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Gold/Mining/Energy : Gold and Silver Juniors, Mid-tiers and Producers

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To: tyc:> who wrote (71509)	8/28/2011 1:07:58 PM
From: onepath	Read Replies (2) of 78417

>"I think this situation may be the result of high frequency trading."< I think you will find this comment on HFT quite interesting and it backs up your perceptions(and mine) of this market. Subject: Dynamic Alpha Performance Hedge Fund Update Week Ended August 26th 2011 Joshua (Computer): Greetings, Professor Falken. Stephen Falken: Hello, Joshua. Joshua (Computer): A strange game. The only winning move is not to play. How about a nice game of chess? War Games (1983) Is the current correction different from any other that we have experienced? Yes. According to Lowery’s Research we have experienced four consecutive 90% Days (90% of stocks up or down in the US). The time period from August 8th to August 11th represented extremes of intense selling interrupted by days of equally intense buying as US markets alternated between 90% Down Days and 90% Up Days. Going as far back as 1940, there is no evidence of these extremities in the markets. Make no mistake about these markets – they are being manipulated by High Frequency Traders (HFTs). According to data compiled by Bloomberg and Credit Suisse Group AG, the equity volume from August 4th to August 10th reached a daily average of 16 billion shares surpassing the previous five-day record of 15.9 shares billion following the Lehman crisis (the daily average in the first half of 2011 was 7.5 billion shares). According to Wedbush Securities, the stock market’s fastest electronic firms increased trading threefold during the first ten days of August and Wedbush estimates that HFTs accounted for 75% of US equity volume in August. For technicians who use volume as a guide it’s impossible to know if their technical indicators have been rendered useless. My friend Doug Kass at Seabreeze Partners wrote that during this week’s surge on Tuesday he “polled numerous sell-side institutional desks and a number of sizeable high-net-worth brokers, and none of them had any meaningful individual buy orders during the late afternoon that could account for the sharp market advance. By contrast, [Doug’s] contacts in the high-frequency-trading community were on trading overload after 2:00 p.m. EDT, as the [HFTs] dominated the market's trading activity.” Unprecedented intra-stock correlation is impacting the ability to seize idiosyncratic opportunities. While the stock specific opportunities for numerous secular growth companies are some of the best I’ve ever seen in my career they are being drowned by the HFTs. Last week we mentioned that intra-stock correlation surpassed 2008 levels, making it nearly impossible for any stock to overcome the systemic fears infecting the markets. As of this week the 65 day cross correlation hit an all time high of 85%. This compares to the average 20 year correlation in the 30% range and the previous highs in 2008 which peaked at 75%. Correlation has doubled from July when it was at 40%. The surge in correlation perfectly overlaps the surge in HFT trading. These are very bizarre times. The question remains – will there be a real impact on the economy from this manipulation? Are HFT’s akin to portfolio insurance in the 1980s that caused the crash of 1987? Post 1987 there was little impact on the real economy from the crash and worries about a recession were misplaced. Thus far, the Euro Stoxx 50 is down 17% in August with Germany declining 24% over the same time period. While the S&P 500 is performing relatively better, down ~ 10% for the month of August, it is still the second worst August in US stock market history. There is little doubt that the gyrations are having an impact on investor confidence as there is a flight from equity funds and corporate bond funds. The level of investor redemptions are at their highest levels since early 2009. In my opinion, this is a market that is impossible to trade or interpret given the HFTs. So what am I doing today? Like the computer Joshua in the movie War Games learning that since there are no winners in Global Thermonuclear War its best not to play, I’m currently not playing. For me, that’s saying a lot ( http://www.theglobeandmail.com/globe-investor/investment-ideas/experts-podium/linking-excess-returns-and-high-turnover/article2116293/). Have a nice weekend. - N

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