Thursday, April 17, 2014

U.S. Stock Market, Modern Day Nero

     Roman mythology says that first century Roman emperor Nero was so oblivious that he played his fiddle while Rome burned. The recent behavior of the stock market is reminiscent of Nero's obtuseness. But instead of ignoring a city in flames, those in the market have ignored economic data that would need an extension ladder just to rise to the level of mediocrity, corporate earnings that can barely jump the hurdle of the market's lowest expectations, and a brewing civil war in Ukraine orchestrated by Vladimir Putin.
     The market has reached new highs even as the economy makes its obvious lurch towards recession. This slowdown is not only evidenced by the economic data that is worst than last year at this time, which was no great shakes even then, but by companies reporting first quarter results that, even when they meet lowered expectations for earnings, have missed on revenues. And even companies who have met expectations on both earnings and revenue, have not, for the most part, met their previous year's sales. Of the nation's three biggest banks, JP Morgan Chase, Bank of America, and Citigroup, the two former missed even the lowered expectations for earnings, and Citigroup barely eked out a mediocre performance.
     Author Michael Lewis recently penned a tome called, "Flash Boys," in which he surmises that the stock market is rigged by high frequency traders. High frequency traders are those who ply their trade in the milliseconds between when an order for a stock purchase is made and when it is filled on the exchange. They use high powered computers near the exchanges, and even higher powered mathematical algorithms to intercept these trades and make fractions of a penny on millions of shares, thousands of times a day.
     The market is rigged, not by high frequency traders, but by the big money players. That is why the market no longer responds to economic data or corporate earnings like it should. Instead, the market is like a marionette, having its strings pulled by the likes of Warren Buffet and others who control its direction. When the Federal Reserve's insanely low interest rates for the last 6 years, and their quantitative easing program which has pumped three trillion dollars into the market, is added to the mix of big money players, the market becomes a rigged game, no more honest than a street level version of Three Card Monty.  
     The mid and low level brokers who are successful, do not acquire that success through studying market fundamentals and corporate earnings, but through following the money flows of the "Big Guys." In  other words, what drives the market is the old adage, "Follow the money." And while the "Rome" of our economy and the stability of geopolitical relationships "burn," the Neros in the market continue to "fiddle," oblivious to anything but driving stocks higher simply because they can.

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