Risk Resets Alas, and Not Real Investment

Category: Tim Quast
Source: Tim Quast

My lovely Karen and I returned this week from the Multiple Sclerosis Society’s annual Houston to Austin MS 150, the largest charity cycling event in the US, featuring some 13,000 riders. 

Our behinds are no worse for the wear, since day one, April 18, was canceled due to rain that was severe even by Houston standards. To understand it, have someone dump a five-gallon bucket of water on your head all at once.  Bad news: the first time I ride is the first time in 25 years they’ve excised an MS 150 day.  Coincidence, we ask? 

Good news: the south Texas drought was remedied in a weekend, and we rode just 80 miles Sunday, from Lagrange (made famous by the ZZ Top tune, for all you fellow guitar players) to Austin and its cheering throngs that felt like the finish to the Tour de France.  In all, a fair trade and a blast!  That’s why we’re a day late with the weekly email. 

Now on to trading, and what it means as you ride the daily investor-relations roller coaster.  Recurring lesson: wild intraday swings and knee-jerk market swoons and swells in tune with Tweats from the US Treasury do not a sound foundation for long-term buy-and-hold investing make.  Four-percent intraday volatility does not typify GARP deployment (see link below on the first GARP ETF, launched in December, the 848th ETF now out). And this goofy schizophrenia is not another bull market in the making, but the expansion of trading in multiple asset classes, on many market centers simultaneously, in various global locales. 

We don’t wish to be the Nouriel Roubini of IR perspectives, all dour and lugubrious. We watch the behavior of money and report to you its effects on price and volume.  Money doesn’t guess or lie, it ebbs and flows.  Right now, it’s ebbing and flowing like a seismograph. This is a fact, not a hunch.

What nuggets shall we glean from last week’s options expirations and this week’s trading? One key observation: where speculative trading had risen to unprecedented heights the week before, April 13-17 showed surging prime brokerage, which screamed to all traders that risk resets by large money sources were at work. 

Why?  Revamping risk profiles in portfolios cannot be executed efficiently in Reg NMS markets by electronic trading in fast fragments.  It must be done through internalization at large sellside firms, which can then hit 20 or 30 different liquidity pools with algorithms to balance out excesses.  This sort of trading soared last week. This week, big money again feels safeguarded and able to continue chasing minute, real-time yields through trading.  Do not confuse this behavior with investing.

We’ll know when real investment returns, because traders will stop reacting to each other and investors will again respond to fundamentals.  When will that be?  When markets are allowed to flesh out value at the garage sale without filing a TARP application, asking permission to pay their employees, adapting to every ex post facto rule, and wondering just what sort of law, if any, applies in US markets, since government appears to have little regard for corporate by-laws, articles of incorporation, or the Constitution.

On the bright side, it’s 76 fantastic degrees in Denver today, the Front Range glistening gloriously white and the plain verdantly lit with spring happiness. 

Have a good week,

Tim Quast

Managing Director

ModernNetworks IR LLC
WisdomTree launches GARP ETF

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