What Happens When the Machines Start Selling?

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The death of fundamental analysis.

The infamous FAANG stocks – Facebook, Apple, Amazon, Netflix, and Google’s parent Alphabet – along with other “tech” stocks have been getting “hammered,” to use a term that for now exaggerates their “plight.” The FAANG stocks are down between 1.7% and 2.5% at the moment and between 5.5% and 11% since their peak on June 8. Given how far these stocks have soared over the past few years, this selloff is just a barely visible dip.

But fundamental analysis has long been helpless in explaining the surge in stocks. The shares of Amazon now sport a Price-Earnings ratio of 180, when classic fundamental analyses might lose interest at a PE ratio of 18 for the profit-challenged growth company that has been around for over two decades. For them, the stock price might have to come down 90% before it makes sense.

Or Netflix, with a PE ratio of 195. Or companies like Tesla. Forget a PE ratio. There are no earnings. The company might never make any money. Its sales are so minuscule in the overall US automotive market that they get lost as a rounding error. It bought Elon Musk’s failing solar-panel company as a way to bail it out. And the battery-cell technology Tesla uses comes from Panasonic. So what should a company like this be worth? Fundamental analysis has been completely irrelevant: Tesla’s current stock price gives it a market capitalization of $61 billion.

So investors trying to sort through this mess by using fundamental analysis have been left in the dust years ago. Fundamentals no longer matter in this market. Valuations have been surgically removed from any sense of fundamental reality.

There are a lot of reasons for this, including the enormous amounts of liquidity in the markets, after the Fed, the ECB, the Bank of Japan, the Bank of England, and the Swiss National Bank have created $11 trillion out of nothing since the onset of the Financial Crisis and used that money to buy $11 trillion of securities – in the SNB’s and BOJ’s case even common stocks. They now sit on $15 trillion in assets.

Under such relentless buying pressure, fundamentals in the markets have become useless. People still truly engaged in it – rather than in churning out “fundamental” rationalizations for irrational stock prices – are being ridiculed. But algorithms have picked up the slack.




“The majority of equity investors today don’t buy or sell stocks based on stock specific fundamentals,” Marko Kolanovic, global head of quantitative and derivatives research at JPMorgan, explained in a note to clients, cited by CNBC.

“Fundamental discretionary traders” now account for only about 10% of trading volume in stocks, he said. Passive and quantitative investing account for about 60%; this share has more than doubled over the past decade.

These “big data strategies are increasingly challenging traditional fundamental investing and will be a catalyst for changes in the years to come,” he said.

Since fundamental analysis of specific stocks and companies no longer influences trading decisions, the sell-off in tech stocks can’t be the doing of those still hopelessly clinging to fundamental analysis. Instead, it was likely associated with some change in strategy by quantitative and algorithmic trading. The algorithms were reacting to something.

But these algorithms – many of them written by people who went to the same schools and learned the same things – and the vast amounts of data they churn through end up doing similar things, following similar strategies, and producing similar results. Hence, the surge of FAANG stocks and other stocks to where fundamentals are just a quaint reminder of a bygone era.

But without fundamentals, what will hold up stock prices, once the quantitative strategies shift without notice and see selling as the opportunity, and other algos react to those market data points and follow them or try to run ahead of them? No one knows.

This environment has amassed phenomenal risks. These shifts, as we have seen with the tech stocks, can occur without prior notice, without obvious trigger. They occur because an algo sets it off and other algos follow since they react to each other, and the whole machinery can suddenly go into reverse and get stuck in it.

Quant hedge funds – where trading is done by machines, not humans – now dominate stock trading. Read…  Will Quant Funds Trigger the Next Stock Market Crash?




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  74 comments for “What Happens When the Machines Start Selling?

  1. mick
    Jun 15, 2017 at 11:57 am

    When it hits, nobody will have time to react.

    • andy
      Jun 15, 2017 at 11:20 pm

      And if one does have time to react, how does one react?

      • hidflect
        Jun 16, 2017 at 4:13 am

        Buy a solid gold producing mining company.

        • Peter hunt
          Jun 18, 2017 at 2:09 am

          Evn rms rsg are good companys with solid profits and reserves

  2. Rates
    Jun 15, 2017 at 11:59 am

    As someone who’s been involved in building many of these big data driven strategies, I am always confused when there’s an article saying fundamental analysis is dead, because numbers coming out of fundamental analysis such as cash flow, etc do make it into those strategies. I think the more appropriate way of saying things is “fundamental only strategy is dead”. These strategies still make use of numbers that are predictive and not just any data such as the time of the full moon, etc.

    I definitely agree though that because of the factors you pointed out i.e. people going to the same school etc that correlation and covariance factors of the models are probably higher than what’s computed.

    Then again these things are also known to some smart people like the guys at the Medallion fund so I expect the factors they use to have quite a degree of differentiation.

    • c_heale
      Jun 15, 2017 at 11:15 pm

      No numbers are predictive. I have to ask if you have read anything by Taleb, or if you have any understanding of chaotic dynamics, or even of post newtonian physics. Everything is inherently unpredictable. The only thing that can be even vaguely predicted is the degree of uncertainty. And this is not accurate. If it was based on the time of the full moon it would probably be as accurate.

  3. Willy2
    Jun 15, 2017 at 12:04 pm

    – Then all the people that have bought with leverage will be forced to sell. Causing more selling.

    • milking institute
      Jun 15, 2017 at 7:11 pm

      In any downdraft the “momentum” stocks will be sold first. when the margin calls go out investors are forced to raise cash and the cash is in APPLE,FARCEBOOK,AMAZON etc. dumping procter & gamble will only be a last resort. get yer puts or go QID. who said it? “the early worm get’s eaten by the bird”….

  4. cdr
    Jun 15, 2017 at 12:06 pm

    1) Algos have not demonstrated the ability to sell or short aggressively. Buy the dip is as bad as they go. Banging the close or other similar tactic is normal. Used to be illegal but ok if a machine controlled by a computer program does it. I don’t even think they would comprehend a naked short sell rampage. The easy money follows a course that’s biased upward regardless of fundamentals. A market crash will be something to see, but can be expected to reverse quickly as idle money creates losses.

    2) Cost of sales, as in can money be borrowed cheaply enough to churn and flip paper at a profit, is the only fundamental that matters. Price is a function of being able to flip paper at a profit, not the operations of the company. The actual company is almost irrelevant except for public relations and attracting new money from the public in the form of deposits, rather than via margin.

    3) ETFs were sold as a means to buy a basket of stocks and the ETF price was supposed to be set by the actual share price. Rather, ETFs are bought and sold and their activity sets the price for the underlying. The tail wags the dog.

    4) The textbook method is a historical curiosity today. All they are good for are definitions and basic market functions – a 101 level course.

    • walter map
      Jun 15, 2017 at 2:42 pm

      “Algos have not demonstrated the ability to sell or short aggressively.”

      They did in the last crash, now didn’t they?

      “A market crash will be something to see, but can be expected to reverse quickly as idle money creates losses.”

      Do market crashes create losses?

      Does “buying the dip” always work?

      • cdr
        Jun 15, 2017 at 4:59 pm

        Algos became a big thing a few years ago. They existed but were minor 10 years ago. Short selling today in general is a joke compared to yesteryear. Those people used to be terrorists.

        Loss: buying price greater than sale price. No loss if hold and don’t sell. Lots of people had real estate losses. Fewer had stock losses.

        Buy the dip is the common best strategy of today for algos. That’s how they exist. You and I would have problems being that nimble. Algos do it with ease.

        • cdr
          Jun 15, 2017 at 5:21 pm

          “idle money creates losses”

          Algos need to churn to make money. Lots of churn.

        • walter map
          Jun 15, 2017 at 6:36 pm

          “Algos became a big thing a few years ago. They existed but were minor 10 years ago.”

          Untrue:

          Financial markets with fully electronic execution and similar electronic communication networks developed in the late 1980s and 1990s … MGD was a modified version of the “GD” algorithm invented by Steven Gjerstad & John Dickhaut in 1996/7;[39] the ZIP algorithm had been invented at HP by Dave Cliff (professor) in 1996. In their paper, the IBM team wrote that the financial impact of their results showing MGD and ZIP outperforming human traders “…might be measured in billions of dollars annually”; the IBM paper generated international media coverage.

          https://en.wikipedia.org/wiki/Algorithmic_trading

          Electronic trading started to mass-develop in the ‘80s across asset-classes, and accounts today for a vastly dominant portion of the overall trading activity. As trading volumes increased and more electronic markets progressively opened, investors requested improved execution capabilities by controlling execution cost and market risk, and the business of execution algos took off in the early ‘90s.

          [emphasis mine]
          http://fintank.net/position_papers/a-brief-history-of-algos/

          “Buy the dip is the common best strategy of today for algos.”

          Also untrue:

          Trend Following Strategies
          Arbitrage Opportunities
          Index Fund Rebalancing
          Mathematical Model Based Strategies
          Trading Range (Mean Reversion)
          Volume Weighted Average Price (VWAP)
          Time Weighted Average Price (TWAP)
          Percentage of Volume (POV)
          Implementation Shortfall

          http://www.investopedia.com/articles/active-trading/101014/basics-algorithmic-trading-concepts-and-examples.asp

          So-called “buying the dip” isn’t included in the such lists because it’s considered trivial, you don’t need algorithmic trading to do it, and it would be a waste of expensive high-end resources if you did.

          Sorry.

        • wkevinw
          Jun 16, 2017 at 3:20 am

          Walter Map’s reply is spot on.

          If the algorithmic/quant trading methods were really capturing something you would not have big bear markets that bankrupted large numbers of hedge funds, etc., that use them.

          The ones that really work, you don’t really know about. Those people survive and keep to themselves.

          The only meaningful time to evaluate an investment method’s value is near the bottom of a bear market. That’s where you have only the survivors.

          At the top of a bull, where we are now, all the buy and hold and other over-simplified and/or recent winner strategies are touted.

          Buy and hold is great over infinite/very long time frames. Try telling a buy-and-holder that it was good if they retired in 2002 or 2008. It’s called the “sequence of returns risk”.

        • cdr
          Jun 16, 2017 at 6:02 am

          Walter,

          How long did it take for you do figure out that quants really existed long ago and started learning their trade on the Commodore 64 and Apple IIe, as those were the only computers existing way way back then. Of course, the 10MB PC XT was magnificent with HFT. dBase II made it a contender. The 9600 baud modems of the late 1990s turned thousandairs into multi thousandairs. The ultra smooth T1 lines in the early 2000s with their 1.44Mb line speeds conquered the HFT world after that. What a great time to be alive!

          Today the need for microsecond data feeds and direct connections to exchanges and laser microwave line of sight towers pales to the old days. Right? The best days for HFT were long ago on CP/M. Why do you think Osbournes were so popular? Certainly not for their pre-laptop like qualities. They were born to spoof orders and front-run.

          Buy the dip is a gift that keeps on giving.

          Old style technical analysis is a sort of rule book that keeps things from getting too crazy. Slowly upwardly biased prices are a byproduct of the human aspect of their programming. Fundamental analysis prevents companies with little revenue get overpriced stock prices (see how fundamental analysis doesn’t seem to do much anymore?) HFT will trade a bankrupt company that’s ready to fold in high volume as long as it can sucker someone or another machine into buying some shares for a quick flip.

          Just out of curiosity, why don’t you explain how HFT works?

          You can’t.

          Or you’re selling it and making lame accusations to confuse the cattle who know nothing about it.

          Snipe over here … quick. Get it.

        • cdr
          Jun 16, 2017 at 6:48 am

          walter – my apologies.

          Of course cobol programmers on the s/370 could have easily rampaged the financial world using their 1.44Mb T1 lines or 56k modems. Those bruisers could have easily cornered the HFT market in the 1980s. It’s successor was even more fabulous and in the late 2000s undoubtedly blasted the landscape with a 44Mb T3 line and PL/1.

        • cdr
          Jun 16, 2017 at 7:02 am

          walter – oops, meant early 2000s. By the late 2000s, they probably had something better than T3.

          BTW, in the 1990s, did the HFT masters use their tech to rapidly fax orders directly onto the exchange floor for immediate execution by the floor personnel? Top of the in-basket priority?

          My point, anything automated before about 2007 was either primitive or a prototype proof of concept R&D project. Or idiots like the LCTM running amok. Today, it’s all that keeps the market afloat. Remove HFT and remove liquidity. Remove low rates and reduce HFT margins to the point of problems. Massive volatility, as in buy the big dip, would be an offset to high rates.

        • walter map
          Jun 16, 2017 at 9:47 am

          CDR:

          “Just out of curiosity, why don’t you explain how HFT works?

          You can’t. ”

          To be quite frank, sir, you can’t afford me.

        • cdr
          Jun 16, 2017 at 12:25 pm

          Walter – I’m married (over 40 years) and appalled by the offer.

    • kam
      Jun 15, 2017 at 2:46 pm

      As in the article, without Central Banks this market wouldn’t exist. All the algorithms today are but spin off of linear regression. Boats rising with the tide.

      Earnings can be replaced with Central Bank cash/credit, but not over the long run. And that day could be tomorrow, or in 10 years. Who could have thought that easy money would have created so many walking corpses.

  5. TJ Martin
    Jun 15, 2017 at 12:09 pm

    So what you’re pretty much confirming is my constant claim/rant that common sense , discernment and reality have been thrown out the 22nd story window replaced by overly optimistic delusional thinking with little or no concern for the long or even the short term consequences of their illogical actions as long as for the moment their pockets are getting fuller .

    In other words … the very pinnacle of Randian (ill)logic

    So for those of us … lets say not of a temperament to delve into this eminently disastrous mess .. what options are there ?

  6. IdahoPotato
    Jun 15, 2017 at 12:15 pm

    A revised paradigm for assessing the market.

    Price Return = Price Return from Change in Aggregate Investor Allocation to Stocks + Price Return from Increase in Cash-Bond Supply (Realized if Aggregate Investor Allocation to Stocks Were to Stay Constant) + Dividend Return

    http://www.philosophicaleconomics.com/2013/12/the-single-greatest-predictor-of-future-stock-market-returns/

    • cdr
      Jun 15, 2017 at 12:24 pm

      Politely disagree.

      [(Planned sale price X qty) – [(Purchase Price x qty) + cost of funds]] x number of flips per day. Holding time measured in seconds.

      If the cost of funds gets too high, the gain per transaction must grow to cover it. If not, liquidity disappears and the market crashes.

      To the good, big gains, as in a fast crash recovery, offset high cost of funds. Also … why buy the dip works.

    • jb
      Jun 15, 2017 at 3:25 pm

      IdahoPotato: looks like an “Algo” to me

      side note: take a peek at ‘Long Term Capital Management’.
      A faulty ‘algo’ or financial model executed by an overly leveraged hedge fund. Greenspan came to the rescue.

  7. andoheb
    Jun 15, 2017 at 12:25 pm

    Much Market commentary these days echos what Irving Fisher said in 1929 — stocks have reached a permanently high plateau.

  8. mean chicken
    Jun 15, 2017 at 12:30 pm

    I’m thinking more in terms of a rotation than a broad selloff. This is the new world run by purveyors of unicorns and pixie-dust.

    • Kasadour
      Jun 15, 2017 at 3:22 pm

      You put too much faith in purveyors of unicorns and pixie dust and not enough in the natural laws of economics.

      The CBs, aka PPT(s), are not the all seeing Eyes of the economic universe. They are not gods. They are men, subject to natural laws that govern all of mankind. Eventually, this will catch up, in a natural way.

      • mean chicken
        Jun 15, 2017 at 3:55 pm

        Catch up yes, and I could argue it already has elsewhere in meaningful ways, aside from the protected usual suspects, the only game in town, of course.

        • Kasadour
          Jun 15, 2017 at 4:01 pm

          Agreed.

  9. cdr
    Jun 15, 2017 at 12:39 pm

    The new fundamental analysis:

    If you understand the flows and motivations of the algos, then you can invest based on their predictability. If you can figure out why the machines would turn off for a while, you can avoid the resultant crash. Otherwise, the bias is upward. The underlying has much less relevance.

    Re technical analysis: the 200 day moving average is the absolute floor, unless something as major as the Eurozone failing occurs.

    • walter map
      Jun 15, 2017 at 2:48 pm

      “If you understand the flows and motivations of the algos, then you can invest based on their predictability.”

      It’s easy to assume the players who use algos know how the other players’ algos work. Which makes it easy to also assume they’re going to second-guess each other into situations where there’s no advantage.

      All very circular, not to mention tautological.

      • cdr
        Jun 15, 2017 at 5:09 pm

        “All very circular, not to mention tautological”

        Not even a little. They set the rules now. Computers don’t buy and sell like people. They make a few cents per share millions of times per day every day. They have strategies to manufacture volatility which would be illegal if not done by a computer. Regulation NMS maybe. I don’t memorize the names of them.

        If there’s a big market wide crash the algos don’t end quickly then buy it. The algos will buy it back up quickly … unless the crash is due to something massive such as the EU failing financially. Then it might take 2 or three months after the last shock to repair.

        These are the new fundamentals. Company earnings have little to do with fundamentals today. Only suckers think the texts still work. The bring in fresh money for the algos to play with.

    • nick kelly
      Jun 15, 2017 at 3:49 pm

      I remember Louis Rukeyser the day after the 1987 23% crash asking head Tech Nurock “so do you still believe in this stuff?”

      The head tech had of course been bullish the day before.
      When fundamentals reassert themselves all these chart stuff evaporates.

      BTW: it was some of the original quants and their algos in Long Term Capital Management that almost crashed the world in 1998.

      The fundamental that sank their ship and almost sank everyone’s was overtaken by a fundamental: Russia defaulting

      Another word for fundamentals: reality.

  10. Petunia
    Jun 15, 2017 at 1:08 pm

    Wolf,

    Not only is fundamental analysis dead, but “big data” is a big cozy cover for automated insider trading.

    While most HFT firms trade on patterns of one sort or another, the bigger trading operations have access to all sorts of insider information, which can easily be coded into a trading strategy for a particular instrument. This is where the big profits lay and they can be buying or selling strategies. Remember the code is proprietary to the firm, can continually change, and doesn’t ever get divulged.

    Most analysts these days are gathering information to be used in specific trading strategies. When they find a good trade, it’s call your quant time. Can an algo be blamed for being a great trader?

  11. Kreditanstalt
    Jun 15, 2017 at 1:10 pm

    Not until on of these stocks actually goes incontrovertibly, obviously, undeniably bona fide “bankrupt” (that is, runs out of access to credit) will things change. Passive index investors have to learn TERROR.

    But as long as yield-desperate funds, machines and mom’n’pop ETF buyers continue purchasing at any price…

    Only after the free “money” has run out will any of them be forced to actually SELL.

    • mean chicken
      Jun 15, 2017 at 3:49 pm

      Where do mom and pop get their free money and what about the hundreds of thousands of other businesses that need access to credit, how are they performing at this moment?

  12. cdr
    Jun 15, 2017 at 1:22 pm

    or, to put in the simplest possible terms …

    Machines flip paper with each other and this activity biases the price upward. They don’t know anything else. Machines run the financial markets. The cost of funds is their only variable cost and it’s controllable/uncontrollable depending on if the fix is in. Wall street has transformed into a business that has mastered the science and business of paper flipping. It generates no other beneficial byproduct.

    The obscene wealth they generate allows them to manufacture a lot of influence that benefits themselves.

    Paper flipping and the low interest rates it needs chokes out beneficial investment just like the snakehead carp or zebra mussel push out beneficial wildlife.

    • Kent
      Jun 15, 2017 at 3:33 pm

      So the $1/per trade tax?

      • cdr
        Jun 15, 2017 at 5:11 pm

        Probably too low. 5 cents a share would be deadly.

  13. mvojy
    Jun 15, 2017 at 1:28 pm

    Terminator 5: Rise of the Trading Machines

    • Dangerous Dave
      Jun 15, 2017 at 2:50 pm

      Except that this time (whenever the exponential rise actually stops and thereby follows an absolute, I posit immediate, crash) the machines will be proven to be useless and put in the bin.

      Then life carries on and the average man on the street will not see anything, as every asset will devalue at the same time.

      Well that’s my theory (Read Schumacher ‘Small is beautiful’)

  14. akiddy111
    Jun 15, 2017 at 1:35 pm

    The FAANG stocks are not only the most globally dominant companies on the planet but they all headquartered in densely populated regions of two states in the USA.

    Snapchat is the only relevant tech IPO this year and it’s clearly flaming out. It’s displaying early price action more similar to Twitter than Facebook.

    Also, there was chatter at the end of last year that Uber and Airbnb would also debut in 2017. Remains to be seen if they’ll get out of the gate anytime soon.

    More importantly, I cannot see how the algo folks can keep the FANG plates spinning for much longer. And let’s keep in mind that other than the US dollar as reserve currency, the crown jewel of the USA for at least the last 20 years has been the monetisation of tech innovation.

    Have we reached the point of peak technology ? Do we have enough cloud companies, social media sites ? Sure, there may be exciting AI and Robotics companies coming down the pike. That would only exacerbate wealth inequality in our society, no ?

    These may be important points to consider as it may have enormous economic ramifications for the citizens of developed regions like North America and Europe.

  15. RD Blakeslee
    Jun 15, 2017 at 1:56 pm

    “Fundamentals no longer matter in this market. Valuations have been surgically removed from any sense of fundamental reality.”

    Reality: “Valuations” don’t mattered at Las Vegas, either. But everybody there knows it, so there aren’t any soothsayers (“analysts”) shilling this or that bet.

    • Dan Romig
      Jun 16, 2017 at 7:11 am

      One thing about Vegas’ sports betting is that they are remarkably accurate in posting the odds.

      I don’t know how this is achieved, but I would assume that there’s some algos that crunch the stats and come up with the sport line at the casinos.

      Baseball has really taken to using analytics for example, and the Minnesota Twins have replaced their GM and ‘Chief Baseball Officer’ with two people who use analytics. After losing 103 games last year, the Twins are in first place in the AL Central with a 34 and 29 record.

  16. Old Codger
    Jun 15, 2017 at 2:13 pm

    What happens when the computer says “SELL”, and the market says “NO BID”?

    • Jun 15, 2017 at 2:36 pm

      A flash crash. For example, NVDA down 15% in just a couple of hours the other day.

      • Old Codger
        Jun 15, 2017 at 3:06 pm

        What happens when the “NO BID” stays on the screen for a week or three?
        Stay away from tall buildings?
        ;-)
        Old Codger, (AKA Worlds biggest pessimist)

      • d
        Jun 15, 2017 at 5:04 pm

        Exactly, Translated to SHTF BIG time.

        Machine trading is fine untill, somebody accidentally writes or hacks in a flaw that starts a sell off.

        Then there wont be enough Hands around who know what they are doing to control it.

        “Not only is fundamental analysis dead, but “big data” is a big cozy cover for automated insider trading.”

        Petunia.

        Has been fro a while as first the SEC needs to decipher the code to know what it is reacting to. To do that they need hackers or a warrant. They have limited evidence for a warrant, so no investigation.

  17. jb
    Jun 15, 2017 at 2:14 pm

    W. Buffet is having a challenging time investing in this environment . His buying and holding fundamentally sound companies has made his legacy. I also heard him say it was difficult to compete with borrowed money . His purchases are largely cash.

  18. nick kelly
    Jun 15, 2017 at 3:56 pm

    This is why the Aussie fund manager shut down his fund and returned the money- he couldn’t find any rational investments.

    Some of the comments here that the machines will turn into contrarians and buy when the REAL wave of selling hits would no doubt re-enforce his decision.

    • Lee
      Jun 15, 2017 at 4:56 pm

      Actually what later came out in a national newspaper:

      1. The guy wasn’t making any money.

      2. The size of fund was too small to cover costs.

      3. Some kind of legal problem with a related family member.

      • nick kelly
        Jun 15, 2017 at 5:47 pm

        If the above were not the case which rational investment would you advise him to make.
        Marc Faber has none of the above issues and says all asset classes are overvalued.
        Given the actions of central banks since 2008, this is hardly surprising.

        • nick kelly
          Jun 15, 2017 at 5:48 pm

          He could surely have sold the fund to a bigger fund.

        • d
          Jun 15, 2017 at 7:13 pm

          “He could surely have sold the fund to a bigger fund.”

          A lot of “Fund’s” are like Trusts., Where the Manager does not have the Authority to seel or resign without consent unless in “Exceptional circumstances” Like death, or incapacity.

    • d
      Jun 15, 2017 at 5:09 pm

      “Some of the comments here that the machines will turn into contrarians and buy when the REAL wave of selling hits would no doubt re-enforce his decision.”

      Then they will end up holding the baby as the People will sell to machines at untenable prices (for people).

      The market is that rigged and dominated by machines that currently I only trade the indexes not the stocks/currency’s, in the indexes.

  19. raxadian
    Jun 15, 2017 at 4:11 pm

    Is only a matter of time before a digital virus or several messes up with these stockholder AIs. It doesn’t even need to be Os dependant, just mess up with the data the AIs use a reference. And remember that AIs are way worse than humans finding out if news or data in general is false.

    • d
      Jun 15, 2017 at 5:15 pm

      A criminal group will in future, figure out how to feed the Algos false signals and clean up Billions, if they haven’t already.

      If I was the nut-job running DPRK or any of the other nasty dictator states, that’s what I would have people working on.

      If a Kid in London. Can allegedly spoof the US market into a flash crash, what can a dedicated market manipulation team do????????????????????????

  20. Lee
    Jun 15, 2017 at 5:13 pm

    To be a parrot and repeat what I have posted before: forget the USA and look at Japan.

    While the US market has been soaring on hype and hope and pushing up companies that don’t make much of anything but red ink, Japanese companies have been plodding along make real things and real money.

    A quick look shows that there around 200 or so companies on the First Section of the Tokyo Stock Exchange that have dividend yields of 3% or more. Another 250 or so have yields of 2.5% or more.

    About 400 or so have PER’s less than 11. About 850 have PBR’s of 1 or less.

    If you want more risk and more adventure you can look at companies on the other exchanges such as the Nagoya Stock Exchange Second section. Lots of smaller companies there with lots of interesting products.

    And yeah, Japanese accounting and all that are a little different than the stuff in the USA, but which would you rather buy:

    Toyota or Tesla?

    Rakuten or Amazon?

    Of course you have to worry about currency risk in addition to the other normal risks of buying stocks, but you can hedge that if you have enough funds.

    • raxadian
      Jun 15, 2017 at 10:30 pm

      Unfortunately if what Konami does is standard practice ,those Japanese companies then go and blacklist their former employees. And with robotification of jobs (as in people losing jobs because robots are cheaper in the long run. And many jobs like call centers, trade stocks and so on being done more and more by AIs) then Japan future will have a lot of disgruntled people without jobs that aren’t able to get new ones, even with Japan gentrification being so high.

  21. Thor's Hammer
    Jun 15, 2017 at 5:54 pm

    If we are to even have a chance of understanding contemporary financial systems we must first cast aside our delusions:

    1- “The operations of “the market” resemble an actual market where sellers and buyer’s meet to arrive at a price that reflects actual value.”

    “The Market” is actually a casino where the players are algorithmic robots programmed to joust for advantage against other robots. The casino has two primary functions: (a) To extract any remaining funds from the little people— the fools who think that they are “investing” in their retirement or “saving” for a better future. (b) To provide cover for the few hundred individuals who own the majority of the world’s wealth by letting them pose as investors rather than simply sociopathic oligarchs.

    2- “The purpose of financial markets is to rationally allocate capital to companies who produce goods or services demanded or needed by the public. ”

    Financial markets have very little to do with rational allocation of capital for societal good. Valuations are divorced from earnings or long term potentials, and instead are set by image creation and machine traders chasing momentum. As a result, corporate officers no longer need pay much attention to management or production. Their bonuses are determined by the latest quarterly stock price, so why should they bother with irrelevant things like actually producing something?

    3- “The purpose of central banking systems is to control the rate of monetary growth such as to produce economic stability and *limitless but controlled growth.”

    The purpose of central banking systems is to create money out of thin air and transfer it into the hands of the ruling elite without the general citizenry becoming aware of how the system works. Zero interest rates accomplish this in two ways: (a) by eliminating the ability of saved capital to earn interest, it turns savers into yield-seeking equity investors, thus supporting stock pricing. And the ruling elite owns the vast percentage of all stocks. (b) For big borrowers with access to near-zero loans, the money to sit at a table in the big casino is a bottomless fountain. Even losses are but a minor inconvenience because they can always be passed on to the taxpayers by judicious advance purchase of Senators or Presidents– a minor cost of doing business. (remember Jon Corzine)

    *long term economic growth is mathematically impossible in a finite world.

  22. Old Farmer
    Jun 15, 2017 at 6:11 pm

    The first rule of investing is don’t invest in something you don’t understand. So I don’t have bitcoins or CDO’s or stocks or any other abstract things. I have invested in increasing the productivity of my farm, in my children’s educations, and in my community (by supporting some worthy local non-profits), but beyond that my money sits in the credit union earning 0.3%. This article and the varied comments on it reenforce my sense that for a simple person there is no obvious good way to invest. We just sit on the sidelines and wait to see what happens.

    • william
      Jun 15, 2017 at 10:13 pm

      Why aren’t you parking your cash into rental properties? You can buy a place a place for cash and get 6-8% return in cash.

      • c_heale
        Jun 15, 2017 at 11:23 pm

        I’m not the original poster, but there is an obvious answer to that. You may be able to get 6-8% return in cash at this very moment, but if you look at what happened in Spain (massive overbuilding, leading to a property crash), or the UK in the 90’s – negative equity, you could easily be left holding the bag. Since everyone has been piling into rental property recently, I would say it’s time to get out, since it’s a bubble. The original poster has their head screwed on.

        • TheDona
          Jun 16, 2017 at 9:57 am

          I agree heale. I thought I was the smartest person in the room during the 80s housing boom and bought up a nice portfolio of rental properties. First the accounting rules were changed and then the S&L debacle and oil bust. Not to mention companies such as Safeway leaving Texas because they could not bust the Unions. People were moving out of my properties in the middle of the night. Almost busted me. I am too old to have any worries. Debt free, lots of cash, no spending, enjoy the little things for me!

      • Lee
        Jun 16, 2017 at 12:08 am

        Why not buy a ‘solar farm’ in Japan?

        Yields on advertised ‘farms’ are around the 10% area……………

        Well if the sun shines, birds don’t crap on the panels, the inverter doesn’t blow up, and a typhoon doesn’t take your panels to China with it!!!

  23. walter map
    Jun 15, 2017 at 7:13 pm

    “What Happens When the Machines Start Selling?”

    Well, it couldn’t result in an instant meltdown. That would require several sessions, more than enough time for the Plunge Protection Teams to act.

    Trading curbs have been around since the 1987 program trading crash:

    At the start of each day, the NYSE sets three circuit breaker levels at levels of 7% (Level 1), 13% (Level 2) and 20% (Level 3).

    https://en.wikipedia.org/wiki/Trading_curb

    Curbs have evolved a bit since then:

    http://www.investopedia.com/terms/t/tradingcurb.asp
    http://www.cnbc.com/id/100617758
    http://www.programtrading.com/curbs.htm

    It would probably take a disaster in some fundamental, like a military attack, to result in a meltdown any more, and it would have to be something the PPTs couldn’t handle, like a sophisticated systems hack.

    The markets are pretty rigged anyway, which would tend to mostly prevent a meltdown, unless it were deliberately engineered for fun and profit. Which is in no way beyond the realm of possibility.

  24. Tom kauser
    Jun 15, 2017 at 7:49 pm

    The fed over the course of 10 years has been increasing its balance sheet to its current obscene level under the false notion that zero interest rates was a type of free money for everyone.
    It fact the increase was to hide the MBS that sits on its balance as crap!
    The fed is AIG who bought worthless agency bonds that are stuck on the economy (neck of taxpayer) regardless of origination discovery?

  25. Jun 16, 2017 at 1:55 am

    The only thing that seems worthwhile in the long term is physical gold and silver. They are heavily manipulated markets, but the astronomical prices of stocks and bonds, caused by asset-inflation from the central banks, leaves little recourse for the pension-less 401k-less working man.

    I save what I’m legally allowed to in an IRA, then I put whatever else I can into physical gold and (mainly) silver.
    My older relatives have talked down on the idea, like I’m some kinda miser renting a Craigslist place and staying single so near 40, but I told them it’s all I’ve got past social security once I eventually retire, and they can’t complain about the pittance I “hoard” when they’ve got their pensions.

    • raxadian
      Jun 16, 2017 at 3:45 am

      Be careful with silver, is way easier to manipulate it’s price than with gold. Since is long term wait until silver gets high and then trade it for gold.

      • TheDona
        Jun 16, 2017 at 9:42 am

        Silver: As in Hunt Brother manipulation…?

        I worked for an elderly day trader (one of the founding fathers of “modern” FT Worth) at that time and Merrill Lynch screwed him over hugely. They were backing the run obviously. We could not find an Atty who understood the stock market or would go against ML. I even had an automatic tape recorder made to record all calls since back then is was all calls and paper. ML did not follow any of our instructions. Talking about elderly exploitation!!!

    • Lee
      Jun 16, 2017 at 7:34 am

      Start a hobby like stamp or coin collecting. Educate yourself and specialize.

      Multiply your wealth through knowledge gained from your hobby……………..and have fun doing it!

  26. DaveC
    Jun 16, 2017 at 5:51 am

    Shirley they have PPT algos?

    Haven’t we already seen these invoked?
    Aren’t all the random flash crashes and trading stops over the last few years this exact thing?

    We’re essentially just watching computers playing a game against themselves now.

    The law of unintended consequences will bite.

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