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No Volume? Don't Shut The Algos Just Yet Says An Increasingly Angry Nic Lenoir

Tyler Durden's picture




 

From Nic Lenoir of ICAP

No Volume? Don't Shut The Algos Just Yet

I will send a macro update in a little bit. For now I would like to comment on the volumes or lack thereof... Today is just a dismal showing so far, and unless some bomb hits the news this afternoon this could well be the worst day on record. The attached chart is quite telling, and keep in mind that other than the short covering last week the past few weeks have already set record lows in volume for the year, so the comparison is quite telling! I understand it's a Jewish holiday but we are running at 1/3 of the volume of what would be already a very slow day!

A lot of noise has been circulating regarding high frequency and how the new market structure is detrimental to participation. Yes order front-running via flash trading and some bidding/offering patterns show that there are practices that are questionable to say the least, however I decided to pull out the chart of the volume or the Nikkei after the crash... That alone pretty much tells you LOWER VOLUMES HAVE NOTHING TO DO WITH MARKET STRUCTURE. The daily volumes traded on the Nikkei decreased 6-folds from 88/89 to 92 and that was without high frequency computers disturbing the market structure. So while I agree that there are definitely some problems with the current way our markets function in terms of mechanics, I think people are wildly missing the point. Besides, it's not like the market was not rigged before when brokers and sales traders would leak out selected information to their "favorite" customers. There will always be a race to informational advantage, and while it must be kept fair, the technological race is in a sense more fair than the old structure where the volume you traded commended the information you received... At least now the edge is obtained using your brain and not based on your size of your wallet. Order visibility is definitely making it difficult to move size easily, but I think part of it is also a need for participants to adapt.

The real reason why volume is so poor is that the market is fixed, I just don't know anyone who is a clever investor out there who thinks the market is fairly valued here and most buyers I talk to are motivated by the thought that the Fed will keep printing and debase the currency enough to make asset prices go up... talk about an optimist point of view: the only buyers are cynical! I was faced with an interesting challenge last night. My fiancee came home after starting a new job at a big firm asking me to help her decide on the allocation of her 401K. My first response was: I don't have a 401K (I do save, just not in a 401K), are they matching your contributions, if so only contribute up to the maximum they match. Having cleared that I looked at the options offered: company stock (ya right, you will get enough of that in bonuses and you are long just by working there), a handful of bond funds with just a vague description of the strategy/assets invested in, maybe a dozen equity funds... and that's it! Where is the "cash" box? Where is the "Gold" box? Ultra-short ETFs anyone? It became completely obvious that the 401K system is a perfect way to send savers to the slaughter house. It worked during the credit expansion of the last 40 years but now it's an awful proposition. Trying to come up with some sort of allocation in order to collect the matching program of my fiancee's employer was a lot trickier than it seemed and after tossing 33% into TIPS I really had to scratch my head to come up with the other two thirds. Other than a couple foreign equities funds that allow you to "escape" the government's and the Fed's policies partially you are pretty much stuck.

Laurence Kotlikoff has been talked about quite a bit after a couple op-eds in which he basically highlighted the fiscal gap and the absurdity of our current pension system. Volumes in stocks will not and should not pick up until we deal with it, it's time to wake smell the coffee and address a problem that everybody recognizes. People don't invest because they know the system is broken and they want nothing to do with it in its current state, as made obvious by the outflow out of equity funds. Sadly bond funds may not really save them when the bill comes due. Forget for a second that we have exported job overseas, automated manual labor, and doubled the workforce by including women (I am not talking negatively of any of these, just observing effect on labor supply) thereby devaluating labor, that this was only possible because we borrowed our growth and have now a broken world economy with producers with no demand and over-borrowed consumers who can't buy in countries that don't produce... We are still left with massive fiscal gaps. Again I bring up Japan where in the late 1990s they simply slashed pension payments. Americans are not as docile and with what is in practice a 2-year election cycle politicians are busy buying votes with money they don't have rather than tightening the government's belt. However cutting entitlements is exactly what's needed. Not for future retirees or people who start working now, absolutely not, for everybody now dead or alive (America is one of the rare countries where there are dead people collecting pension payments... this gives me very dark ideas). Retirees and people in their 40s and 50s vote, but they don't burn things up... young people do. Why is it that young people should pay the bill for a retirement system basically put in place by our great grand-parents and benefited for by our grand-parents and parents? On top of that people don't retire anymore because their pension savings don't cover their life style and so young graduates can't find jobs to pay for their parents retirements. With Illinois where pension payments are more senior than teachers' salaries in the debt structure cutting jobs, I wonder when people are going to get properly angry. I am already and it's not getting better. Voting turnout has actually gone up the past 10 years after a 30 year downtrend during which fat and happy baby boomers did not really bother showing up at the urns since both democrats and republicans were united in the demagogy of borrowing an illusory prosperity. People started voting a bit more, and it seems all they want is change, but change they are not getting. You want change? Well how about the truth for a change: we are bankrupt, your investments are in their totality worth 35 cents on the dollar including your house, you need to move in with your parents because we are slashing their pension payments and you can't afford a home. Now start from scratch! To me it sounds better than 4-day school weeks in Oregon where we are not educating the future generation so they can be even angrier and counter-productive revolutionary protesters when they grow up.

Good luck trading... from the short side!

Nic 

 

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Thu, 09/09/2010 - 18:46 | 573037 faustian bargain
faustian bargain's picture

Just tell her to read the book...it's a pretty easy read.

Thu, 09/09/2010 - 17:17 | 572894 -1Delta
-1Delta's picture

Well said, I am actually waiting till next month when the permabulls will be forced to reconsider their AAPL holdings...

earnings- street will look at topline weakness

ISM data- leading incators will outwiegh the lagging

 

Thu, 09/09/2010 - 19:41 | 573128 PrDtR
PrDtR's picture

mephisto..

I'd also say keep an eye on the metals.. gold, svr trading off recent new highs.. a rally attempt today also failed.. they are ripe for consolidation here..

like you I am looking for some catalyst or opportunity to enter where we aren't so technically oversold in the short term.. these machines move sooo FNfast!

Thu, 09/09/2010 - 21:46 | 573263 RockyRacoon
RockyRacoon's picture

"Oversold" is like cocktail hour.  Somebody always thinks it is!

Buy gold and silver at all times.  Been sayin' that since 2001.

Thu, 09/09/2010 - 15:49 | 572666 LooseLee
LooseLee's picture

And now the MFers in congress are trying to mandate a % of all retirement deposits go into guberment securities! These BUMS would F%$# Up a Wet Dream (of Trish on CNBC, of course!) and we keep electing them to 'lead' our country! Does anyone see where this all leads?

Thu, 09/09/2010 - 15:57 | 572682 rubearish10
rubearish10's picture

Trish is EXOTIC!

Thu, 09/09/2010 - 15:58 | 572689 Boilermaker
Boilermaker's picture

Yea, well, it was good enough for Argentina...so...

Thu, 09/09/2010 - 16:03 | 572707 deepsouthdoug
deepsouthdoug's picture

I've helped my Son for the last couple of years with his 401k - he has the same crap.  Long equity and  bond funds or .000000002 cash funds.  He has maybe 100 funds, and the  first time I looked at it I said, 'you've got nothing here!'  Anyway he only lost 5% in 08, and made money in 09.  I had him in gumbment bonds from early this year to last week.  Back to his .00000002 cash fund.  At least he won't lose any $ during the next stock shearing.  No hyperinflation please!

If oil goes to the moon, he's got some oil funds that can work for him in the future. 

 

Fri, 09/10/2010 - 11:58 | 574186 Hellholeratrace
Hellholeratrace's picture

well that sounds like he has more choices than alot of us.  I can be in equity funds, bond funds, TIPS, and 2 foreign funds (which aren't good at all). No cash, no commodities. I moved all out of equities earlier this year. Unfortunately, I feel like there's nowhere I can hide...

Fri, 09/10/2010 - 14:26 | 574623 Geoff-UK
Geoff-UK's picture

You could always close the account, pay the tax penalty in 2010 before taxes do a moon-shot, and buy PMs.  Cognitive Dissonance and others on here make a great case that 401-Ks and IRAs will be seized...I've closed mine and buying PMs with cash at coin shows to avoid paper trail.

"I suggest you panic."---Hugh Hendry

Thu, 09/09/2010 - 16:03 | 572709 meatloaf
meatloaf's picture

Are there any SHORT mutual funds?  I can invest in almost any mutual fund in my 401k, but not ETFs.

Thu, 09/09/2010 - 16:12 | 572729 deepsouthdoug
deepsouthdoug's picture

Yes, right now I'm in GRZZX, URPIX, SRPIX.  TDAmericatrade has a bunch of short funds available. 

Thu, 09/09/2010 - 21:01 | 573222 Biggvs
Biggvs's picture

BEARX combines shorts with some gold exposure.

Thu, 09/09/2010 - 16:05 | 572712 Downtoolong
Downtoolong's picture

The real reason why volume is so poor is that the market is fixed.

 

Fixed, broken, plagued by HFT parasites, flash orders, flash crashes, whatever. It all adds up to a much riskier proposition for retail investors than it was before, even just five years ago. The risk isn’t worth the incremental reward anymore (if there even is one). That’s how simple the decision to leave the stock market was for me. And the fact that it’s not easy to find decent risk/reward alternatives is no excuse for anyone to stick around and hope that the few who control and gain from the current market structure and trading practices will do anything to change it.  

Thu, 09/09/2010 - 16:18 | 572737 Racer
Racer's picture

And when the market can be gunned higher on imaginary numbers fed by the bureau of BS, then ... this is the new 'dot com', link to website...

www.Hopium.gov.usa

Thu, 09/09/2010 - 16:36 | 572789 Bold Eagle
Bold Eagle's picture

Me think that any participation in this "market" is a sin. Nothing but greed driven ponzi based on robbing our children. It's time to boycott this thing. Buy PM, farmland, wheat, whatever, but do not participate in this ponzi, long or short. Starve the beast!

Thu, 09/09/2010 - 16:16 | 572739 scratch_and_sniff
scratch_and_sniff's picture

Did that dude burn the Koran yet?

Thu, 09/09/2010 - 16:21 | 572755 Turd Ferguson
Turd Ferguson's picture

scheduled for Saturday

That idiot, Theo van Gogh and Salmon Rushdie  are the Jihad Trifecta.

Thu, 09/09/2010 - 17:32 | 572921 Greater Fool
Greater Fool's picture

I have a question: If you burned a drawing of Mohammed, would that be piety or double blasphemy?

Thu, 09/09/2010 - 18:47 | 573043 faustian bargain
faustian bargain's picture

Maybe if you had your eyes closed, it cancels everything out.

Fri, 09/10/2010 - 14:29 | 574640 Geoff-UK
Geoff-UK's picture

You KNOW the answer.  If you do something and you're Muslim, you're pious.  If you're not, infidel shortly about to become dead.

Whether you agree with what the Koran-burner has planned or not, you gotta give the guy this--he has stones to do this in public with world-wide publicity.  My weather report on his body if he does this is: overcast, with 98% chance of chilly temperature. 

Fri, 09/10/2010 - 12:07 | 574207 Hellholeratrace
Hellholeratrace's picture

they cancelled it.  and in the news yesterday, "“In Afghanistan, hundreds of angry Afghans burned an American flag and chanted "Death to the Christians" to protest the planned Quran burning”. 

Thu, 09/09/2010 - 17:39 | 572930 ratava
ratava's picture

short dollar long gold ignore stocks

Thu, 09/09/2010 - 17:41 | 572933 Dr. Sandi
Dr. Sandi's picture

The 'market' has been supplanted by a convenience store. If you're in a hurry and you don't care how much it will set you back, stop in and load up on some fast, easy equities at Wall Street Kwikie Mart. It's all self-serve since we replaced our checkers with robots.

Thu, 09/09/2010 - 19:50 | 573145 Diogenes
Diogenes's picture

Investors are BROKE, they have NO MONEY, NO EQUITY IN THEIR HOMES, NO JOBS and NOWHERE to turn except to liquidate their savings if any.

That explains the stampede of ordinary investors from the markets, or 90% of it.

Another thing. Don't tell those who have paid into the system and worked for 40 years that they are not going to get their pensions. They have paid and they are owed, and as long as votes count they are going to get their pensions.

It may be that the cash from those pensions going into the economy will be one of the few things keeping it afloat. It will make a nice change for ordinary citizens to get money that is owed to them. You should be complaining about fat cat bankers ripping off the system for trillions not little old ladies being allowed to live out their last years with a little dignity.

Thu, 09/09/2010 - 19:53 | 573148 BoyChristmas
Thu, 09/09/2010 - 22:24 | 573315 Irrational Exub...
Irrational Exuberance's picture

HEY! I live in the hippie-ness that is Oregon!  It's the only place where you don't have to be 21 to get a Sam Adams!

Thu, 09/09/2010 - 22:52 | 573344 SideshowBob
SideshowBob's picture

It seems to me that the Fed pumping up the markets to keep gramp's 401k/IRA flush is a clear admission that the great 401k solution has failed.

Now we have yet one more social program that must be funded to keep our house of cards from collapsing.

I for one, no longer contribute to my 401k. I have no plans of ever contributing again. Ever.

Thu, 09/09/2010 - 23:25 | 573394 bronzie
bronzie's picture

cashed out the 401K several years ago and invested the $$$ in tangibles: precious metals, guns, ammo, dehydrated food, etc

stocks are for suckers

Fri, 09/10/2010 - 03:21 | 573635 Dr. Sandi
Dr. Sandi's picture

Stocks for suckers? But my broker is EF Hutton.

And EF Hutton says:

"Where's the Hutton sign on the front of the building. Hey, who took over my office.

What the hell happened here?"

Fri, 09/10/2010 - 01:16 | 573521 Hard1
Hard1's picture

I thought they are called 101k now that they are worth-less

Fri, 09/10/2010 - 01:16 | 573523 Hard1
Hard1's picture

I thought they are called 101k now that they are worth-less

Fri, 09/10/2010 - 06:20 | 573667 Fred C Dobbs
Fred C Dobbs's picture

I called ING today to ask about my options for getting money out of my 401k.  I have $241,000 in it.  I asked my options for getting it out because I want to invest in things I want to invest.  I was told I could get a $50,000 loan on my money at just over 5% interest.  I could not believe it that I had to pay interest to ING on my own money while they can get it from the Fed at .25%.  My other option was I could get $165,000 in a hardship withdrawal plus pay taxes and 10% penalty.  I only had to be able to prove to the Human Resource person that I needed it due to medical expenses, buy a house, tuition, prevent eviction, burial of a loved one, and/or damage to my house all of which would be lies.  Here are my investment choices.  99% of the money is in the money market fund.  Any opinions on what I should do?  I am 54 and make about $175,00 per year.  

                                                                                                                                                                                                                                                                                                                               

Alger Mid Cap Growth

Alliance Bern Grth & Inc

Alliance Bern Lg Cap Gr A

Amcap Fund R3

Amer Growth Fund R3

Invesco Constellation

LM CBrdge Fndmentl AllCpV

Legg CBrdge Agg Grw

Legg CBrdge Appreciation

Legg CBrdge Cap

Legg CBrdge Div Strategy

Legg CBrdge Lcp Value

Legg Cap Mgt All Cap

Legg S&P 500 Ind

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Legg West Asst Strat Inc

Legg Wstrn Glb HiYld Bnd

Lord Abbett Sm Cap Val P

Templeton Foreign R Shrs

Western Asst Money Market

Fri, 09/10/2010 - 09:43 | 573891 Bryan
Bryan's picture

If you're stuck with those choices, with the amount you have in your account, I would investigate maybe The Mutual Fund Store to help you allocate your funds to what you have available.  I listen to Adam Bold on the radio sometimes and he seems pretty competent.

 

http://www.mutualfundstore.com/

Fri, 09/10/2010 - 12:18 | 574242 Hellholeratrace
Hellholeratrace's picture

With the loan, you are paying yourself back the interest, not ING.  So the loan really makes sense if you use it to pay off debt. You shouldn't have to pay the penalty on the hardship withdrawal.   99% money market probably isn't a bad move.

Tue, 09/28/2010 - 03:14 | 609317 Herry12
Herry12's picture

Thank u, i found this for a long time.
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