Sunday, January 18, 2015

Volatility In The Markets

I have written occasionally about the markets, Wall Street, global finance and trade, but usually it is more from the point of view of a casual but very interested bystander. I do not live and die by the market, but I do understand it and know my way around in the realm of "investment". As is typical, I want to practice full disclosure. I do own a paltry amount of stocks and bonds, as part of two union retirement plans. To date, I have earned enough money, that has gone into these funds, to support myself in the style that I have become accustomed (one step "above" poverty) for about four moons after I stop working. In Green Bay, school crossing guards are organized as teamsters and working for a few years as a a crossing guard for about four hours per day during the school year, netted me about two thousand dollars that went into the Wisconsin Retirement System, a state-run retirement fund. This money is invested in ways that I have no control over. My work as a union stagehand has netted me slightly more, but it has taken over ten years to amass a similar amount of money in my retirement account with them. Several years ago, I got to have some say in which funds I wanted to "invest" in, but the choices I could make through that retirement account are severely limited as well.

I have followed "the markets" for over twenty years, and have not limited myself to casual  understanding or cursory knowledge of what goes on there. This is one of the reasons that I have chosen to write this at this time. About a year ago, in a well buried story that most people overlooked, was a tidbit of truth that everyone should be aware of before getting talked into "investing" in the markets. The biggest investment firms have spent billions on hardware and software to see trades before they are even done and cut in line ahead of any market changes that are taking place. Many, who have been paying attention, have seen some of the terrible fallout from credit default swaps, derivatives markets and some of the technically legal but immoral actions associated with Wall Street. Yet, one of the most heinous and insidious changes in the markets recently has gone by, right under our noses in the not too distant past. This is having a massive effect on markets that, as of yet, has not been researched, understood or even hinted at by most analysts. what is worse is that it is not even mentioned in regulations because no one thought that milliseconds, or even nanoseconds could matter, but they do.

Billions have been spent on equipment that "jumps" orders, both buy and sell orders. My understanding is that it is only by a factor of a couple nanoseconds, but knowing which way every stock is headed is just enough to reap benefit from every single transaction. Time really is money and now there are technologies in place and working that allow the wealthiest trading companies to insert their orders ahead of trades made by everyone else. Now that electronic trade volume far exceeds that done in person and the actual people making in person orders or offers eventually fall back into the realm of action, ultimately, on an electronic playing field, this means that all trades occur in the realm of data, transmitted electronically. At first, it seemed that the biggest trading houses were spending wildly on being able to jump orders for what seemed like a few pennies here or there, but the territory that we are in now makes the investment seem quite prudent. As with all things motivated by greed, there are two ways to make more money faster. Insider trading, which is almost like creating a "hot", "new" product that has the ability to become a growth item and if margins remain constant, pushing greater volume. What we are seeing on Wall Street today is directly attributable to these perturbations of the marketplace.

The desperation, reflected in rising volumes, is not explainable by any other rationale. We have always been appeased by the term "free market", but there has not been such a thing for many generations. When the first environmental law was enacted, making it illegal to cut any of the King's oaks in England, the market for wood was no longer free. This in turn had a cascading effect that spread into other markets, like metals and other woods. When taxes were first levied on people to support government, markets were no longer free. In the U.S.A., the precursor to the FDA (Food and Drug Administration) USDA (U.S. Department of Agriculture) was given the task of testing agricultural, food and medicinal products for purity in 1906. Many, who do not understand history, point to that time as the beginning of the end for free markets in this country. Before that time, if I wanted to sell "snake oil", pills for bed wetting or sleeping tonic, all I had to do is buy some bottles and pour any concoction I deemed worthy into them and I could, then sell them at any price the market would support. That was technically a free market. However, the Wild West attitude toward the marketplace was killing too many people and stealing people blind as the carnage mounted.

Today, electronically jumping buy and sell orders is creating a death of many cuts for those willing to put their money down on Wall Street investments. The same technology is being used in commodities markets, and to some extent in metals markets as well. The techniques and devices that are being used are autonomous, meaning that no human effort or activity is required to actuate them. The slowness of our nervous system compared to the speed of the technology makes any action by humans useless in these actions.

Seeing as I am fond of picking on one specific stock this week, Schlumberger, I will use them as an example. Anyone interested in the revolution which is not being televised should look into this company.  Schlumberger (pronounced slumber-jay), the largest oil field services company in the world, trade as SLB on the NYSE and are sitting at about $80 per share. Had you been holding them yesterday, you would have made nearly five dollars per share. Over 6% in one day. The news driving this relatively sudden jump is that (of their 120,000 employees worldwide) they will be laying off nine thousand people and cutting capital expenditures by 25% this year alone. Why would a multi-national corporate welfare whore such as this be worth more as oil is in free fall? How can the entire sector be contracting but companies serving the sector be increasing in value? Well, let us dissect this a bit. Remember the two ways to fulfill the greed motivation, increased margins or greater volume. Spending less and laying off people typically means that a company is having tough times, or trying to make themselves look better in bad conditions. In a rational world, this would reduce the value of their company. However, especially in a troubled market, dollars get shifted into what has worked in the past and even more dollars are looking for "good deals". When the first purchase order for SLB came across the internet, it kicked off a string of interactions that had nothing to do with reality. The computers jumped in to buy and because of the volume, the price continued to rise which in turn influenced more people to trust that it was a good idea to buy and that in turn kicked the electronic purchasing into a higher gear and the market was perturbed as volume increased and limited availability drove up the price. on the news of the rise, it got the attention of even more and even more desperate people, who were again beaten into the market by computers when they placed their orders.

As you can see, it is a bit like a merry go round and each trade adds momentum. It will continue in this way until the first person changes their order from "buy" to "sell". The computerized equipment will jump that sale and increase both the volume of shares traded and increase the rate of decline in the price per share. Somewhat like the movie "Office space", where the main characters found a way to harvest all the half pennies that were floating around in the stock market, these are microscopic thefts based on something akin to insider trading. If you can know with certainty that the markets are going to move, and which individual stocks are moving which ways, you only have to make a fraction of a cent on each transaction. Multiply those earnings by millions of transactions each day, and you will do remarkably well. People are far too slow to drive this sort of volatility. This is just one more way that the wealthiest classes are taking whatever they want. The only way to keep from being robbed by the greedy is to stay as far away from their territory as possible. Invest in what you know, what you love and what you want to see more of.

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