Posts Tagged ‘Wall Street’

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April 16, 2014 marketvalue

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Posted: 11 April 2014 in Uncategorized
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NASDAQ

Yesterday’s dramatic sell-off—starting on the NASDAQ, which sank 3.1 percent, its worst day since November 2011, and then taking down the Dow Jones Industrial Average, which fell 1.6 percent, and the Standard & Poor’s 500-stock index, which fell 2.1 percent—which has continued this morning, has been accompanied by a wide range of “explanations” from so-called experts. (You can find a good sampling here.)

One of my professors in graduate school explained that 10 percent of movements in the stock market may be based on “real” events, while the other 90 percent stemmed from other factors. And no one understood which was the 10 percent and which the 90 percent.

Barry Ritholtz offers a similar perspective:

Whenever we see any sort of disruption in markets an explanation usually follows. The headlines will explain that “Markets are going up/down because of this good/bad thing.” News anchors will solemnly intone why the volatility is significant and what it means for one thing or another.

None of these casual explanations can withstand close examination. They are often things that have existed for months or years, and so can’t account for what happened yesterday.

Stocks are fully valued, and have been for a while, so why is it that valuations suddenly matter after not mattering at all? The market for initial public offerings is too hot? Wait, the Federal Reserve is going to end quantitative easing, something it has been warning us about for two years? Now it suddenly matters?

Of course, all of these narratives serve a singular purpose: They give the appearance of meaning and rationality to actions that are meaningless and irrational. The daily action in the markets is a form of noisy, random, Brownian motion. If you are looking for a clear reason as to why stocks did what they did, then you are in the wrong line of business.

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This week, in A Tale of Two Depressions, we taught Don DeLillo’s extraordinarily prescient novel Cosmopolis (which was later made into a movie by David Cronenberg).

We presented it as a description of our time—of the conditions leading up to the crash of 2008 and, as it turns out, of the conditions that still obtain even now in the midst of the Second Great Depression. In the scene above from the movie, Eric Packer learns that his prostate is asymmetrical—and, toward the end of the novel, his would-be assassin, Benno, reminds Packer that “You should have listened to your prostate” (p. 199). Why? Because in attempting to predict movements in the yen, Packer forgot about

“The importance of the lopsided, the thing that’s skewed a little. You were looking for balance, beautiful balance, equal parts, equal sides. I know this. I know you. But you should have been tracking the yen in its tics and quirks. The little quirk. The misshape.” (p. 200)

What we didn’t plan on was the publication of Michael Lewis’s latest, Flash Boys: A Wall Street Revolt, which—much to the consternation of Wall Street, which Lewis didn’t anticipate—documents the profits that can be and are made through a form of insider trading based on the asymmetry of information caused by the difference in speeds of placing and fulfilling orders. As Elaine Wah explains,

Virtually all modern financial markets match orders continuously – that is, as orders arrive to the exchange. Continuous-time matching is essentially a winner-takes-all race. A high-frequency trader who receives and acts on new information faster than others can readily pick off orders sitting on exchanges – over 40 venues are competing for the same orders – before others can react. So being faster by as little as one microsecond is enough to grab all the profit.

This is how the “flash boys” win.

Apparently, high-frequency traders have been listening to their prostates.

We also spent a great deal of time in class arguing about whether Packer, in all his posthumanist will to become “cosmic dust” (p. 206), is an accurate representation of our contemporary subjectivity. The general opinion was that, no, Packer lives in a virtual world devoid of “real” human contact and is too callous and lacking in empathy to tell us anything about ourselves. My own view, for what it’s worth, is that today—more than a century after Nietzsche and when we communicate with and learn about others (and, of course, ourselves) in the on-line world of  Facebook and other social media—Packer does tell us a great deal about what we have become or, at least, are on our way to becoming.

Of course, I could have also made the argument that we have become a nation that cuts food stamps and extended unemployment benefits for our fellow citizens. And of not changing faulty ignition switches directly linked to the deaths of at least 13 people because it would have added about a dollar to the cost of each car.

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We’re all betting on the success of Obamacare to expand people’s access to decent, affordable healthcare. Apparently, for quite different reasons, so are investors [ht: sm].

“A new online broker, Motif Investing, is offering Obamacare’s friends and foes alike a chance to put their money where their mouth is. Co-founded by a former Microsoft executive, Hardeep Walia, and backed by Goldman Sachs and other investors, Motif allows customers to bet on narrowly tailored concepts.”

“Two of the hottest motifs right now are Obamacare and repeal Obamacare.”

“What’s most striking isn’t the performance of the two funds, but where investors are choosing to place their money … One is clearly more popular: … Motif investors have bet 45 times more money on Obamacare’s success than on its failure.”