Ever the optimist, the headlining story from Wall Street is that the large-cap equities sector scored a modest gain for the first quarter, a 2.2% lift in the benchmark S&P 500. This was achieved mostly due to a technical push that kick-started the index over the last two trading sessions (ie. Janet Yellen opening her mouth) : otherwise, had the markets closed last week, we would have been staring at a sub-1% gain.

Of course, that's splitting hairs. I'm more interested in how equities managed to eek out a respectable performance in light of so many fundamental headwinds. To answer this pressing question, I turned to my fellow hedge fund managers that employ physics-based models to better guide their investment decisions by comparing the first quarter performances of 2013 and 2014 in terms of market velocity.

Last year, the first quarter was defined by a relatively even range of trader sentiment, with only a few days where the markets followed a statistically anomalous path.

However, the most recent quarter that we had was marked by uneven, perhaps pensive trading sentiment, with activity plotting a wide and unpredictable range.

This is indicative of the professional money not knowing where to make their capital work for them : indeed, with the Fed constantly playing the part of the seductress, taking away the QE punchbowl only to promise its return later, equities have lost much of their directional momentum. In addition, there's been more instances of sharp volatility in 2014 than was recorded in the first quarter of the prior year, which may be a harbinger should any fundamental trouble spot, such as a geopolitical incident, take an unexpected turn.

Regardless of what may actually happen over the next two or three months, I've been very consistent : there's not much room here for improvement (assuming a bullish perspective) but there's plenty of downside just lying in wait. At the very least, a serious consideration to rebalance one's portfolio would be extremely prudent.

The U.S. stock market is rigged, with elite traders buying access to a high-speed network that allows them to figure out what you've just ordered, order it first, then raise the price before your order is complete. And according to Michael Lewis, author of a new book about high-frequency trading called "Flash Boys," this form of "front running" is completely legal.

So begins the latest online article from the Huffington Post, which chronicles the accusation that Mr. Lewis, a best-selling non-fiction author and financial journalist, levels at the Wall Street machinery. During an interview with 60 Minutes that aired just a few hours ago, he proclaimed, "The insiders are able to move faster than you. They're able to see your order and play it against other orders in ways that you don't understand. They're able to front run your order."

The advantage gained from high frequency trading is often narrowed down to the nano-second but for the firms managing big-time funds, it can amount to a significant payout if applied correctly. "One hedge fund manager said, 'I was running a hedge fund that was $9 billion and that we figured that the, just our inability to, to make the trades the market said we should be able to make was costing us $300 million a year.' That was $300 million a year in someone else's pocket," Lewis said.

So a hedge fund manager lost out on $300 million...boohoo! Cry me a river. Capitalism, as I asserted in full-length article, espouses, even demands innovation in all industries to make them quicker and more efficient. Why should the financial markets be any different? In fact, it would be excruciatingly hypocritical to criticize high frequency traders when the advent of the internet has allowed all of us to access more information and execute trades based on that information than people of previous generations. Are we then to say that using technology is allowable in the markets but only at the speed dictated by the slowest person on the trading room floor?

Please don't get me wrong : I am not naïve to be believe that everything that goes on in Wall Street is on the up and up. Far from it, I have personally criticized the albatross that it is time and time again. However, we have to be intellectually honest with our allegations and in this case, the mere existence of high frequency trading is not enough evidence that the markets are rigged, as was stated by Mr. Lewis.

One of the misconceptions about high frequency trading is that it amounts to risk-free arbitrage. I believe that this is an over-simplification due to the fact that such trading systems can exacerbate losses if the wrong inputs are calculated into the algorithm or the trader is woefully incorrect about his speculation regarding market direction. Recall the failure of Long-Term Capital Management in 1998 and the widespread implosion of quant funds, or hedge funds that employed extreme mathematical models, during the summer of 2007. These were highly capitalized investment firms that relied on computerized systems and physics-based models that very few people had access to, yet their hubris was their undoing.

High-frequency trading is just another system that is a product of the capitalist ethos. Getting rid of it would be impossible since it distorts the very incentive to gain a competitive edge and thus endangers the essence of a free market.


For more information regarding this topic, please read my article, "Race, Sex and The Rig."

Right now, someone in America is receiving a bad stock tip. So bad, in fact, that it may permanently derail his or her trading account, causing that person to never want to participate in the markets again. It may sound like an exaggeration, but there's really nothing of legal or procedural substance that can prevent the dissemination of bad advice, so long as the advice was not intentionally misleading. This gaping loophole allows would-be used car salesmen to pursue another lucrative career to practice their dubious "talents."

I mentioned in an earlier blog that I receive "penny stock tips" into my anonymous Hotmail (now called "Outlook") account as a form of guilty pleasure, a reverse Schadenfreude that is actually quite educational in terms of deciphering the language of financial marketing. A surprising number of people are swayed by the promises of easy money and instant wealth creation, which in many ways is understandable but this then leads to the problematic situation of enabling con artists to find relatively easy prey.

I sympathize with those that have ever lost money to any kind of scam. Regardless of one's intellect, anyone that happens to let their guard down at an inopportune moment can be victimized. It's an ongoing dilemma that will not end until humanity ceases to exist. But for myself, I can't help but find the penny stock scam to be laughable!

It goes something like this : you get an email "alerting" you that so-and-so company is the "top pick" of the day, week, month, whatever. When you open it (because hey, that's what you do!), you are let in on a "secret" that apparently no one else in the world knows about except the tip "alerter" (and his vast army of subscribers...). Paragraph after paragraph is devoted to information about the industry that the company is associated with, and how competitors in the past have done extraordinarily well (how would you like to go back in time and buy Apple shares at 15-cents a pop?), with the not-so-hidden implication being that investing in the "secret company" will yield the same results. 

However, very little, if any information, is devoted to the "secret company" itself. And no wonder! First of all, it's advertised as a secret, so information regarding it must logically be secretive as well. Second and more to the point, penny stock companies, or companies whose equity shares are traded in the Over-The-Counter (OTC) markets, have little in the way of financial statements or other public disclosures. They exist, of course, but getting to them may require a lot of work, often times forcing you to contact their investor relations office.

For this, and many other reasons, investing in penny stocks based on someone else's whim is a bad idea. Note that I did not say investing in penny stocks is a bad idea : they can offer powerful leverage but you must invest with the right intention and the right information. Anything less is akin to financial suicide due to their thin liquidity and extreme range of volatility.

A funny exercise is to objectively examine the penny stock pumpers record. My favorite pumper, a person I will not name, has had a very bad go at it for month of March. Here are his streak of absolute doozies!

PLPL - alert issued March 4  (-15% loss)

GASE - alert issued March 9  (-16.3% loss)

TNKE - alert issued March 11  (-47.5% loss!?)

DKAM - alert issued March 13  (-5% loss)

ENDO - alert issued March 16  (-10.8% loss)

RBIZ - alert issued March 18   (-11.8% loss)

OGNG - alert issued March 20   (+5.9% gain)

GEFI - alert issued March 24   (-7.7% loss)

WBXU - alert issued March 25  (the jury's still out but it don't look good...)

Out of 8 picks not including WBXU, only one turned profitable, with the average percentage loss being -13.52%! Unfortunately for any investors that may have followed this stock pumper's advice, all of the losing picks exhibited clear signs of trouble, yet people continue for some strange reason to flock to these so-called oracles, only to be fleeced time and time again.

It may be a sign of things to come : we are a nation addicted to optimism regardless of its foundations. Over the next few weeks, financial pundits will continue to push other people's money into the large cap equity funds while quietly pulling out theirs. Facts may not matter at this point, adding even more reasons why investors need to be absolutely careful heading into the second quarter of the year.

In an expired Yahoo Finance poll which asked readers how they were handling the current volatility in the domestic equities sector, 56% of respondents answered that they were "buying the dips" while only 18% were selling out of the markets, with the remainder (27%) saying that they were staying in cash. Personally, I found the results surprising not from a fundamental assumption of investor sentiment (since the Wall Street marketing albatross always advertises that "every day is a buying opportunity" so one can expect a large contingency of the investing public to participate in the markets, come hell or high water...) but from the sourcing dilemma. The majority of participants are likely Yahoo commentators, the most invalid of the intellectually deficient, a giant step backward from the sewage pipe otherwise known as YouTube.

The comments section of most Yahoo articles regardless of content is home to some of the most vile vitriol, a pathetic attempt by otherwise able-minded individuals to compensate for their apathetic, self-induced retardation. But these are the honest ones : when someone deliberately makes poor choices in their personal life and then proceeds to lash out at the government (or some other entity like an ethnic group different from their own), we immediately recognize such individuals as losers, not because they are inherently so, but that they have transformed as such by their own free will.

The real problem with Yahoo commentators is the rise of the Google Savant, or a cognitively deficient person who relies on search-engine skills and copy-and-paste mechanisms in lieu of appropriate context. Information is just a static element : the application of information is the true power, but one that requires a considerable investment of time and effort. The GS sidesteps this important process by reproducing another's work without vetting the work or the source. This is why so many Yahoo comments have the pretense of intellect but upon closer examination revealing a more mundane truth.

That so many of the GS believe in buying the dips suggest that this may be the beginning of the end. A GS never wants to reveal his true lack of knowledge that stems from personal apathy and therefore, will seek and reproduce any content of perceived intellectual value. If the majority of the GS community believes that dip-buying is an appropriate strategy, this indirectly credits the Wall Street machinery and their success in infiltrating the mindset of the greater public with distortion or outright lies.

The real truth that can only come from rigorous analysis and a full consideration of path-dependency, a critical component of the scientific method, reveals significant reasons to be concerned about the sustainability of domestic, large-cap equities. This goes far beyond speculation of mass human behavior,  a logical extenuation of the Weber-Fechner law in which contrarianism appears to have a favorable risk leverage. This may be so, and aligns with my own opinion, but the quantifiable realm is just as convincing. While I will not list the details on this forum, one can simply look at the first quarter performance of the S&P 500 as a strong starting point. With a return of less than 2% and with geopolitics hardly swinging in favor of stability, just how far can the stock market go?

Apparently, the Google Savant believes it can go higher still. But is that where you want to place your money?  

We are a society addicted to the instantaneous gratification of up-to-the-minute headlines. That much is obvious when major news outlets such as CNN and FOXNEWS employ the anonymous ramblings of live Twitter feeds as part of their daily segments. But despite the obvious journalistic criticisms, we do know one thing : it works! No one does non-news better than the mainstream media, regardless of what side of the political spectrum their inherent biases lay. This is not a Republican or Democrat issue ; it's a media issue! Finally, there's one thing where bipartisanship finally has the potential to work.

I consider myself a talented writer, a passion that I was born with and has never left me regardless of whatever academic journeys life took me on. While underappreciated in this techno-centric world, the ability to tell a story engages the human mind that no other artificial element can replace. It can connect people of all walks of life, carrying them to destinations that are otherwise impossible due to physical or existential restrictions. Stories of heroism, tragedy, and love survive despite their terrestrial manifestations succumbing to their natural limitations. An argument can be made that the entire human experience is one magnificent story, a script of beautiful imperfection.

But in order for the narrative to have any true meaning, it must have some kind of velocity, a catalyst composed of characters and the conflicts that they find themselves in. A written journal of equilibrium is not a story, but a description. Yet this is what we are left with in the sad case of Malaysia Airlines Flight MH370. As we enter the 14th day since the airliner disappeared, speculation has run rampant regarding an explanation, ranging from terrorism all the way to miniature black holes. No, seriously. There have been multiple reports of "possible debris" from the plane, only to be cruelly rebuffed, leaving many affected family members in limbo.

And yet, the mainstream media has essentially gone on a 300-hour filibuster regarding Flight MH370 with zero confirmed facts outside the sole fact that the plane went missing. "Breaking News" headlines flashed from CNN to Fox to MSNBC, all guilty of horrible misappropriation of the term. The deceptive headlines essentially became justification for random experts to tout their latest theory, most of it perhaps enlightening but would only be so if their assumptions were true.

But with so many assumptions taking us one way or the other, which assumption is true? In a situation like this, there can only be one truth, leaving all other theories worthless. That's a mighty big risk in terms of credibility and journalistic integrity that's on the line here. Yet this happens all the time in the financial sector. Pundits from across the vast money-diaspora weigh in on the latest goings-on, using complicated rhetoric and formulas to predict the market's future, but their prognostications are only as good as their assumptions. In other words, even if the math is correct, the answer could still be wrong.

What the media is chasing today is the math, not the numbers that go into the math. We have grown accustomed to the technicalities of a process being the justification for the process itself without taking into consideration its total integrity. While the assumptions that the media runs with do make for good entertainment, there are potentially serious consequences for accepting them at full value.  

I love getting "pump and dump" penny stock alerts. Call it a financial guilty pleasure but there's something truly comical about the cheesy marketing and the god-awful writing that gives it an air of genius. Case in point is an email alert I received from, well, let's just call him "Bob the Penny Picker." Bob assures me that his next great pick is a company called Endocan Corporation, ticker symbol ENDO. Why Endocan? According to Bob, "There’s a very strange thing happening around medical cannabis plays lately. You might have noticed it but if you haven’t here it is: Medical cannabis plays are now flying off the shelves faster than you can blink! The bad news is that as soon as they hit the scene, traders rush in and before long, you can’t afford to buy one. The good news is that I have found a company that is ready to move north and at current levels, it is affordable. Actually, it is so cheap you’ll wonder if it’s real."

A cursory look at its technical chart reveals this :

Bob is certainly right about something : the stock, at $0.09 a share, is cheap. It's damn cheap! And you know what? It's getting cheaper. A lot cheaper! So cheap, in fact, that shares will fall to about $0.03 a share. May not sound like much of a loss, but when a stock is already at such a nominal "discount," a 6-cent loss is the equivalent to a 67% haircut.

How can I be so sure this is a bad deal? Because pump-and-dumpers don't trade the math ; they trade the stories and stories can be awfully misleading. But the real giveaway is the chart pattern. As soon as I see this, I run. I don't even think about it. I just run. I run like investors should have run from VeriSign Inc. when shares were trading at $260 in the crazy days of 2000.

Pull up a historical chart and compare the two. Then make your decision.

In yet another amusing headline from the mainstream media networks, a Bloomberg article ran with the opening title, "S&P 500 Rebounds to Record as Putin Comments Ease Tension." I find myself asking two questions. First, what defines "rebound?" Yes, the market added some much needed points, but we are still down compared to a week ago : not by much perhaps (-1.17% for the S&P 500), but nevertheless down. And that raises concerns (or at least it should!) about market sustainability and whether the alleged improvements in key economic metrics will have a meaningful impact for investors. The second question I have may be more philosophical in nature yet is perfectly relevant : who trusts the KGB?

Look, I get it : our government spies on us and regardless of your opinion about Edward Snowden, he did bring attention to the civil rights violations of the National Security Agency. No longer an entity only mentioned in conspiracy theory websites, the NSA was publicly embarrassed not only by domestic sources, but international ones as well. It turns out that there was no country safe from the leering eyes of this once ultra-clandestine organization. The implication is that the United States should be the last country criticizing the political and military actions of another, especially on moral or even legal grounds.

However, laws are laws. It does not matter if another entity broke the law and got away with it. If you are accused of committing an infraction, you have to present a case for yourself. The ill-deeds of third-parties are auxiliary distractions if anything, and the employment of such tactics as a primary defense is juvenile and suggests a lack of conviction. It also doesn't matter if you and a majority of other people think a particular law is bullshit. I think the speed limit of 65mph is bullshit because I rarely come across drivers that obey that restriction, yet if I was pulled over for speeding, my defense cannot be that "the law is bullshit." I must have something of greater substance than that!

Which is why the events in Ukraine still deeply concern me : we are dealing with a former KGB agent with mental problems (as per German chancellor, Angela Merkel) and a penchant for violating rules and laws. Remember, this is a guy who put in place a lackey as president and then proceeded to rewrite his own country's constitution so that he could resume the top executive seat. And people are soothed by his comments that the Ukrainian conflict will not escalate? This man has already invaded the sovereign territory of another country under obviously false pretexts and propaganda! Why should we believe anything that comes out of a known liar's mouth?   

It may not be tomorrow but we can be certain that this geopolitical crisis will not end so quietly. That would obviously have very dire consequences for your investment portfolio. Maybe America and the West can sleep easy for a few weeks or a few months. I don't have a crystal ball or anything. But I do know a thing or two about history.

The last time the world attempted appeasement and diplomacy, it didn't go over so well... 

Headlines are always interesting to read and can often provide humor and levity towards a situation lacking in such characteristics. Case in point is the front-running article from Yahoo! Finance, which reads, "Wall Street Little Changed as Ukraine, China Concerns Brushed Off." While it's true that the Street hardly wavered, with the major indices moving an average of barely over a tenth of a percent against the prior session, that in and of itself should be the primary reason why everyday investors ought to be concerned. Considering that the benchmark S&P 500 index gained 26% of valuation for 2013, or a quarterly average of +6.5%, the new year is off to a comparatively poor start, only up 2%. For perspective, the equity market at this time last year was moving 3 times faster, meaning that the fundamental drivers of today have already exacted a heavy toll. Any further changes to upset the equilibrium could precipitously send us into bear market territory.  

Just how far down the rabbit hole can we go? A deeper analysis between the first quarter's price action for 2013 and 2014 reveals some shocking discrepancies. Last year, the S&P 500 scored a total upside gain of 7.3% in Q1, with a little noise in late February bringing in a temporary -2.8% correction. This year, total upside so far has been limited to 2%, whereas the correction that was experienced in late January resulted in a 5.6% correction. In essence, the risk in the current market has doubled, whereas the reward has slowed by a factor of three. So the question that everybody should be asking is, who the hell wants to absorb greater risk for less reward, and at a premium of plus-21 percent?

Not too many, judging from the price of gold, which has been making headlines in recent weeks. The yellow metal is now trading above the all important $1,350 technical threshold, a price point that analysts agreed must be taken out in order to confirm sustainability for another bull run. Last year, its first quarter price action resulted in a loss of -5.2%. This year, gold is up nearly 12%, an astonishing turnaround that can only be explained by over-riding fundamentals. During the precious metals' parabolic move to record heights, investors flocked to the safety net of hard assets to counter inflationary concerns that were as relevant back then as they are today. This time around, it's the fear of global instability as the Russian bear rears its ugly head, causing German chancellor Angela Merkel to question Vladimir Putin's mental state, in a conversation with U.S. President Barack Obama.  

Moving forward into next week, the theme will be risk management : the referendum proposed by the Crimean government to be annexed into Russia has a deadline of Sunday, March 16th, but is wholly rejected by the international community. While there could be some upside if the referendum is passed peacefully, this geopolitical event is a cinder box waiting to explode.

Offense scores points but defense wins games.

As boring and as tired as that statement is, it's true. In football and in life, you cannot stay on offense forever if you want to have any hope of winning games, let alone a championship ring or two. Whether we like it or not, we've got to punt the ball away to keep ourselves in the game. It's not about acquiescence but making deliberate choices to put ourselves in the most advantageous position possible, regardless of what side of the field that we happen to be on. One can think of punting as offensive defense, a sort of psychological warfare but without the benefit of the ball.

Of course, I understand why people don't like punting. Our American culture prides itself in never giving in and continuing to fight until the last whistle blows. The moxy that resides in the undertones of our social fabric moves us in ways both subconsciously and cerebrally. We hate quitting. And we hate even the pretense of it, which is what punting is for most people. I've yet to meet a fan who was happy to give the ball away to the other team...

But emotions aside, there's a reason why coaches call in the punting unit when the distance to the first down marker is "only" a yard. While the distance may be marginal in a nominal sense, there is always an established risk in going for it, meaning that the offensive unit could fail to execute properly. Then there is a variable risk in which the opposing team's defensive unit could stymie the attempt. Established risks are easier to control but variable risks are not. When the combination of risk becomes too large relative to the reward, virtually all coaches will elect to punt.

Punting is as critical to a football game as it is to your portfolio. You can't possibly expect to "go long" in every market cycle. You certainly can't expect to be long in a bear market where most stocks eventually take major losses. And the crazy thing is that the less money you have, the more important it is to punt in the face of down-trending markets. The ultra-rich have access to the best information and to the best financial tools : they have the granularity to dice through any market with the help of a good advisor. A 401K account, which is nothing more than a glorified mutual fund, does not have acute diversity and therefore lacks the agility to survive a major downturn. If you don't believe this, remember back a few years ago when your account statement was nothing but a sea of red.

I can't speak for other people but I'm not in any mood to "ride out" another major downturn just like I wouldn't go for it on 4th and long and backed into my own endzone. If the game isn't on the line, there's no reason to be foolish. And even if there's a shred of opportunity to get the ball back with some decent time on the clock, it's better to take that road then to do something that has very little chance of ending up well.

The focus is, after all, on winning...

"S&P 500 ends at another record after strong jobs data," is the Reuters headline for their summary of Friday's market action. It's an interesting choice of words considering that this record is a mere technicality on the scale of 1.01 points, or in percentage terms, a move of 0.05%. True, the index performance is noteworthy against the fundamental headwind of a slowly escalating crisis in Ukraine, a situation that appears more than likely to worsen, not the other way around. So why the enthusiasm? Has the threat of armed conflict already been priced in to the equities?

Many will cite, as did this Reuters article, that a positive jobs report released by the U.S. Labor Department, exceeded expectations by hitting 175,000, a surprise of +17%. It's always good to know that Taco Bell is apparently on another hiring binge and that just might be the problem. I don't think anyone is buying the economic recovery story simply based on a jobs number that is subject to all sorts of statistical manipulation. Besides, how confident can we be if the entire nation is up in arms regarding the raising of the federal minimum wage? While I'm not discussing yay or nay in this blog entry, it should be pointed that if everything was going fine, the minimum wage debate wouldn't conjure up such passionate discourse.

But the real reason I'm not buying into anything the Street says about the economy is because the professional money has obviously left the playing field. We emphasize the theme "Go with the Money" because you certainly don't want to fight the money : wherever the professionals go, whatever they do, that's probably a very solid starting point for your own personal strategy. The professionals always want you buying and staying in the markets since they occupy the opposite side of the trade. It's just simple survival reflexes that if you want to be around for mating season, you want to trade with the big money, not against it.

And with such a small margin of "victory" today, they've found something else to do besides risking exposure to a potentially volatile situation.