Warp Speed

On New Year's Day The New York Times posted a terrific article on their Web site by Graham Bowley titled "The New Speed of Money, Reshaping Markets". The article talks primarily about Direct Edge, "one of the top four stock exchanges in the United States"and the ramifications of all of the high speed trading that has dominated the markets the past decade, accelerated by mainframes and server farms the new exchanges utilize to bring you trades in a nanosecond. I was not aware of Direct Edge, or The BATS Exchange located in Kansas City, another large stock exchange that does all of the back-office work you don't see when you tap your iPod screen or click that mouse to make a trade.

The digerati have clearly taken over and although technological advances in the markets have reduced trading costs (at least if you use a discount broker), there is something ominous about these upstarts that are taking market share away from NASDAQ and the New York Stock Exchange at an alarming rate. In fact, according to Mr. Bowley: "The N.Y.S.E. accounted for more than 70 percent of trading in N.Y.S.E.-listed stocks just five years ago. Now, the Big Board handles only 36 percent of those trades itself. The remaining market share is divided among about 12 other public exchanges, several electronic trading platforms and vast so-called unlit markets, including those known as dark pools.".

I've discussed dark pools before in other postings and are wary of them, especially since they are growing larger by the minute. To refresh your memory, a dark pool is a trading venue that doesn't quote prices publicly. This translates into a lack of transparency and I'm a firm believer in transparency and government regulation because without either one, we tend to get into trouble. It's like some of the institutional investors are playing with a marked deck. You give some of these white shoe firms an inch and they take a yard. Just look at The Goldman Sachs Group (GS) that recently was fined $550 million by the S.E.C. for fraud in the sub-prime meltdown. They were like used car salesmen knowingly selling you lemons.

I went to the Direct Edge Web site and on their FAQ page they state that The Goldman Sachs Group (GS), Citadel Securities and Knight Capital Group each own 19.9% of the exchange. You sharpen your pencil and that's 59.7% of the organization. Citadel Securities and Knight Capital Group are both major players in the dark pool arena. You can't tell the players without a scorecard and once the dust settles it's like you're dealing with Skynet, the artificial intelligence network that went haywire in The Terminator movies. If it weren't for the dark pools and flash trading that Direct Edge allows, I wouldn't have a problem with them, but I do because I believe it effects everyone on Main Street. IRA's, 401K's, pension plans and mutual funds that are the lifeblood of your Average Joe on the Street's retirement could be in jeopardy without proper government supervision.

I've got nothing against somebody trying to make a buck. I tip my hat to Direct Edge for coming up with a modern trading concept and padding their coffers, but there seems to be a conflict of interest when they are still dabbling in flash trading and dark pools. Supposedly you get a better price for your trade with dark pools if you are involved with high-frequency trading, but the little guy doesn't have access to Big Iron. Your discount broker may get you a penny more per share when you are buying or selling securities on these exchanges. Big deal. If left unattended, these exchanges may bring down the economy again. That's not good for anybody except for corporations like The Goldman Sachs Group (GS) who seem to make money no matter which way the wind blows.

Exile on Main Street

The problem with following stock shaman like you see all day on CNBC is that you don't know if they are investors or traders. They never give you a timeline as to how long to hold a security. One day they love a company and if it goes up a meager 2 points in a momentum move, they'll drop it like a bad habit. I don't like to invest that way. I want to be like Warren Buffett and buy a piece of the business. However, there are times to sell. Now may be one of them. I just don't know because I've gotten it wrong with one of the best market rides since the 1940's. I really don't make many market or security calls, but in 2010, I got three wrong: the direction of the market, Apple Computer (AAPL) and Gold (GLD). I still believe that all three of them are overvalued, but they've got the wind at their backs.

Ever since the New York Stock Exchange was founded in 1792 with the Buttonwood Agreement, there has been a rift between Wall Street and Main Street. As you are probably well aware, things haven't changed too much in 200 years. Just look at the returns of the markets in 2010: DOW up 11%, S&P 500 up 12.8%, NASDAQ up 16.9% and the Russell 2000 up a whopping 25.3%. Main Street, on the other hand, has a distinct problem of unemployment hovering around 10%. The lofty unemployment rate coupled with underemployment and individuals who have stopped looking for work, puts the downtrodden closer to 17%. That's a lot of people on the dole.

For the majority of my life, I have been a Main Street guy. Still am and probably always will be. I am currently putting money under the mattress in for form of CD's and savings accounts and have been doing so for almost 2 years. I also have a percentage of my money in short ETF's which you are already aware of if you have been following this blog. I see the economy from the ground level: food stamps, soup kitchens, foreclosures and muggings. The rosy scenario that a majority of Wall Street pundits are promoting isn't what it's like on the front lines. This is why I'm staying out of the market for the time being. However, the "little guy" or Main Street may be getting back into the market with all of the current bullish sentiment after staying on the sidelines since the 'great recession' wiped out a great number of investors. This could be a bad move.

Throughout the years the markets have been very kind to my portfolios and I thank them for that. This includes all of the Wall Street "experts" who can't seem to agree on anything. You've got to parse out the white noise and get to the transmissions that are down in your range. Right now, the sentiment is extremely bullish and I heard this same tune in the late 1990's when there was a "new normal" and stocks were just going to keep going up. I am a subscriber to ValueLine and the majority of the securities I am interested in have very little room for growth in the next 3-5 years according to their reports. In fact, some will have negative returns with no dividends to pay out if you believe in ValueLine. Many of these stocks are in the green technology, mobile computing and cloud computing sectors. Bubbles abound so buyer beware.

Brian Wesbury

In December of 2009 I reviewed Brian Wesbury's book It's Not as Bad as You Think and gave it a five star rating, but didn't agree with what he was saying because he thought the market was going to rally in 2010 and into 2011. This was at a time when pessimism was rampant on Wall Street, and out of the two dozen or so finance and economics books I read during the latter part of 2009 and early part of 2010, he was the only author except for Steve Forbes that put a positive spin on the markets. Well, kudos to Mr. Wesbusry for being dead on with his assessment. In It's Not as Bad as You Think Wesbury states the DOW could reach 14,000 in the not too distant future. According to his blog First Trust Economy and watching him on CNBC, he is still bullish on the markets for 2011. If you would have taken his advice when he was the lone wolf out in the wilderness, you would have profited handsomely. I just wanted to give him a shout out for not only being right, but taking a gutsy stance.

I haven't been posting any updates to The Ithaca Experiment for a few months because I am still short the market and didn't want to be repetitive like Chicken Little chirping "the sky is falling" over and over again. The market had a very good 2010, especially since September when the rally seemed to have snowballed into a very nice year for those that are long equities. Do I regret being in leveraged short ETFs? No I don't because I still believe that there will be a day of reckoning with the massive debts that governments have accrued - especially in the "civilized" world.

This portfolio is a multi-year holding, just like most of my positions when I was long equities during the 80's and 90's and most of the double aughts. I don't like to sell for tax purposes, and statistics show frequent trading is not good for your bottom line. It is very difficult to time the market so I need to follow my gut instincts. As long as I don't panic and sell anything, all I have are paper losses. I have to be patient and wait it out as long as I remain solvent in my ETF holdings. My positions in ProShares Ultra Short S&P 500 (SDS) will be less of a problem of staying afloat than my holdings in the Direxion Small Cap Bear 3X Shares (TZA) because the former is double leveraged whereas the latter is triple leveraged. In fact, my allotment of shares in the Direxion Small Cap Bear 3X Shares (TZA) have already done one reverse split since I've owned them and may in fact do that again if the price falls to hat sizes once more. I have thought about selling them, but they are a small percentage of my portfolio, and, I believe they will get me to break even point eventually, or pretty close to it. I'm going to just let it ride as they say in the casinos.