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We admit our statistics for total Dollar Trading
Volume (DTV) are not 100% accurate. We're not even sure that any
entity would be able to tally exact numbers at this point. The BATs
exchange purports to report it all (links for trading on Friday, March
18th) and our link shows data for 15 arenas, including Nasdaq and the New
York Stock Exchange but is everything reported, including all transactions
in so-called dark pools? We're by no means sure they are. Wikipedia's
article (see http://en.wikipedia.org/wiki/Dark_liquidity)
states that "the trade is usually visible after the fact in the market's
public trade feed" for so-called "Iceberg Orders," but
usually means not always. Furthermore, regarding dark pools,
the Wiki states that ".... detailed information about the volumes and
types of transactions is left to the crossing network to report to clients
if they desire and are contractually obligated." This certainly
sounds like information can be withheld. If information can
be withheld, some information can be assumed to be withheld.
FOR NYSE TRADING]
FOR NASDAQ TRADING]
FOR BATS TRADING]
Thus, our tally is best treated as an estimate.
In any event, we are confident that our estimates are within 1% to 2% of
the actual totals. Given the size and scope of trading in today's
markets, a rough estimate is all we need to infer a continuing environment
that is distinctly unfriendly to investors, both individual and professional,
an environment that favors high frequency traders and those who trade via
programs and algorithms.
At the pace of the last 12 months, the NYSE will
alone account for $18.69 trillion in dollar trading volume. If we
use the month-to-date average of NYSE trading as a percentage of overall
trading (28.22%), we can estimate total DTV of $66.22 trillion for this
year, slightly less than last year's estimated total of roughly $65 trillion.
However, we have refined our estimate a bit further and as of today, believe
DTV totals approximately $61.26 trillion, an amount equal to almost four
times total market capitalization and easily more than four times the country's
gross domestic product.
Remember the tech mania of
1999 and 2000???
Trading has doubled
Turnover in the U.S. stock market is so rapid,
we now term it "Churnover." It's all about the churning. Imagine,
on a routine day, stocks are transacted at a rate four times all the transactions
that take place throughout our economy. If the public represented
the overwhelming majority of transactions, as they used to in decades past,
commercial activity would grind to a complete halt as there would no longer
be sufficient time to actually labor to produce goods or provide services.
The SPDR S&P 500 ETF Trust (SPY) hit its peak
on February 18, 2011. Volume in the rally had previously begun to
contract - a bad sign - yet close to $16.9 trillion of SPY shares traded
that day, equivalent to 41% of the day's GDP. But that was just
an ordinary day. On May 6th of 2010 when the "flash crash" occurred,
DTV for just the SPY alone totaled an astonishing $73.11 billion versus
perhaps $41.15 billion generated by the economy.
High frequency trading (HFT) probably accounts
for as much as 70% of all trading nowadays. HFT requires that participants
seek out quicker and quicker ways to transact, lest the competition jump
ahead of them. Trading, which was once confined to orders placed
in milliseconds from the time information arrived at computers, has been
accelerated to microseconds and is well on its way to picoseconds (one-trillionth
of a second). Although HFT proponents claim the market enjoys increased
liquidity, it most certainly does not. Last May 6th, when the Dow
dropped 1000 points in mere minutes was all the proof one needed to illustrate
that HFT does not promise liquidity. Despite the propaganda, as long
as bids can be pulled en masse by participants, all in reaction to one
another, our markets will continue to suffer the threat of new flash crashes.
It's not a matter of if, it
is a matter of when.
Clearly, HFT transactors trade
ahead of the public
and have information the public
does not have.
HFT transactors trade with
the equivalent of inside information.
Non-HFT trading now amounts
to roughly $18.4 trillion.
HFT trading now amounts to
roughly $42.9 trillion
Is there any doubt that the
public cannot possibly receive the best price?
Our stock market no longer
serves the public.
The following article was the
lead article in our February 21, 2011 issue.
The charts below have not
been updated since but a few thoughts have been added.
Lies, Damned Lies And Statistics.
It seems like a hundred years ago now, but it was
November 1996 when your Editor had his first article published in BARRON’s.
The subject was the relationship between inflation and stocks and specifically,
we cited a long term 14-year average rate of inflation, which after further
research, was tweaked to 15 years. We speculated that the common
wisdom was all wrong. The widely held conventional view has always
been that a rise in inflation is bad for stocks and a lower rate of inflation
is good for stocks. The question we posed was “suppose inflation
has little impact upon stocks? Suppose, instead, the stock market
has a major impact upon inflation?” The theory is simple; it’s all
about the allocation and reallocation of money. When stocks are out
of favor, money tends to be reallocated into other assets including commodities,
and as a result, inflation rises. When stocks are in favor, money
drains from other assets including commodities and inflation moderates.
Today’s featured chart is a compelling view of our theory at work, beginning
with a secular peak for stocks in 1966 and lasting 16+ years to the secular
bear market low in 1982 and another 13+ years until the Dow regained its
former inflation adjusted peak. Money flowed out of stocks and into
other assets and commodities and then the flows reversed into stocks; stock
prices rose and average CPI fell.
As more and more money poured into stocks, there
was relatively less available to flow into commodities and other asset
classes, thus inflation continued to fall. When our lines crossed
in 1995, the total assets of mutual funds were less than $1 trillion.
From that time to the top in March 2000, another $1 trillion flowed into
stock mutual funds, pushing the rate of inflation still lower. And
then things began to get really interesting. Despite the obvious
dichotomy, that stocks have remained out of favor and the long term CPI
has continued to decline, we see three bumps where a crash in stocks was
accompanied by a brief bump up in the long term CPI. Nevertheless,
a recent dichotomy. Or is there?
We can’t think of very much that costs less than
it did in 1995. Computers, sure. But we do not eat computers,
nor do we wear them, nor do we live in them nor do we drive them to work.
Despite the government’s computations, everything important seems to be
far more expensive for consumers than the CPI would have you believe.
A recent visit to John William’s Shadow Stats website (see http://www.shadowstats.com/)
was quite instructive. Take Mr. Willam’s inflation calculator, for
instance. Plug in any dates you want (http://tinyurl.com/4vgcezp)
and see how William’s SGS stats compare with the officially. stated
CPI for the same period of time. For instance, from mid-1995 through
the end of last year, the official CPI says it took $143.72 to buy what
$100 used to buy, an annualized rate of 2.4%). ShadowStats claims
it took more than $350, an annualized rate of 8.7%. See the table
below; a small sampling of price increases since 1995 showing what it costs
now for $100 worth of the same in 1995. While the average of this
sampling does not approach the ShadowStats $350, we have left a lot out.
Nevertheless, our average comes to $209.34, more than twice the CPI’s
stated rate. Bear in mind, we spend a lot more money on bread,
gas and tuition than we spend on eggs. A real-life average based
on likely spending habits and with a complete list of consumer needs, and
the ShadowStats average is eminently believable. Thus, there
really is no dichotomy at all. Clearly, inflows into stocks
have not only abated, they have turned extremely negative in the last few
years and as a result, money has found other places of favor, lifting prices
substantially along the way. Prices for rice, grains, cotton, oil,
copper and other commodities have been soaring. Prepare to be shocked
We have no doubt whatsoever, that the CPI is woefully understated, a lie,
a damned lie, a statistic utilized to calm fears and even mitigate the
government’s social security obligations, which in 2009, totaled $650 billion.
*Tuition example: Johns Hopkins
Worse yet, the stated policy of the Federal Reserve
to lift stock prices, has to exacerbate the problem of rising prices.
The amount of money we need to print to buy all the bonds required by QE1
and QE2 cannot help but result in higher inflation. If there is going
to be a significant increase in the supply of money, everything whether
nailed down or not must eventually cost more (including stocks).
It is the law of supply and demand at work. Thus, now we’re in a
very strange situation; negative inflows provide pressure while the increasing
stock of money provides impetus. In the last year, M2 has risen by
$332 billion. While that has had the desired effect upon stock prices,
it is also having an undesirable effect upon other prices. In our
view, we are facing an inevitable rapid rise in inflation, including the
very visible CPI, not just the Shadowstat version.
We have no doubts about QE2. It cannot
work. Why the Fed Chairman’s goal of lifting stock prices
may be admirable for some, it cannot address the lost wealth from housing
nor the continuing plight of those who are underemployed. If one
wanted to make just plain folks feel more comfortable about spending money
to lift the economy, a better target would be to lift housing prices.
Instead, housing prices remain mired as interest rates rise, a direct result
of the further debasement of our currency. Furthermore, as this insane
policy continues to be implemented, we must expect interest rates to rise
still more, exerting still more pressure on housing prices. The QE2
exercise is palpably insane.
Although stock prices are rising, we’re not sure
who is getting rich besides high frequency traders and the major brokers.
When JPMorgan and other bankers announce they have been able to trade six
months without even one losing day, can Mr. Bernanke really opine that
John & Jane Doe are feeling that much better about their portfolio
that they will spend enough to create 4 million jobs? While
stock prices have risen, housing prices have gone nowhere.
Herein lies the real dichotomy as housing has always been the best measure
of wealth for Americans. On one hand, there remains a sullen, or
more realistic outlook for housing while stock market bulls continue to
proliferate based on the Fed’s stated goal of reflating stocks, apparently
to prior bubble levels. Yet, as our featured chart clearly illustrates,
stocks remain well below their inflation adjusted highs.
History has been a great teacher. As we show
below, stocks (ex-dividends) can be counted on to return roughly 5% per
year over the long term. Sometimes more, sometimes less. Sometimes
much more, sometimes much less. Annualized 20-year returns now stand
at 7.3% (ex-dividends), far above the historic norm. We believe
that long term returns are destined to eventually regress to the historic
norm of 5%. If we are correct, Bernanke’s plans are for naught.
If The Dow simply went nowhere, the 5% level would not be reached for another
four years and three months, in May 2015. Even a return to
a very generous 6% would take three years at Dow 12,000. And consider
that long term returns have been above a 6% benchmark less than 44% of
the time. Expectations for stocks are still way too high.
The S&P 500 recently achieved a CAPE (Cyclically
Adjusted P/E) of 24. CAPE is based on ten-year earnings adjusted
for inflation. A similar run occurred during the Roaring Twenties,
peaking in 1928, again into the 1937 peak, again into the 1960’s, just
before the ’66 secular peak, and again into the great tech mania.
Today’s overvaluations imply bare-bones returns for years to come (see
John Hussman’s views at http://tinyurl.com/48h36xz).
When ten-year annualized returns rebounded after the 2000-2002 crash to
more than 11% in November 2004, our outlook remained grim and not only
did we predict a fall to the historic norm, we claimed very good odds that
the ten-year annualized rate could fall to zero.
Ten-year annualized returns
eventually fell to nearly minus 4%
at the very bottom in March
We now expect 20-year returns
to decline to more normal levels.
Money is still coming out of
stocks and is moving elsewhere.
Inflation is rising and will
accelerate in 2011 and quite likely beyond.
For those who are interested,
a limited number of reprints of our original BARRON’s article are available.
Please send a stamped self-addressed
envelope to Crosscurrent Publications, 3280 Sunrise Highway, Suite 125,
Wantagh, NY 11793.
Below, our entire lead article
reprinted from the January 3rd issue of Crosscurrents.
Time To Punish The Risk Takers
In our November 19th interview with Financialsense's
Jim Puplava (www.financialsense.com),
we were asked about QE2. Our immediate response was to bring up the
old saw about "buy on rumor, sell on news." Treasuries were solid
for months as speculation centered on the Fed finalizing plans to buy bonds
for the ease but when push came to shove and the plan was finally implemented,
prices reversed and headed south. Strange? No, not really.
Amazingly, despite the Fed's best intentions, interest
rates are going up, not down. Incredibly, the Fed has turned out
to be even dumber than most of us already knew. By telegraphing each
and every purchase, the Fed has enabled the banks and brokers to buy beforehand
and then sell to the Fed. And each time the Fed's demand ends, prices
drop. Mortgage rates were supposed to decline to enable more affordable
housing and easier financing, but only a month after the implementation
of QE2, rates were up a full percentage point. QE2 has done nothing
except enrich banks and brokers. No one in government understands
what is going on.
Worse yet, the Chairman of the Fed has now undermined
any remaining confidence that observers might have in Bernanke with his
new stance that the Fed is not printing money, an admission that he candidly
made a year ago. See Jon Stewart explain it all at http://tinyurl.com/38qyngu.
Unfortunately, this is really not comedy. It is tragedy. And
Congress and the Administration are powerless to prevent the creeping oligarchy
of such as those at the top of Goldman Sachs and other firms that purport
to believe they are doing God's work and not robbing our Treasury nor negatively
impacting the lives of most Americans. We believe differently.
The push to securitize literally everything in sight has had disastrous
consequences and continues to threaten our economy (see Mark J. Perry’s
and Robert Dell’s interesting story at http://tinyurl.com/38saz8s).
The surfeit of government malfeasance is the saddest
state of affairs for the country this Editor has witnessed in his lifetime.
And through all of this, the beat goes on.
Stock prices levitate as the Fed desperately and stupidly attempts to create
yet another bubble and sentiment turns grossly optimistic. For a
couple of months, we have seen a substantial pickup in optimism in several
measures of sentiment, such as the Investor’s Intelligence tally of professional
advisors and the American Association of Individual Investors (AAII).
Traditionally, excessive optimism in these two indicators points to an
imminent correction, often short to intermediate term in nature, a few
weeks to perhaps a couple of months. However, our featured chart
today indicates risk taking (read optimism) on a far greater scale, implying
strong odds for considerably lower prices one year from today.
When FINRA released the total margin stats for
October, it was only the 23rd occasion in which total margin debt exceeded
$300 billion. A year after the very first instance, in December 2006,
the S&P 500 was ahead by 3.5%. A year after each of the other
occasions, a consecutive string of months from January 2007 to September
2008, stock prices were not only down but were down big, averaging a 22%
decline. We have taken the liberty of adding the month of March 2000
to the bottom of our chart, despite the month’s tally of margin debt not
quite getting to $300 billion (it was $299.93 billion). However,
a year later, stocks were down 22.6%. It’s not that we believe $300
billion in total margin debt represents a magical barrier for stocks but
the more margin debt is accommodated by players, it is clear that there
is more risk in holding stocks. Leverage was one of the principal
factors that undid the great rise into the 2007 peaks for all the major
averages, as individuals, banks, brokers and hedge funds resorted to extreme
exposure, some in excess of 30-1. Historically, periods of extreme
leverage have augured quite poorly for stocks. Just updated: FINRA
reported total margin debt up another 2% in November to a total of $309.3
billion. From only six days before the March 2009 low, margin debt
has expanded by 54.9%. In the same period of 21 months into the October
2007 peak, margin debt expanded by a lesser amount, 48.8%, Clearly,
risks have grown to an extreme.
At left below, the same chart we placed in our
Chart Spotlight feature at www.cross-currents.net/monthly.htm
recently, but updated to reflect data for November. The peak for
margin debt in 1987 was accompanied by the greatest stock market crash
in history. The black bar for 2000 represents where margin debt was
at the March 10th highs (the year end reading is represented by the gray
bar). Stocks were subsequently cut in half and Nasdaq was slaughtered,
down 70%. And currently, we see the second highest level in history,
second only to the utter madness that was described as the “Roaring Twenties.”
We believe the comparison today offers a stark and threatening perspective.
Margin debt as a percentage of gross domestic product (GDP) is the highest
it has been in decades. The use of excessive leverage was one of
the principal factors that catalyzed the collapse from the 2007 highs and
only three years and change later, the same situation is at hand.
Curiously, since the 2007 collapse, margin debt
as a percentage of capitalization has continued to climb. Since 1987,
GDP has tripled. Market capitalization is up six-fold. Margin
debt is up seven-fold. Dollar trading volume is 27 times what it
was. The only fair comparison would be an assumption that the present
peak in margin will result in the same type of price collapse as suffered
three times previously. Thus, as the year ahead opens for trading,
as we have come to expect in the modern era of over leveraged and aggressive
strategies, there is considerable risk ahead on the horizon.
CHART DATA UPDATED THROUGH
The risk takers have returned
and they have proliferated.
After two halvings in the major
averages in only 9 years,
margin debt is somehow again
at ebullient levels,
on a par with the record setting
levels of 2007 to 2008.
We expect the risk takers and
gamblers to be punished yet again.
Below, reprinted from the
January 31st issue of Crosscurrents.
We urge readers to revisit our archives to see
our comments on Edson Gould, written for the February 2004 edition of Pictures
of a Stock Market Mania (see http://www.cross-currents.net/archives/feb04.htm).
Gould was one of the all time greats and his “Sentimeter” was one of the
most salient concepts ever shared with the public. As our chart above
clearly illustrates, the boundaries Gould cited worked wonderfully from
1928 to 1994, a lifetime. And then something changed. We believe
a good portion of the discrepancy between then and now is a result of the
stock option era. And of course, this is an excellent reason why
insiders want no part of their own companies, since dividends are no longer
a significant part of the picture. As well, the lack of dividends
is a good reason for the public to have lost interest as well. There
once was a time when you could invest and afford to sit through a bear
market as stocks earned 5%-6% or more while you waited for the tide to
shift. No longer.
Thus, a nation that grew up on savings accounts
and dividends now has neither. A sad perspective on how vastly
things have changed. At center, the price to dividend ratio is surging
again well into overvalued territory. Although we show the ratio
versus the Dow, the dashed line represents where the broad based S&P
500 trades today, significantly higher and much further into overvalued
Yet another reason for the
Fed’s goal to create a stock market bubble to fail.
Once more, the Federal Reserve
is making a huge mistake....
Bubbles do not end well.
To see a free sample copy
of the Crosscurrents newsletter, CLICK
***THIS USED TO BE OUR FORECAST SECTION***
Some of our readers may be aware
of a purported "study" of stock market forecasters, published by an internet
blogger. In our case, the blog reported accuracy ratings that we
can only describe as devised and so far from accurate as to be laughable.
Needless to say, our forecasts were interpreted incorrectly and denigrated.
We have no desire to direct any traffic to this blog and if you are interested
in seeing the "study," you will have to search for it.
The blog admits "The Crosscurrents
forecasts/targets frequently include qualifications/embellishments that
makes testing difficult," yet the ratings were undertaken as if gospel.
The blog further admits that "a few very bad forecasts make the average
absolute error high." Ironically, and most disturbingly, those
very same forecasts begin and end with our initial forecast of a secular
bear market bottom at Dow 6400, originally published on our website as
far back as 2003 and published in our Washington, DC speech before the
International Federation of Technical Analysts in November of 2003.
However, as our initially cited time target was pushed out with
each new forecast, the aforementioned study considered the entire forecast
before it to be utterly wrong and in some cases, awarded us a rating of
minus 80% accuracy. That is a stunning misapplication of statistical
science, in that the actual bear market low to date was Dow 6469 print
basis on March 6, 2009. On a number of occasions, we also specified
an SPX low of 680, about as close as one can get to the actual 683 closing
We not only forecasted the
actual price bottom with pinpoint accuracy,
we did so six years
before the fact.
Moreover and most importantly, we
have usually cited the upside parameter as "potential" and the downside
parameter as "risk," in order to highlight both the best and worst possible
cases. The study incorrectly interprets each of these parameters
as actual forecasts, which must, by definition, make one or the other of
our parameters hopelessly wrong. The market cannot move in both directions
at once. If an actual forecast has been issued in the past, it is
typically not accompanied by a disclaimer, such as upside "potential" or
It has always been accepted wisdom
in our business that one does not forecast both price and time together.
If a time is specified, never specify a price. If a price is specified,
never specify a time. It is sufficiently difficult to forecast one
of the two aspects alone. Most forecasters follow this golden rule.
When we issue a forecast, we typically do not follow the golden rule.
However, the denigration of our forecast results by this faulted study
has cast a serious pall on our desire to continue publishing price and
time forecasts for the benefit of the public on the free portion of this
website. The Crosscurrents website has had more than three-and-a-half
million visitors since it was established in 1999 and we are quite proud
to display just a few of the many kudos accorded us by readers at http://www.cross-currents.net/kudos.htm.
We did not earn these kudos by publishing wrong forecasts time after time.
Despite our desire to continue serving
the public, we will no longer expose our analysis to faulty studies and
inadequate math on the free portion of our website. Therefore, our
policy has changed. While we will continue to publish the very popular
Pictures of a Stock Market Mania feature, we will no longer provide any
price and time forecasts or parameters for the public as have accompanied
this feature in the past. The subscriber portion of our website will
have the same article accompanied by price and time forecasts and other
parameters as we deem significant, as it always has. If you wish
to see these forecasts and or parameters, we suggest you subscribe
or purchase a copy of the full article for only $15 [CLICK
HERE]. If you later subscribe, we will
be happy to apply the $20 towards your subscription.
OF THE ENTIRE WEBSITE ARE COPYRIGHT 2011 CROSSCURRENTS PUBLICATIONS, LLC
I hope you have enjoyed your visit. Please
return again and feel free to invite your friends to visit as well.
Alan M. Newman, March 27, 2011
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All information on this website is
prepared from data obtained from sources believed reliable, but not guaranteed
by us, and is not considered to be all inclusive. Any stocks, sectors
or indexes mentioned on this page are not to be construed as buy, sell,
hold or short recommendations. This report is for informational and
entertainment purposes only. Persons affiliated with Crosscurrents
Publications, LLC may be long or short the securities or related options
or other derivative securities mentioned in this report. Our perspectives
are subject to change without notice. We assume no responsibility
or liability for the information contained in this report. No investment
or trading advice whatsoever is implied by our commentary, coverage or