidly passed back and forth. Between 2:45:13 and 2:45:27, HFTs traded over 27,000 contracts, which accounted for about 49 percent of the total trading volume, while buying only about 200 additional contracts net."
Wow. All it took was 14 seconds for the machines, made by humans and the algorithms, designed by humans, to send the market spiralling. Humans. By 3 in the afternoon, less than one quarter of an hour later, stocks had stabilised again back to their levels from less than half an hour prior. If the date were 1910 and not 2010 then the horse and wagon would not have even been attached to send the messenger out. Or some such thing.
And in concluding this piece I would like to point to a couple of Eddy Elfenbein tweets about the US Dollar and how that supremacy still remains. So think Bitcoin and all the hype around the new currency, currency in inverted commas, and all the airtime that it has been getting. Check this:
A 5.3 trillion Dollar market is the daily Forex trade, of which 87 percent is US dollars. And as Eddy points out, the other trades are converting currencies into Dollars and then back to another currency. I always say this, but until it is not the Dollar, it will be the Dollar. The end for now! More again tomorrow!
Byron beats the streets and speaks about one of the most innovative companies in the world, Google.
Over the past couple of years Google has become our 6th biggest position in New York. This has been the result of constant additions as well as a fast appreciating share price. The stock was up over 50% last year. The businesses initial focus is on advertising revenue through people using their search site. That makes sense as a very profitable business model. But the company has bucket loads of cash ($57bn at the end of last year) and a very ambitious and innovative management team.
This has resulted in Google dipping their fingers into all sorts of businesses with big focus on hardware. They paid $12.5bn for Motorola a few years back and yesterday announced a $3.2bn acquisition of a company called Nest. Basically Nest manufactures smart thermostats and smoke detectors. The thermostat is programmed to keep your home at the right temperature at all times. It even learns what time you wake up, have a shower, go to work and then come home. This obviously has great benefits when it comes to energy saving.
According to the WSJ estimates are that the company is selling 100 000 thermostats a month. At $250 a pop that means annual revenue of around $300 million. Paying over 10 times revenue sounds expensive but as you can imagine there is a lot more to it. With the company comes founder and CEO Tony Fadell who was integral in the design of the iPod when he was at Apple. I am sure his expertise afford a bit of a premium.
There are also so many potential synergies with Google products. Last year they released a product called Comcast which allows you to control all your electronics in the house wirelessly. This includes streaming anything from the internet through your TV or playing music through your speakers from your phone without any connection needed. Basically through Nest technology you could control every single device in your house through your phone. Change the temperature of your fridge, turn on the sprinklers, who knows maybe even tell your robot to wash your dishes one day.
There are concerns that Google are seriously sacrificing margins by shifting their business into more capital intensive strategies. But I truly believe this is the way of the future and as a technology company, if you don't constantly stay ahead of the curve you will find yourself in huge trouble. I think it is best to embrace it as both a consumer and an investor. At the end of the day, if the product makes your life easier it will have customers because in our fast paced lives, time has become one of the most important commodities.
Home again, home again, jiggety-jog. Stocks are up today and down yesterday. Europe is all together, in fact you will recall that Latvia was added to the Eurozone at the beginning of the year. So despite all those folks that were convinced that the Eurozone would be falling apart, the Eurozone is actually expanding. So much for that.
Sasha Naryshkine and Byron Lotter
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