Capitalogix

Is the U.S. Stock Market Rigged?

Did you see the 60 Minutes report on Michael Lewis' new book, "Flash Boys," that reveals some of the ways that high speed traders work the stock market to their advantage.

 

 

Here is an excerpt from the intro.

 

Steve Kroft: What’s the headline here?

Michael Lewis: The Stock Market is rigged. The United States stock market, the most iconic market in global capitalism is rigged.

Steve Kroft: By whom?

Michael Lewis: By a combination of these stock exchanges, the big Wall Street banks and high-frequency traders.

Steve Kroft: Who are the victims?

Michael Lewis: Everybody who has an investment in the stock market.

 

The 60 Minutes piece has a interesting explanation of what is happening.

For an even better one, click to watch this Michael Lewis interview on Bloomberg, where he defends his claim that the market is rigged.

 

 

via Bloomberg Television's “Market Makers.”

 

Let me know if you want to talk about high frequency trading or what is likely to happen as a result of press coverage like this and the ensuing regulatory scrutiny.

 

We live in interesting times.

 

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The Big Mac Index - A Feast of Burgernomics

Image by Simon Miller via Flickr

The Economist's Big Mac index seeks to make exchange-rate theory more digestible.  They say, tongue-in-cheek, that it is arguably the world's most accurate financial indicator to be based on a fast-food item.

The Big Mac index is based on the theory of purchasing-power parity (PPP), according to which exchange rates should adjust to equalize the price of a basket of goods and services around the world. For them, the basket is a burger ... a McDonald’s Big Mac.

According to this measure, the most undervalued currency is India's Rupee at about 67%  below its PPP rate.  In India, a McDonald’s Big Mac costs just 95 Rupees on average, the equivalent of $1.54 at market exchange rates. In America, the same burger averages $4.62.

The interactive graphic, below, shows by how much, in Big Mac PPP terms, selected currencies were over- or undervalued.

 

 

The index is supposed to give a guide to the direction in which currencies should, in theory, head in the long run. It is only a rough guide, because its price reflects non-tradable elements ­such as rent and labor. For that reason, it is probably least rough when comparing countries at roughly the same stage of development.  The Economist has added an adjustment option to account for this in the interactive version of the data.

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Here Are Some Links to Start Your Week

First they will laugh ... Then they will copy.

 

 

Don't give up. 

"Many of life's failures are people who did not realize how close they were to success when they gave up."   ~  Thomas A. Edison

 

Here are some of the posts that caught my eye. Hope you find something interesting.

 

Lighter Links:

• Do Entrepreneurs Have an Optimism Bias -- Or Do You Have a Pessimism Bias? (HBR)
• Why Positive Encouragement Works Better Than Criticism, According to Science. (Buffer)
• 'Hey Dumbass, Say Something Nice to Your Wife' — There's an App for That. (Mashable)
• 21 Awkward Cards For Your Confusing Modern Relationships. (HuffingtonPost)
• You'll Be Surprised How Many Donuts worth of Sugar Are in These 10 Everyday Foods. (BI)
  
  

 

Trading Links:

• That Viral Chart Predicting Another 1929 Stock-Market Crash? It's Absurd. (The Atlantic)
• This Good News Might Actually Be Bad News: Americans Are Borrowing Big Again. (Quartz)
• Do Stress Hormones Fuel Volatility In Financial Markets? (LATimes)
• The Average Successful Startup Raises $41M, Exits at $242.9M. (TechCrunch)
• Accidental Tax Break Saves Wealthiest Americans $100 Billion. (Yahoo Finance)

Misled by a Map: The True Size of Africa Might Surprise You

Here is jigsaw graphic that shows the size of Africa relative to other countries.

 

via Kai Krause.

 

This video from the second season of "West Wing" presents other misleading map distortions. 

 

 

 

Interesting stuff ...  Click here for more.

 

Here Are Some Links to Start Your Week

We just passed the five-year anniversary of economic stimulus.

 

 

Here are some of the posts that caught my eye. Hope you find something interesting.

 

Lighter Links:

• Are We Alone in the Universe? (NYTimes)
• Some of the Most Plausible Scenarios for Alien Civilizations. (Io9)
• Lockheed Martin Working on a Spy Plane that Can Fly Anywhere on Earth—in an Hour. (Newser)
• The Future of Health Tech Is Going to Try to Improve Your Life In 2014. (TechCrunch)
• Six Famous Thought Experiments, Animated in 60 Seconds Each. (Brain Pickings)

 

Trading Links:

• Are Banks Obsolete? (Forbes)
• How close are we to the self-driving car age? (The New Yorker)
• Drone Deliveries May Be a Sideshow to Amazon’s Real Ambition for the Skies. (Quartz)
• Why colonize planets when you can colonize outer space? (Dvorak)
• A “Future-Hunter” Examines the Dangers of Stock Trading at the Speed of Light. (ScientificAmerican)

This is What a Bull Market Feels Like

Were you surprised how quickly Markets digested the risk of Russia and the Ukraine?

It's not the news ... it's what markets do after the news hits.  In Bear Markets, markets are looking for excuses to pull-back and take risk off the table.  In Bull Markets, things can advance, even with uncertainty. 

The New York Stock Exchange publishes end-of-month data for margin debt.  Historically, surging peaks of margin debt often happen before big market pull-backs.

The chart, below, shows the relationship between margin debt and the market (using the S&P 500 as the proxy for the market). Even adjusted for inflation, the latest data puts margin debt as at an all-time high.

 

 via Doug Short.

Victor Sperandeo advised speculators to ride the false train of hope as far as possible and jump off just before it falls into the abyss.

Good luck.

 

Warren Buffett's Annual Letter: The Oracle of Omaha Shares Some Wisdom

Warren Buffett’s annual letter to Berkshire Hathaway shareholders is out.  

Why should you care?  Well, his fund posted a record profit, last year, of $19.5 billion. It owns meaningful parts of American Express, Goldman Sachs, Wells Fargo, IBM, Exxon, Phillips 66, Walmart, Coca Cola ... and the list goes on.

Buffett's annual letter is always an interesting read ... even if you don’t agree with everything he says.  There is a reason he is called “the Oracle of Omaha.” 

Here are a few of the ideas that I noted.

Own Low-Cost S&P 500 Index Funds:

Mr. Buffett advocates going long "the economic future of the United States."

That sentiment was nothing new for him: "We’ve been making similar wagers ever since Buffett Partnership Ltd. acquired control of Berkshire in 1965. For good reason, too. Charlie and I have always considered a 'bet' on ever-rising U.S. prosperity to be very close to a sure thing."

Historically, Mr. Buffett has cautioned against trying to pick winning stocks. Instead “own a cross section of businesses that, in aggregate, are bound to do well.” A low-cost S&P 500 index fund helps any investor do this well.

Mr. Buffett has emphasized this point throughout his investing career.

“In the 20th century, the Dow Jones industrial average advanced from 66 to 11,497, paying a rising stream of dividends to boot. The 21st century will witness further gains, almost certain to be substantial.”

Mr. Buffett writes that when he passes away, he has left instructions for his trustee to invest the cash designated for his wife in two ways — 10% in short-term government bonds and 90% in a very low-cost S&P index fund. He suggests Vanguard’s index fund.

“I believe the trust’s long-term results from this policy will be superior to those attained by most investors who employ high-fee managers.”

Swing Both Ways When It Comes To Investing:

Buffett said Berkshire likes to buy businesses outright, but also will invest large sums in stock or partial ownership of a company, to increase its profit opportunities.

"Woody Allen stated the general idea when he said: 'The advantage of being bisexual is that it doubles your chances for a date on Saturday night.' Similarly, our appetite for either operating businesses or passive investments doubles our chances of finding sensible uses for our endless gusher of cash."

 

A Hint Towards the Future:

Three things struck me here. 

First, in describing the large purchase and financing of ketchup maker (H.J. Heinz), Mr. Buffett called it a 'template' that Berkshire Hathaway could use in future acquisitions.

Second, near the end of this year's letter, Mr. Buffett notes that most Americans don’t understand the math behind pensions ... and cautions about the 'accelerating' dangers of local and state financial problems. Pensions, he says, have become a "gigantic financial tapeworm" because "public entities promised pensions they couldn’t afford." Mr. Buffett predicts: "During the next decade, you will read a lot of news — bad news– about public pension plans."

Third, he said: "Next year’s letter will review our 50 years at Berkshire and speculate a bit about the next 50."  Interesting ...

Mr. Buffett has often said: "At Berkshire, our time horizon is forever."  That perspective makes it a lot easier for the game not to end until you've won.

It reminds me of a lesson from an earlier Annual Letter:

Nothing stopped so many innovators and entrepreneurs more than the fear of failure.  If you allow yourself to be constantly scared into thinking that the world is doomed you will never take that risk which might result in great reward.  And perhaps worse, if you never fail you will never learn to get up, brush yourself off, move on and succeed in the future.  This does not mean you should wander through this world with great complacency and blind optimism, but if you deny yourself the ability to maximize your full potential, you will always come up short.

 

Two Other Things:

• Quicken Loans announced on Tuesday a $1 billion prize paid out over 40 years—insured by Warren Buffett's Berkshire Hathaway—to anyone who pulls off the ultimate forecasting feat in sports: predicting every tournament game's winner.The winner also gets investment advice from Mr. Buffett. (WSJ)
• Buffett bulleted five fundamentals of investing (BusinessInsider)

 

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Here Are Some Links to Start Your Week

Are the Olympics over yet?  No?  Here are some worthwile momements, in case you missed them.

For example, here, a woman tried to snap a picture of the hockey game between Russia and Slovenia — but instead she got an eyeful.  Call it a new form of 'Selfie'.

 

 

And here's one the Wide World of Sports would call the "Thrill of Victory and the Agony of Defeat".

 

 

For more Olympic pictures, click here.

Here are some of the posts that caught my eye. Hope you find something interesting.

 

Lighter Links:

• Why Big Data Might Be More About Automation Than Insights. (GigaOM)
• Better Than Human: Why Robots Will — And Must — Take Our Jobs. (Wired)
• Why Are We Here? Evolution’s Dirty Secrets. (Salon)
• How Roommates Replaced Spouses in the 20th Century. (The Atlantic)
• Debunking the Myth of the 10,000-Hours Rule: What It Actually Takes to Reach Genius-Level Excellence. (Brain Pickings)

 

Trading Links:

• FED: "Lower Rates Don't Induce Investment." Wasn't That a Central Tenet of Monetary Policy? (BI)
• Are Trading and Gambling the Same? (FuturesMag)
• Statistics Done Wrong: A Guide to Common Analysis Mistakes. (Online)
• IBM Announces $1B Watson Group, Moves Jeopardy Ace Computer To NYC. (Forbes)
• DeathWatch 2014 - Companies on the edge of irrelevance. These five companies won’t die, but they may not escape 2014 in one piece. (ArsTechnica)

Why Facebook Thinks WhatsApp Is Worth $19B

When Facebook bought Instagram for $1B, I remember thinking that seemed like a lot of money.  Well, this deal is like Facebook buying 19 Instagrams ... That's lots of lots of money!

So, why does Facebook think WhatsApp is worth $19 Billion dollars?

The answer is surprisingly easy to understand. 

When Facebook announced its acquisition of WhatsApp last week, it revealed some interesting statistics about WhatsApp's user base and overall usage.  They are eye-popping.

According to Facebook's presentation slides, WhatsApp's 450 million monthly active users send 19 billion messages per day ... and receive 34 billion (the seeming discrepancy is caused by WhatsApp's group chat feature, where one message can be sent to several receivers).

This chart shows how much an average user uses WhatsApp per month.

 

 via Statista.

WhatsApp's growth and usage numbers are absolutely mind-boggling.  As noted, it has 450 million monthly users ... but 70 percent of them (310 million) use the service daily.

More impressively, Facebook claimed that the number of messages being sent through the company’s service is “approaching the entire global telecom SMS volume” (according to telecom market researcher Informa, this was about 19.5 billion last year).

And for a 'cherry-on-top', Whatsapp continues to bring in over a million new users each day. That’s the kind of growth that Facebook can’t ignore if it wants to remain a leader in social networking and communication, and the company knows it.

In other words, WhatsApp has both offensive and defensive value to Facebook. 

One last thought on the subject ... word on the street is that Whatsapp only had 55 employees. It is a testament to what cloud-scale is making possible.

Hope you have a great week.   Sign-up to get this delivered once a week.

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Analysts Discuss Whether the U.S. Will Still Be the #1 Global Economy in 25 Years

Investors often want a peek at the global future.

Here is a comilation of views from global experts.  They consider things like whether the U.S. will still be the one of the top global economies in 25 years ... and who else will share that stage?

Here is the video from CNBC.

 

 

For more on this, here is an interview with George Friedman.

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