There’s a possibility of higher synergies from AB InBev’s acquisition of the world’s second larger brewer SABMiller.
AB InBev has a massive presence across the world, that continues to grow with 59% of revenue coming from emerging markets.
AB InBev is diversified in terms of price and taste, with its High End unit leading the way with both revenue and EBITDA growth.
AB InBev is financially much stronger than its peers, with operating margin double of its peers and EBITDA margin highest of major consumer goods companies.
Forgive me, Father, for I have sinned. I invested in a sin company, specifically the Big Tobacco.
Over the path month, I have been researching consumer goods companies. Initially, I believed I was going to invest in a recession-proof company like Procter & Gamble (PG) or Clorox (CLX). Not even close. I’m going to be a bad boy, set aside the social responsibility consequences, and invest in a sin stock. As Gordon Gekko said in the famous “Wall Street” movie, “greed is good.”
Figure 1: Trump Military Headlines. Google Trends – “North Korea”
At 17-years-old, Donald Trump was named a captain for his senior year at a military boarding school. Spending five years at New York Military Academy, the school taught Trump to channel his aggression into achievement.
Under the Trump budget, almost every budget increase goes to military departments, 10% increase Y/Y in the budget for military spending. It’s not a rocket science to figure out Trump madly loves force.
Even Trump’s Secretary of Defense loves force. Mad Dog James Mattis once said, “It’s fun to shoot some people. I’ll be right up there with you. I like brawling.”
At his confirmation hearing in January, Mattis said, “My belief is that we have to stay focused on the military that is so lethal that on the battlefield, it is the enemy’s longest day and worst day when they run into that force.”
Then there came 59 Tomahawk missiles to military bases in Syria and “Mother of All Bombs” on Daesh tunnels in Afghanistan. All of those came during the heightened tensions with North Korea.
War is Good for the Cold-Hearted Stock Market
North Korea acting out is a good thing for America. War throughout the history has made us united. Not to mention that the stock market goes up.
Figure 2: S&P 500 Index (SPX) – Daily Chart. The first circle represents the time of news reports on U.S. airstrikes on Syrian bases. The second circle represents the time of news reports on most powerful non-nuclear bomb being dropped in Afghanistan
As you can see in figure 2, the stock market barely reacted to the recent U.S. military actions that Trump gave a green light to.
As a trader and investor, I wouldn’t be concerned about the potential war with North Korea. (Although I would be concerned about the loss of human lives and loss of limbs.)
In early 2013, there were increased tensions with North Korea, similar to today. At the time, the stock market did not give a damn about the threats from DPRK.
Figure 3: S&P 500 Index – Daily The first headline shows two arrows. The first arrow represents when the headline came out. The second arrow represents February 12 when NK conducted the nuclear test. The second headline represents North Korea threatening the west as usually.
Not only does the stock market not care about North Korea, but also for any other war in the past century. War is good for the cold-hearted stock market.
Over the past 4 decades, Dow Industrials on average was turned on by U.S.-led military operations, returning 4% in a month after the beginning of military operations and more afterward.
Figure 4: War is Good for the Cold-Hearted Stock Market
Recent Three Wars
When the U.S., with support from allies, started bombing against Taliban forces in Afghanistan on October 7, 2001, the stock market went up, not down. Even after 12 days later when the first wave of conventional ground forces arrived, the stock market kept going up. By the year-end when Taliban collapsed, S&P 500 was up about 14.5%.
Figure 5: S&P 500’s reaction to the U.S. military action in Afghanistan – Weekly Chart
When the U.S. began the major combat operations in Iraq on March 20, 2003, the stock market skyrocketed as shown in the candlestick bar on the highlighted portion of S&P 500 Weekly chart in figure 6 below. By the time the operations ended on May 1, the stock market was up about 11.5%.
Figure 6: S&P 500’s reaction to the U.S. military action in Iraq – Weekly Chart
Figure 5: S&P 500 reaction’s to the U.S. military action in Libya – Weekly Chart
The only difference this time is we got leaders who very much loves forces and are violent themselves. Another difference is that North Korea is little powerful today than they were in 2013. But they are very weak compared to China, Russia, Europe, and U.S. It’s better to act now before North Korea gets even stronger. Although lives and limbs will be lost, I think there’s a greater cost if we allow North Korea to get even stronger.
China and North Korea
With China possibly increasingly going against North Korea, Kim Jong-un might act even more violent. I don’t think China really wants to break off its relationship DPKR due to the geographic proximity and China’s willingness to make more friends in the region. Besides being a military and diplomatic ally, China is also an economic ally. In 2015, the second largest economy accounted for 83%, or $2.34 billion, of the North Korea’s exports.
In late February, China sanctioned coal shipments from North Korea, who is a significant supplier of coal. Instead, China has been ordering the coal from the U.S. In the past, Trump said he wants to help the country’s struggling coal sector.
As Reuters reported, Thomson Reuters Eikon data shows “no U.S. coking coal was exported to China between late 2014 and 2016, but shipments soared to over 400,000 tonnes by late February.”
Is China having a change of heart on its relationship with North Korea? I don’t think as China’s trade with North Korea still increased by almost 40% in the first quarter of this year. China also buys other stuff, such as minerals and seafood. Looks like China wants to be on the good side of North Korea and Trump. The Art of the Deal.
Is this time is also different when it comes to the stock market? I don’t believe so. I’m not worried about the negative impact on the stock market due to North Korea, even though they were to be invaded.
However, I’m watching very cautiously China and Russia getting into an armed conflict with the U.S because of the North Korea situation. Armed conflict between the superpowers is a game changer. Although that’s very unlikely as superpowers argue all the time.
Suggestion For Your Portfolio
The situations might affect the markets for a very short period of time, especially if there’s uncertainty. But investors shouldn’t worry about it. The market could care less about a war, specifically when it’s aboard.
During the times of war, don’t reduce your holdings because of misconception war is bad. If you do, you will miss the gains.
Figure 6: Capital Market Performance During Times of War Sources: The indices used for each asset class are as follows: the S&P 500 Index for large-Cap stocks; CRSP Deciles 6-10 for small-cap stocks; long-term US government bonds for long-term bonds; five-year US Treasury notes for five-year notes; long-term US corporate bonds for long-term credit; one-month Treasury bills for cash; and the Consumer Price Index for inflation. All index returns are total returns for that index. Returns for a war-time period are calculated as the returns of the index four months before the war and during the entire war itself. Returns for “All Wars” are the annualized geometric return of the index over all “war-time periods.” Risk is the annualized standard deviation of the index over the given period. Past performance is not indicative of future results.
In the previous two articles, I wrote about my forex trading and equity investments performance for the first quarter of this year. In this article, I will talk about my 1st quarter performance for equity/commodity trading.
For the first quarter of 2017, my active trading performance for equities and commodities (commodity ETFs) was up 3.51%.
Equity/Commodity Trading Portfolio (Robinhood) P/L The white line represents the start of the year.
For years, I could not trade equities and commodity ETFs due to commissions. Thanks to Robinhood, I’m not able to trade for free.
I closed the SCO position a month later at 22.55% gain, the biggest gainer of all positions closed during the first quarter of this year.
My biggest loss came from VelocityShares Daily 2x VIX Short-Term ETN (TVIX). I thought volatility would pick up in the coming month (and it did a little bit). However, after they underwent 1:10 reverse split on March 16th, I did not want to risk having the ETN go to single digits once again, so I indeed closed the position at 17.27% loss.
In nominal terms, the 22.55% gain on SCO is 3 times larger than the 17.27 loss on TVIX.
There are other positions that made and lost money. But overall, my portfolio was up 3.51% in the 1st quarter.
Current Positions:
I can only go long securities on Robinhood. My current positions are SPXS, WFC, LULU, DIS, EXPE, VRX.
I went long on Direxion Daily S&P 500 Bill and Bear 3x Shares (SPXS), which is inverse of S&P 500, because I believe investors are underestimating the negatives of Trump’s policies. Once investors realize the negatives of Trump’s fiscal policies and/or his actual policies are less stimulative as he proposed, the market will take a dump.
A lot of people think tax rate will be reduced to 15%. I have been watching some of Trump’s TV interviews, especially on Fox News, and it seems Trump himself does not believe tax cut will be 15% or lower. He basically said it might have to be little higher, say around 20%.
I also watched Trump’s body language and I believe Trump is not confident in what he’s saying about his fiscal stimulus plan as he was during the campaign.
So when the actual plan is released, investors will be disappointed.
SPXS is also a small hedge for my portfolio as I’m long individual U.S. stocks.
I’m also long on Wells Fargo (WFC), Lulelemon Athletica (LULU). I believe the plunge on LULU is overdone and could fill half of the gap. WFC fell after the earnings report last week. General bank earnings are trending higher and Well Fargo is no different. I went long on WFC also due to technical purposes.
I’m also long on Disney (DIS). I bought just at the start of rumors that Apple (AAPL) would buy Disney.
I’m also long on Expedia (EXPE). See this awesome tweet thread.
1/ I’m gonna buy $EXPE (short-term). Here comes the reasons…
And finally, I’m long Valeant (VRX). I went long on the pharmaceutical company the day after Bill Ackman revealed he cut his $4 billion loss.
Valeant recently extended the maturity of their debt until the early 2020s, which gives them about 5 years to restructure their capital and the company. Plus, they have over $5 in cash for each share.
Just because Ackman lost big on VRX does not mean he’s not a great investor. He is a great investor (that’s why he’s rich?). If you watch his presentations and talks, he knows about he’s talking about. He does his research and deeply cares about other people. At least that’s what I think.
The current positions I mentioned above can change at any time or reverse. Thank you.
In the previous article, I talked about my performance for Forex portfolio in the first quarter of 2017. This article will lay out the equity investments portfolio performance for the 1st quarter. Unlike for forex, I don’t have much performance results for equity investment portfolio….at least for now.
Cash is trash.
For the first quarter of 2017, my stock investment portfolio was down 1.31%.
In the 1st quarter, I bought W.P. Carey (WPC). In this Seeking Alpha article, I laid out why I bought the diversified REIT.
First, I had a lot of cash sitting in my portfolio. Cash did not add any value to my portfolio.
Second, the ETFs barely moves and yet offers attractive dividends that would be distributed every month, with low expense ratio. Instead of having cash be lazy, the ETFs provided free money since they barely moved in price.
And lastly, the ETFs were commission-free through my broker, Ameritrade. When opportunities arise, I can freely liquidate the ETFs position(s).
All three reasons provided me with great flexibility and free money. The average SEC 30 Day yield from the “big four” is currently 2.43%.
And lastly, I also bought iShares Core Conservative Allocation ETF (AOK). I bought this ETF for the same reasons I bought the “big four” ETFs; low risk, low fees, and attractive dividends.
The portfolio of the five ETFs mentioned above returned 2.77% in the past 5 years, with the largest quarterly loss at 2.65% in the 4th quarter of last year and the largest quarterly gain at 1.70% in the 1st quarter of last year. Year-to-date, it’s up 1.32%.
Estimated investment portfolio dividend yield is 2.8%, with largest being 6.4% and lowest 0%. I plan to increase the portfolio dividend yield by getting rid of non-dividend yielding stocks and/or buying dividend-yielding stocks.
I did not sell anything in the portfolio during the first quarter. However, I’m planning to make some changes this quarter, which will be released in the 2nd quarter performance article. But first, I will probably tweet out the changes.
32.30% of my portfolio is currently in cash. I plan to cut that in half. How will I do it? I’m not sure yet. I’m doing research on multiple companies. The one that stands out will be bought and an article about it will be posted, mostly likely on Seeking Alpha.
Note: Equity/Commodity active trading portfolio (Robinhood) performance will be posted later.
W.P. Carey is highly diversified both by the property sectors and the global locations, unlike its competitors.
Carey’s FFO multiple is below sector average.
Company’s investment management platform offers more flexibility and M&A opportunities.
Carey has been aggressively financing its growth with debt, but fundamentals are strong overall.
Traditional investors with stock/bond portfolio may want to take a closer look at the real estate sector. REITs provide a strong portfolio diversification with lower exposure to market volatility.
Failure of trial III Alzheimer drug, Solanezumab, is a major setback for Eli Lilly.
Lilly’s spending relative to the industry is following the same pattern as in 2005 and 2007, before its stock price got cut in half in over a year.
While Lilly is strengthening its pipeline in the diabetes space, it will not be enough to stop the stock from continuing to fall as they face stiff competition.
Four drugs accounting for 29.6%, or almost $1.5 billion of its third-quarter sales, are due to lose their compound protection this month and next year.
About two weeks ago, my second article was approved on Seeking Alpha. The article is about FireEye (NASDAQ: FEYE). The first article was about Eli Lilly and Company (NYSE: LLY)
If you have any questions/suggestions, feel free to contact me anytime. Thank you.
Summary
FireEye acquired four companies in the last three years.
Issued nearly $900 million in debt and continues to lose money.
Possible secondary offering, diluting shareholders’ equity further.
Founded in 2004, FireEye (NASDAQ:FEYE) has grown exponentially. The importance of security is extremely vital, and the demand for security continues to increase as cyber attacks increase and the world becomes more connected.
In 1988, after four years from the Macintosh introduction, the Internet’s first ever worm virus hit the computers. The Morris worm – one of the finest recognized worms to affect the world’s nascent cyber infrastructure – changed everything. Bugs in the code caused hundreds of systems to slow down and crash. Computer security was then no longer a science fiction.
Today, it is not just a computer security, but also smartphone security, cloud security, and so on. In short, the Internet is everywhere. As FireEye says:
“Attackers are clever, technology is complex, and experts are in short supply.”
FireEye stands out in the global Specialized Threat Analysis and Protection (STAP) market. According to research firm IDC, FireEye had 37.9% of the nearly $1 billion STAP market in 2014, seven times greater than its closest competitor. The $930 million STAP market grew 126.3% from 2013. By the end of 2019, it’s expected to reach $3.14 billion, compounded annual growth rate (CAGR) of 27.6% from 2014 to 2019.
From the STAP market alone, FireEye generated $353 million in revenue, a 119.2% growth year over year (Y/Y). The STAP market revenue accounted for a whopping 82.86% of FireEye’s total $426 million revenue in 2014. If the company can maintain its 38% of share by 2019, it could be generating about $1.2 billion in revenue from that market alone.
STAP Revenue – 2011-2019 ($M)
While these are great news, there’s a disappointment. FireEye’s 37.9% share of the market in 2014 declined from 43.1% in 2013 due to a growing competition, notably from Palo Alto Networks (NYSE:PANW).
In April 2014, Palo Alto Networks acquired Israeli cyber security start-up Cyvera for nearly $180 million. In September 2014, it introduced Traps, an endpoint STAP product that was built on the technology from Cyvera.
FireEye itself admits the intense competition it operates in. In its 2015 annual filing, it recognized that “several vendors have either introduced new products or incorporated new features into existing products that compete with our solutions…independent security vendors such as Palo Alto Networks…offer products that claim to perform similar functions to our platform.”
In December 2013, FireEye acquired Mandiant, a leading provider of advanced endpoint security products and security incident response management solutions, for approximately $1.02 billion in cash and stock. Mandiant is well known for a report it published in February 2013, detailing a secretive Chinese military unit believed to be behind a long list of cyber attacks on U.S. companies.
The combination of former FireEye, attack detector, and Mandiant, attack responder, came after the Snowden leaks in June 2013. The marriage between them created a major force in the cyber security industry.
“We’ve gone from selling discrete web and email security appliances to enterprise customers to delivering a global threat management platform integrated across the network, endpoint and cloud to customers large and small.”
According to a report by Cybersecurity Ventures, the global cyber security market is expected to grow from $106.32 billion in 2015 to $170.21 billion by 2020 at a compound annual growth rate of 9.8%. In its cyber security 500 list of the world’s hottest and most innovative cyber security companies, FireEye came in first.
While FireEye may be the hottest, its stock is the ugliest. The share price of FireEye was down 35% last year while the NASDAQ 100 Technology sector has declined 2.8%. Since hitting an all-time high at $97.35 on March 2014, the stock is down 82%. The stock hit all-time lows on February 12th – the day after the fourth-quarter earnings report – at $11.35. Since then, the share price is up 55% at a current price of $17.60.
FEYE data by YCharts
In May 2014, FireEye acquired nPulse Technologies, a privately-held network forensics firm, for $56.6 million. nPulse specialized in the analytics of a cyber attack and how the attacks may have affected the networks. nPulse was a partner of FireEye prior to the acquisition. It seems FireEye benefited from the partnership with nPulse. The combination of Mandiant and nPulse gives FireEye an all-encompassing security framework.
In January 2016, FireEye acquired iSIGHT Security, a cyber threat intelligence solutions provider, for $200 million. iSIGHT is memorable for its discovery of a zero-day vulnerability – a hole in a software that is unknown to the vendor – affecting Microsoft (NASDAQ:MSFT) devices. It was used by Russian hackers to hijack and snoop on computers and servers used by NATO, the European Union, telecommunications and energy sectors.
In February 2016, FireEye acquired Invotas, a small company based in Virginia focusing on security automation and orchestration. The terms of the deal were not disclosed. FEYE said it plans to integrate the security orchestration capabilities from Invotas into the FireEye global threat management platform, “giving enterprises the ability to respond more quickly to attacks through automation,” and help customers deal with the “severe shortage of resources by automating the security process and building intelligence into their operations.”
FireEye expects iSIGHT and Invotas to add approximately $60 million to $65 million to 2016 billings and approximately $55 million to $60 million to 2016 revenue. That alone would bring 7.52% to 8.15% growth to the billings Y/Y. Revenue would grow 8.83% to 8.63% Y/Y.
For the year ending December 31, FireEye expects revenue from $815 million to $845 million and billings from $975 million to $1.1 billion. If the revenue grows as expected, it represents a growth of 31% to 36% Y/Y, and the billings would grow 22% to 32% Y/Y. After subtracting the revenue growth from iSIGHT and Invotas, organic growth would range from 22.85% to 28.48%. Of course, that does not include other acquisitions. The question is what is FireEye’s real organic growth?
FireEye’s Key Financials and Growth Rate
DeWalt believes bringing FireEye, “Mandiant, iSIGHT and Invotas together, we’ve created a cyber security like no other, one with a suite of leading technologies, world-class cyber security expertise, and nation-grade threat intelligence, all brought together to form a comprehensive threat management platform.”
At the end of 2015, the company had $402.1 million in cash and cash equivalents, up from $146.4 million in the end of 2014. With short-term investment – which can be liquidated in less than a year – of $767.8 million, total cash and ST investment adds up to $1.17 billion, an increase of 190.86% from $402.2 million in 2014. Most of the increase in total cash can be attributed to the issuance of debt last year. In 2015, FireEye issued a total debt of $896.5 million. It currently has $706.2 million in debt, which I expect to increase as the company continues to lose money.
FireEye believes the existing “cash and cash equivalents and short-term investments and any cash inflow from operations will be sufficient to meet our anticipated cash needs, including cash we will consume for operations, for at least the next 12 months.” But, I do not take its word for it, considering the company loses about $135 million every quarter, or $500 million in a year. In addition to the issuance of debt, total stockholders’ equity decreased to $1.04 billion in 2015 from $1.25 billion in 2014, as the amount of common shares increased 8.8 million to 162 million. As FireEye continues to lose money, it is possible it might do a secondary offering, which will dilute shareholders’ equity further.
One sign that FireEye is investing into the future is its workforce. At the end of 2015, FireEye had approximately 3,100 employees, up from 2,500 in 2014 and 1,678 in 2013. Growing workforce shows the company is optimistic in the future. Make no mistake, FEYE is clearly positioning itself to take a bigger share of a growing industry.
I believe FireEye is a great company that has the potential to succeed in the growing security market. But, it is too early for me to be optimistic in its future stock performance, as it continues to lose money and possible secondary offering this year.
FireEye is due to report its first-quarter earnings on Thursday, May 5th.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: All information I used here such as revenue, etc are found from FireEye’s official investor relations site, SEC filings, and Bloomberg terminal. The pictures you see here including “FireEye’s Key Financials and Growth Rate” and “STAP Revenue – 2011-2019 ($M)” are my own.
Liquidity is the investor’s ability to buy and sell a security without significantly impacting its price. Lack of liquidity in a security can have its consequences. Post financial crisis regulations, such as Volcker Rule (Dodd-Frank), and Basel 3, has made it more expensive and more difficult for banks to store bonds in their inventories and facilitate trades for investors. Regulations designed to make the system more safer have depressed the trading activity.
Lack of supply is one cause for diminishing liquidity. Banks, the dealers of corporate bonds, have reduced their inventories. According to Bank for International Settlements (BIS), “Market participants have raised concerns that regulatory reforms, by raising the costs of warehousing assets, have contributed to reducing market liquidity and could be keeping banks from acting as shock absorbers during periods of market stress.”
Primary Dealer Net Positions (2006 to 2016) Source: MarketAxess
According to BIS, “US primary dealers…have continued to reduce their corporate bond inventories over the past years. Since the beginning of the year 2013, they have cut back their net positions in U.S. Treasuries by nearly 80%.
Another big cause of decreasing in liquidity is technology. A technology that has changed the structure of markets, high-frequency trading (HFT), an algorithm computer trading in seconds and in fractions of seconds, account for much larger share of the trading transactions and it leads to low liquidity. Majority of HFTs, if not all, reduces liquidity by pairing selected (self-interest), leaving out others. According to BIS, 70% of U.S. Treasury trading is done electronically, up from 60% in 2012. For both high-yield bonds (not highly liquid asset), it accounts for more than 20%. About 90% of transactions on bond futures take place electronically. I have no doubt electronic trading will continue to increase.
“Greater use of electronic trading and enhanced transparency in fixed income markets typically comes at the cost of greater price impact from large trades.”, BIS said in the report. Bonds now trade in smaller transaction sizes than they did before, “… large trades seem less suitable for trading on electronic platforms because prices move quickly against participants who enter large orders due to the transparency of the market infrastructure.” “It “discourages market-makers from accommodating large trades if they fear that they cannot unwind their positions without risking a sizeable impact on prices.”
BIS in its quarterly review report (March 2015) stated (source: FINRA’s TRACE data), the average transaction size of large trades of U.S. investment grade corporate bonds (so-called “block trades”) declined from more than $25 million in 2006 to about $15 million in 2013.
This is a sign of illiquidity since “trading large amounts of corporate bonds has become more difficult.” Trades facing constrained liquidity puts investors, especially large investors, to a disadvantage.
Capacity to buy/sell without too much influence on the market prices are deteriorating. Lack of liquidity can causes wild swings in the bond prices, which then can affect the rest of the financial markets. Today’s financial markets are so connected just like the economic domino effects.
They are connected, but let me tell you why they are so important. The U.S Treasury securities market is the largest, the most liquid, and the most active debt market in the world. They are used to finance the government, and used by the Federal Reserve in implementing its monetary policy. I repeat, in implementing its monetary policy. Having a liquid market – in which having no problem buying and selling securities without affecting the market price – is very important to the market participants and policymakers alike.
Examples of high volatility in a low liquidity:
Flash Crash (May 2010)
In a matter of 30 minutes, major U.S. stock indices fell 10%, only to recover most of the losses before the end of the trading day. Some blue-chip shares briefly traded at pennies. WHAT A SALE! According to a U.S. Securities and Exchange Commission (SEC) report, before 2:32 p.m., volatility was unusually high and liquidity was thinning, a mutual-fund group entered a large sell order (valued at approximately $4.1 billion) in “E-mini” futures on the S&P 500 Index. The large trade was made by an algorithm. The “algo” was programmed to take account of trading volume, with little regard, or no regard at all, to the price nor time. Since the volatility was already high during that time and volume was increasing, this sell trade was executed in just 20 minutes, instead of several hours that would be typical for such an order, 75,000 E-mini contracts (again, valued at approximately $4.1 billion).
May 6, 2010 – SPY Volume and Price Source: SEC ReportMay 6, 2010 – SPY Volume and Price Source: SEC Report
According to the report, this sell pressure was initially absorbed by HFTs, buying E-mini contracts. However, minutes after the execution of the sell order, HFTs “aggressively” reduced their long positions. The increase in the volume again led the mutual-fund group “algo” to increase “the rate at which it was feeding the orders into the markets”, creating what’s known as a negative feedback loop. That’s the power of HFTs.
This was nearly 6 years ago. Today, there’s no doubt the power of the secretive section of the financial markets, HFTs, are much stronger and powerful and can destroy the markets with “one finger”.
With low liquidity in the bond market and increasing HFT transactions in it, the threat is real. Automated trades can trigger extreme price swings and the communication in these automated trades can quickly erode liquidity before you even know it, even though there is a very high volume. While liquidity in the U.S. bond market is high, it’s not high enough to battle the power of the technological progress.
Let’s not forget. Fixed-income assets such as, corporate bonds, are often traded over the counter in illiquid markets, not in more liquid exchanges, as stocks are.
It’s all about profits. Some, if not all HFTs, act the way they do, to make profit. There’s nothing wrong with that. But, the creators of the algorithms have to be ethical and responsible. It’s not likely to happen anytime soon since profits are the main goal (mine too) in the financial markets. So why should HFT “be fair” to others? I know I wouldn’t.
Taper Tantrum (2013 Summer)
In the summer of 2013, the former Federal Reserve chairman, Ben Bernanke, hinted an end to the Fed’s monthly purchases of long-term securities (taper off, or slow down its Quantitative Easing), which sent the financial markets, including the bond market into a tailspin.
On June 19, 2013, Ben Bernanke during a press conference said, “the Committee currently anticipates that it would be appropriate to moderate the monthly pace of purchases later this year.” That sentence alone started the financial market roller coaster.
Yields skyrocketed. The gravity took down the value of greenback (U.S. Dollar). U.S. long-term interest rates shot up by 100 basis points (1%). Even short-term interest rate markets saw the rate-hike to come sooner than the Fed policymakers suggested. Borrowings costs increased so much, as the markets was expecting tightening of the monetary policy, it “locked up” the Fed from cutting the pace of bond buying that year.
This raises (or raised) whatever the market prices can handle orders that are executed in milliseconds. It points to a lack of supply (dealer inventories), A.K.A illiquidity. I feel bad for funds that have a lot of corporate-bonds in their portfolio. The struggle is real.
An open-ended funds that allow investors to exit overnight are more likely to experience a run, as market volatility increases. A run on funds will force the funds to sell illiquid assets, which can push down the prices lower and lower. Recently example of that is the Third Avenue (“investors’ money are being held hostage”).
Brace for a fire sale. Coming soon in your area.
Market makers, where are you? Come back. I need to sell the investments at a current price, before it goes much lower.
October 15, 2014
The financial markets experienced – as the U.S. Department of the Treasury puts it – “an unusually high level of volatility and a very rapid round-trip in prices. Although trading volumes were high and the market continued to function, liquidity conditions became significantly strained.”
On October 15, 2014, the markets went into a tailspin again. The Dow plummeted 460 points, only to recover most of the losses. The Nasdaq briefly fell into a correction territory, only to rebound sharply. The 10-year Treasury yield “experienced a 37-basis-point trading range, only to close 6 basis points below its opening level”, according the U.S. Treasury Department report.
According to Nanex, a firm that offers real-time streaming data on the markets, between 9:33 A.M and 9:45 A.M, “liquidity evaporated in Treasury futures and prices skyrocketed (causing yields to plummet). Five minutes later, prices returned to 9:33 levels.” “Treasury futures were so active, they pushed overall trade counts on the CME to a new record high.”, said the report.
“Note how liquidity just plummets.”
Liquidity in the 10 year as measured by total sizes of orders in 10 levels of depth of book. Source: Nanex
Again, as I said, “Today’s financial markets are so connected just like the economic domino effects.” The mayhem in in the bond market can spread to the foreign exchange (forex) market.
These types of occurrences are becoming common, or the “new normal”. As the Fed raises rates, the market participants will be adjusting their portfolio and/or will adjust them ahead of it (expectations), these adjustments will force another market volatility. But this time, I believe it will be much worse, as liquidity continues to dry up and technology progresses.
Recent market crashes and volatility, including the August 2015 ETF blackout, is just another example of increasing illiquidity in the markets. Hiccups in the markets will get bigger and will become common. Illiquidity is the New Normal.
Hello HFTs, how are you doing? Making $$$? Cool.
With interest rates around 0 (well, before the rate-hike in December), U.S. companies have rushed to issue debt. With the recent rate-hike by the Fed, U.S. corporate bond market will experience more volatility. Lower and diminishing liquidity will “manufacture” a volatility to a record levels that the financial markets and the economy won’t be able to cope with it. As said, “Today’s financial markets are so connected just like the economic domino effects.”, the corporate bond market volatility will spread to the rest of the financial markets.
