It’s likely that you first heard about high-frequency trading way back in 2014 when Michael Lewis published “Flash Boys”. In his book, the supremely talented Mr. Lewis described how high frequency traders, through the use of lightning-fast fiber optic lines, were taking advantage of investors by “front running” orders. Meaning they were buying ahead of us slow-pokes then selling back to us for a fraction more than they paid. Got it?
Peter: So we simplified the whole thing, and dropped the remainder into an account we opened.
Joanna: [Confused] So you’re stealing?
Peter: Ah, no, you don’t understand. It’s very complicated.*
Galactically enough, the once-lucrative business seems to be speed-circling the ol’ microwave dish these days. As a result of vicious infighting and algorithmically rising costs (think millimeter-wave and laser technology), HFT firms – which believe it or not account for around half of average daily volume in U.S. stock trading – have seen revenues plummet from $7.2 billion in 2009 to an estimated $1.1 billion last year. Got that?
Joanna: Oh okay. But you’re gonna’ be making a lot of money, right?
Joanna: Right. And it’s not yours.
While high-frequency trading on its face seems like it should be illegal, HFT firms are doing little more than exploiting the system’s structural flaws. Truth is, the automated stock market is stunningly complex and there exists around it a shadowy layer of middlemen who profit from that complexity – a mysterious labyrinth of greedy souls that adds little actual value to the market or to the larger economy. So who cares if the flash boys aren’t as flashy as they used to be. From where we sit, they’ve taken something and added nothing. They’re only getting now what they deserve.
Peter: Well it becomes ours.
Joanna: And how is that not stealing?
Peter: I don’t think I’m explaining this very well.
*(Office Space, 1999)
What the markets have been doing…
With plenty to worry about this period, not least of which passage of a healthcare bill, traders mostly lost their enthusiasm for the buy side. Beyond the political mess, concerns over rate increases and the reflation trade added to the nervous mix, leaving stocks little where to go but down. In the middle of general declines for the major indexes across the two-week stretch, the S&P 500 posted its first single-day decline of 1% or more for the first time in 109 trading days.
Economic data provided little, if any, boost to investors’ sprits. Home sales reports were mixed for February, weekly jobless claims rose to a seven-week high, while durable goods orders rose a bit. So much for March Madness.
|INDEX||Friday’s Close||Two-Week Point Change||Year-to-Date Change|
Not unlike the equity side, Treasuries of almost all stripe finished lower, and without much enthusiasm. Investment-grades were also lackluster, with only a handful of new deals announced. The high-yield market also seemed to lack much conviction this period, though the asset class moved slightly higher over the period. Municipal bonds posted positive returns in line with Treasuries and the broader fixed income market.
|FIXED INCOME||Period||YTD||12 Months||Yield|
|U.S. Investment Grade||0.7%||1.1%||4.0%||3.3%|
|U.S. High Yield||-(0.2)%||1.8%||15.8%||6.1%|
What Fund Architects has been doing…
By all appearance, the post-Election rally got a little bit ahead of itself, and risk assets finally paused for a breather. Along the way, investors probably found good reason to question the extent to which the new Administration can deliver on its pro-growth economic promises.
In this relatively volatile, or at least more volatile than we’ve seen for a while, environment, the Fund Architect portfolios held up nicely. Given our aggressive positioning on the equity side – you’ll remember we’ve committed the 30% foundation assets to U.S. small/mid/large stocks – we tracked the recent market drop, and, to a degree, slightly more than our less aggressive peers. But things seemed to have calmed down last week, and we’ve not lost confidence in our positioning at all.
As we move toward our first-of-April trades, it’s easy to see we’ll keep our allocation to S&P Global Technology (IXN) for at least one more month. The position was just added in March and it’s performing nicely. Regarding the active equity’s other allocation, the gears of the Fund Architect sector identification process are still turning. We suggested last period European equities might be our next move, but at this writing S&P Global Consumer Staples (KXI) is a more likely trade for our current S&P 500 position.
On the fixed income allocation, we are keeping Convertible bonds for another month, but will likely swap out High Yield bonds for Emerging Market Sovereign debt (EMB). No other changes on the bond side are planned.
As we look to position the Fund Architect Portfolios in the most attractive sectors, it’s hard not to have an opinion about the overall market. From where we sit, it would appear there’s still plenty of room left in this bull market, at least if you know where to look. All in, we feel strongly that there are good opportunities left in the global market, and our systematic and flexible approach is the best method to take advantage of those opportunities.
What the pundits have been saying…
“Progress in reaching the central bank’s full employment and inflation objectives gives me confidence to be gradually and patiently removing accommodation. Raising short-term interest rates three times this year is a reasonable baseline.”
Federal Reserve Bank of Dallas President Robert Kaplan
“We don’t not need to much more to keep inflation in check. I’m okay with a second rate hike this year.”
Federal Reserve Bank of San Francisco President John Williams
“I think the economy is in a good place right now. Growth has been basically a little bit above trend. Raising rates three or four times this year makes sense.”
Federal Reserve Bank of St. Louis President James Bullard
What people have been saying…
“Avon is like a boat that’s been in the water for 130 years. You have to take it out and scrape all the barnacles off.”
Steven Mayer, an executive at private-equity giant Cerberus, which took over Avon’s failing North American business last year
“Roll over, Beethoven, and tell Tchaikovsky the news.”
Chuck Berry, singer, guitarist, composer, and one helluva’ rock-and-roller
What the numbers are saying…
The drop in Sears stock on Wednesday after the retailer raised doubts about its ability to operate as a going concern.
The views in this commentary are those of Fund Architects. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this commentary, will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Moreover, you should not assume that any discussion or information provided here serves as the receipt of, or as a substitute for, personalized investment advice from Fund Architects or any other investment professional. The information contained within this commentary should not be the sole determining factor for making investment decisions. To the extent that you have any questions regarding the applicability of any specific issue discussed to your individual situation, you are encouraged to consult with Fund Architects. Information pertaining to Fund Architects advisory operations, services, and fees is set forth in Fund Architect current disclosure statement, a copy of which is available upon request. Fund Architects, LLC is an SEC Registered Investment Advisory Firm.