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Thursday, May 13, 2010


Thursday Antics

It was a week ago today that we had one of the strangest sessions ever in the markets. About 2:30 or so, I adjourned to the men's room for a necessary bio break. Passing a TV by the reception desk on the way in, I noted the market down a disturbing 400 Dow points, with pictures of the riots in Greece overlaying the market stats (our screen is always tuned into Bloomberg). I emerged a few minutes later, took a fast glance at the screen as I passed, and stopped cold in my tracks to make sure I had seen what I thought it saw. There it was, no possible mistake, the Dow down almost a thousand.

Once I digested this development, I returned to my office and put my Yahoo screen on automatic update. Within twenty minutes, the market had pretty much recovered to where it was when I started my ill-fated bio break.

Needless to say, concentration on the mundane work of the day was all but impossible as we watched the market slosh through an hour of reflexive recovery from the earlier chaos and hapless commentators speculated about what had happened. Despite the early "evidence" about fat fingered keystroke errors or other speculation about blameworthy rapid automated trading mechanisms, it now appears that the explanation is just a function of 21st century trading custom.

First of all, we all know that futures trading is the tail wagging the stock dog. When you arise in the morning, what you want to know is not what happened overnight in Japan or Europe but where the S&P futures are versus fair value. That tells you how the market will open. Sure enough, it appears that a large futures sale Thursday afternoon caused those on the buy side of the trade to execute their hedging strategies by selling stocks in the cash market. When sales of that magnitude hit, (remember the market was already under water because of Greece) dormant stop loss orders become market sell orders as prices retreat and cause the market to go down further. If the bids dry up and/or get withdrawn, prices can really cascade, particularly since we no longer have an NYSE specialist these days charged with maintaining an orderly market for the stock. Instead, the machines are in control, and individual stocks can be available in multiple markets. In some cases, like Proctor and Gamble, there were no bids left to field the market stop loss orders, and the stock went down to one cent!

In its infinite wisdom, the market's powers that be have determined that based on certain arbitrary criteria, some of these trades at silly prices will be cancelled. However, the reality is that a lot of money changed hands anyway. The country's regulatory mindset being what it is, people are hard at work thinking about how to prevent a recurrence. They have floated solutions such as banning market orders (requiring all sale orders to be limit orders), enforcing commodity like "limit moves" on individual stocks, and calling trading halts after certain percentage moves in individual stocks. None of these are really solutions. After all, stop loss orders are limit orders (that become market orders when the limit is reached).

Rather than worry about how to solve the systemic problem, I choose to think about how to protect one's own trading portfolio during meltdowns. I do use market orders since they are cheaper at my discount broker, but also because most of my transactions are executed at the opening, and if I use a limit order, it may not execute if the stock runs the other way. Jim Cramer says to only use limit orders, and that is OK advice if you don't mind missing an execution here and there. I think you can use market orders, but you have to make sure that the bid ask spread is not too great, that trading is not crazy volatile, and that the stock you are trading is not one where you are selling or buying a lot of shares at a low price. Then you need more control over the execution price and it's got to be a limit order. If I want to buy or sell 2000 shares of a stock trading around a dollar or two, I can't take a chance on a market order when a ten cent price differential costs $200, much more than the commission.

If your pending orders are all limit orders, you don't have to worry about selling something for one cent when we have a day like last Thursday. When you put in a market order to sell something, you have to first know where the bid is and that that price is acceptable. For a market order to sell, the operative concern is the ask price. This is all trading 101, but it is amazing how many experienced, even professional traders, muff executions. Just like in an auto race, a reckless trader puts all the other players at risk. That's what happened last week.

One last consideration - when the markets move explosively, it's human nature to want to play. Certainly when I saw things down 1000 points, my first instinct was to call my broker and buy some OEX calls, suspecting something funny going on that would be reversed. I know 25 years ago I would have done just that. Many other folks might have had the idea that they should just sell everything and get out.

Whether your instincts are ultimately proven right or proven wrong, my current philosophy is that when the market is in short term turmoil, we amateur traders and investors should simply stand aside and do nothing. Let the pros battle it out until things get resorted. It's easier for me to do that now that I have established a transaction formula that I trust and do not abandon under stress.

The Mets had a 3-3 home stand, and that's just no good. So after the hot streak that saved Jerry's job for the time being, things are back to (sub)normal. Meanwhile, the underperformances just continue. Hitters are simply not thriving under Howard Johnson - Wright and Francour over swing constantly and don't recognize pitches - so the strikeouts are just appalling. Warthen's pitchers just walk too many hitters - too much nibbling, and Jerry just mangles the bullpen. But since nothing has really changed with this inept manager and coaching staff (except we now seem to have a competent 3rd base coach, unlike last year) why should the results be any different?


At least while the market was being buffeted, I could look forward to an evening's entertainment since I had a ticket to see Mark Knopfler, my favorite rock guitarist, at the United Palace Theater on 175th St. in Manhattan. This is an interesting place to see a show. The neighborhood is a bit dicey, as you can imagine. Standing literally across the street from the theater, I didn't know I had arrived since there was no sign indicating Knopfler's appearance, just a banner hawking the Reverend Ike for Tuesday night. As Dave Barry would say, I am not making this up!

Once inside, there was the agony of getting seated which took forever, since the "ushers" appeared to have been recruited off the local playground basketball court and had no idea of how to find your seats. Once the brief warm-up act finished, it was a bit less complicated, with the lights on, to reseat all the people in their proper places and get everyone in place for the main event. Knopfler did not disappoint. Despite a pinched nerve that restricted him to a stool for the evening, his playing was as brilliant as ever, and most of the songs were arranged to allow him to improvise above the band for a couple of minutes after the last chorus. The band really cooked too, just as good as in the Dire Straits days. Highlights included Sailing to Philadelphia, the ever popular Sultans of Swing and Romeo and Juliet, and the best moments, Telegraph Road, with an unforgettable improvised section to close the main body of the show.

We have been buying. On 5/5 we bought 400 shares of our Australian Aluminum issue, AWC, at 5.40. Monday, we bought 400 shares of Great Lakes Dredging for the IRA at 5.65. This originally was a recommendation by our full service broker, and we still have the faith. Yesterday, we bought the SPDR Gold EFT, 20 shares (two ounces) of GLD at 121.29. This is a high price, but simple economics tell me gold could go much higher.

In the late 1990's, we had the phenomenon where a company could issue a simple press release about a new web site and juice the stock. We had an amazing run in BAMM back then where it went from single digits to 44 and back in less than a week. When this happens, it makes me uneasy - do you sell, or do you let it run. Back then, we got some shares of BAMM off in the teens, but obviously didn't max out, (nor did most others since the stock was in the 40's for only minutes).

Today, our HAUP issue announced via press release a new interface with Apple I-phones and I-Pads, causing the stock to triple between 3:30 and the close. Of course this is a silly move, and it's fun to see the reactions on the message boards. The bear case is that a ten dollar item can't really make a financial difference to any company. The bull case is that it isn't the ten dollar item, it's the demand it will create for the company's more expensive base equipment that means something.

My reaction will be to watch with great interest - and follow our formula. If we realize some profits, that will be just fine.

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