Welcome…to the Haze

Good Morning,


I say “welcome” because it is June 1 – summer is here and will be until the week after Labor Day.  Expect the type of stuff we have seen over the last two days:  low volumes, choppy markets, meandering direction and hiccups each time a scary headline crosses…..




Yesterday morning, the Chicago PMI came out.  The headlines hit early in the morning – it showed a 2% reduction in the index and was “reported” as bad news for the region.


In the next 30 minutes, without much fanfare – and no special headline – the reading was fixed.  It was reported incorrectly in the headline!  And by a wide margin.  Instead of a 2% “miss” down – it was a 2% miss up!


The proper reading was over 59% and was the highest in the region in over three years!!  If it was not so sad – it would be funny.  Why?  Too many still believe the “garbage” reported in so many areas.


You can check the link here from the back pages just in case you are laughing too hard to believe me.


Here is an excerpt:


“A measure of how well the economy is performing in the Chicago area rose in May to the highest level in 2½ years, showing the economy remains quite healthy in key regions of the U.S.


The Chicago business barometer, or Chicago PMI, rose to 59.4 in May from 58.3, MNI Indicators said Wednesday after initially reporting an incorrect number. Any reading over 50 indicates improving conditions.


Originally, the firm mistakenly reported that its Chicago-area gauge fell to 55.2, adding to downward pressure early Wednesday on U.S. stocks. MNI has not explained how the error occurred.


The index has risen sharply since President Donald Trump took office in January promising to boost the economy with a series of pro-business policies.


The energy industry in particular has been revitalized by somewhat higher prices that have spurred drillers to buy more rigs and other equipment used to extract fossil fuels, a bonanza for manufacturers of primary metals and fabricated parts.


In a separate question, more than half of the executives surveyed said their companies plan to hire more workers in the next three months.”


And yet….


The sentiment wilts again just as the summer haze dawns.


Here is the latest for you from AAII:

The summer is dawning and what we can expect is some of the same stuff we have seen in almost every previous summer.  Slow trade.  Choppy trade.  A general downward tilt and softness which has historically proven to be beneficial for the long-term patient investor.  History shows us, it often ends in August with a “summer swoon” – which tends to frighten everyone away for strong year-end closes.


It is not something to fear.  Especially with nearly 75% of the crowd already out of the bullish camp as noted in the latest data released early this morning.


By the way – along with all the other underlying positives – this is very good news.


And it makes the latest jobs data seem even more confusing right?  By the way – the data below is good news too!  A real big beat….

Dirty Little Secrets….


Many have been watching the commission war between the large public houses on the Street.  Here in these notes a few weeks ago, I hinted that soon we may find commissions are free.  I got lots of chatter back with the obvious question of how they would make money.


Ahh, yes, how would they make money indeed….?


Let’s check it out:


Do “The Quants Run Wall Street Now”?


That was the title of a piece in the Wall Street Journal on May 22, 2017.  It’s a question asked often by the talking heads.  It’s why Wall Street has caused you to fall in love with their ETF’s.  Easy right?  Cheap yes?  If the masses only understood the time bomb ticking inside of many ETF’s, they would recognize for what it is – order flow.  I am more than confident most who now embrace the “benefit” of ETF’s have very little understanding of how they actually work.  That is for another note of podcast.


For now, let’s focus on that the article stated:


In that May 22nd piece, the Wall Street Journal revealed how the big hedge funds are more and more controlled by quantitative engineers seeking and exploiting stock market anomalies with lots of crazy, constantly adapting algorithmic models.


Dig a little deeper and you gain a sense of what is most likely happening – and it is all about order flow.  You know how Facebook sells your activity to advertisers?  Well, it seems Wall Street now makes a nice living selling order flow details – the practices are almost identical.


Many big hedge funds look to buy that order flow “intelligence” from Wall Street firms to determine High Frequency Trading (HFT) order flows. They then send all that data into programming processes which are far smarter than I and get an “answer”.  That answer then quickly helps the algo to decide if it wants to move into that flow – or not.


The seeds of this were planted years ago when the NYSE switched to decimal pricing. The sales pitch then is that it would “make things better for the public…..”  Yeah – right.


What is did do is this:  it squeezed bid/ask spreads, replaced market makers and human specialists with computers, and began the channel flow of selling new and growing HFT data (order flow) to the hedge funds.


Selling order flow is now a big business.  (Remember – soon it will look like “commissions are free.”)


Let’s try to get a real feel for this:  Like I noted in the Facebook analogy above – we all now experience this process:   you are on the Internet each day – sifting through popular website portals, going to your sites, your research, your shopping, your – whatever.


All of us are being tracked by an artificial intelligence algorithmic model that is being built from your personal searches and shopping patterns.  That is the data the Google guys and Facebook guys and LinkedIn guys and all the others sell to advertisers.


The data itself then permits the advertiser or platform itself to make suggestions (or essentially an educated guess based on patterns) on items or spots you might want to search, buy from, review, etc., etc. –  next.


I read it referenced in another way:  “This is no different than your dog watching you and trying to figure out if you are headed to the refrigerator to eat – or going outside for a walk.”


There you have it – in the same manner – artificial intelligence algorithmic models are watching you closely for your preference in buying and selling signals.


Back to those Commissions….


The war on commissions seems innocent enough right?  Come on guys.


The “commission war” on Wall Street attracts order flow.  Why on earth would ads for “500 free trades” be everywhere.  The small print tells you why – you gotta trade in the next 6 months – or about 4-5 times every trading day.


Not a great way to build wealth based on lots of history.


Be that as it may – here is the meat grinder reality:  Some major brokerage firms have already admitted on CNBC that their firms would still make money if they did not charge commissions at all!   Why?  How?


They make money by selling order flow data.  And that is one of the big drivers for the professing of love for ETF’s.


In summary, the good news is that the financial markets are liquid and will do just fine a grand majority of the time as history proves for decades.  There will be interruptions, there will be bad news (often), there will be bear markets, there will be disasters.  It’s been that way since the beginning of time.


Trying to run from it or miss it has proven far more costly than living through it – also amassed from much history.


The bad news?  Well, it is not all that bad if you know it – but do understand that – just as Facebook follows your steps and sells them to advertisers – there is a very high likelihood trading platforms, pipes, order management, and HFT systems are selling lots of trading data to the quants on Wall Street – who can indeed take advantage of said order flow.


Most of the time the NYSE’s HFT system adds liquidity, lowers trading costs, and can help many stocks slowly rise.  As with any system open to this, abuses and price anomalies can occur from time to time, especially in the ETF world, since they do not have to trade at NAV.


Understanding this as reality makes you less fearful of it as we continue the journey forward.


If you become less fearful, history suggests you become more patient.


If you become more patient, that same history suggests you make fewer mistakes and knee-jerk reactions which tend to cost you later.


In Closing


Pray for a correction – even if it hurts in the short-run.


Steady as she goes friends.


Just off the bow is the dreaded Summer Haze and often, hidden in the noise, opportunity arises.  We will be patiently looking for same.


The doldrums ahead are likely to be pretty sloppy – but they will cause too many to fear the wrong outcome – and that is a positive for the long-term, contrary investor.


Enjoy the beach plans ahead and time with loved ones and friends – be well and travel safe please.


Until we see you again, may your journey be grand and your legacy significant.