December 2010 By - J.S. Kim the editor of Smart Knowledge University.
Recent news this week again proves that bankers are among the largest charlatans in the universe. First Jim Rickards reported that a Swiss bank refused to deliver roughly $40 million of gold bullion to a wealthy client for 30 days and only finally physically delivered his gold when the client brought in his lawyers and threatened to take his story to Reuters and other syndicated financial news networks.
Then later this week, James Turk reported that he is aware of another individual that has been trying to take physical possession of approximately $550,000 of silver for two months now from a Swiss bank with zero luck. Turk further elaborated that the bank has been trying to pressure the client into accepting the cash equivalent market value of the silver rather than deliver the physical silver to the client. In both of these cases, I presume that neither of these Swiss banks ever held allocated gold and silver for their clients or if they did, had then leased out the gold/silver or sold the same gold/silver to multiple clients, and thus were forced to stonewall their clients until they could secure the physical metal. Why else would a bank take 30 days to deliver something that was supposed to be sitting in a vault in an allocated account?
The New York Stock Exchange (NYSE) now NYSE/Euronext, founded in 1909 is under attack. Not from terrorists, but from upstart electronic exchanges that are continually taking market share from the "Big Board"! As of this date, only 37% of "all" trades in the USA are actually conducted on NYSE.
The rest are conducted on smaller, more nimble, electronic exchanges, known mostly to only the brokers and trading companies. Some are considered "Dark Pools" where major traders have an advantage of seconds over average investors, and not even the SEC or other regulators actually have an indication of just how much trading occurs.
NYSE is fighting back with it's ARCA exchange in Chicago which conducts about 11% of all trades, and holds sway in the giant Derivatives Market. It is also building electronic trading centers in New Jersey and London.
The largest upstart, however, is a direct competitor which is not much known outside of trading circles. The "Direct Edge" Exchange is located in Jersey City and may conduct as much as 15% of all trades conducted in the United States.
The "BATS" Exchange is a small, quiet operation in Kansas City Kansas, far away from the hustle and bustle of Manhattan, but doing about 11% of the nations stock trading. As a direct result of all of this activity, the NYSE/Euronext has lost almost 75% of it's stock value, traded on it's own exchange. The Canadian TMX group is also quietly researching U.S. cities for a stake in the game.
Even the venerable London Stock Exchange (LSE) is under pressure from smaller exchanges popping up on the continent. After dominating trading in Europe for 208 years, the LSE is losing business to upstart electronic exchanges at a fast rate. Up from only 8.5% last year to over 20% this year. Small upstarts are taking market share at unprecedented speed. Speed? Well that is the issue, isn't it. At this writing, the LSE is in talks to buy an electronic exchange called "Turquoise" which was set up in Europe by seven investment banks including Goldman Sachs and Morgan Stanley. London recently bought a small tech service company called MillenniumIT located in Sri Lanka. We are indeed investing in a Global village of trading platforms now.
Many of these upstarts got their start from disgruntled traders and investment houses tired of the huge fees and glacial movements of these monoliths of the capitalist system. Basically, 18th and 19th century ideas for trading don't really belong in the 21st century. The basic premise of trading does, but not the execution nor the idea that a privileged position on an exchange should give one segment of the investment community, the upper hand over others. Ominously, the "others" have now gained a similar advantage utilizing super computers and "flash trading"! No doubt, it's the same old crowd with new toys and a new privileged position. The more things change, the more they stay the same. "Wall Street" as it is referred to by the media these days, is not actually a street in New York anymore, but a club of high speed traders, in various pockets of electronic trading circles. As George Carlin once said "It's a big club, and your not in it"!
Being the catalysts for biggest players in the "Big Club" the NYSE and LSE are being hauled kicking and screaming into the 21st century. People don't give up privilege easily, unless, of course, it is replaced by more privilege. In the mean time, the smaller, more nimble upstarts will gain market share, and that gives opportunity to small fries like us.
In Chicago, which has dominated the derivatives market (futures, options etc) for almost as long, the same thing is occurring. CBOE, CBOT, CME, CFE have consolidated and merged operations to try and fend off high speed electronic futures exchanges and Options Exchanges like the ISE, ICE, ELX, OMX, OneChicago and EUREX, etc. There are also many trading companies that have developed or are developing their own, proprietary, electronic trading platforms. The exchange business is now a horse race, no longer dominated by the old favorites. It is Capitalism at it's best, and it's worst. Could this race be the next catalyst for calamity in the markets? No one knows for sure. Today the U.S. is implementing a strategy for regulating of the Derivatives Market.
If you are betting on this race, bet on the smaller, faster horses to win in the "short term". But don't discount the big dogs in the long run. That is why they are called big dogs.
Stratfor Global Intelligence is forecasting an uneven recovery in the world's economy. Back in June, Liz Ann Sonders, the chief economist at Charles Schwab, called the Recession over (she was one of the first to see it coming back in 2007) Yesterday, Michael Hartnett, chief global equity strategist with Bank of AmericaMerrill Lynch (yes that's the new name) also declared the recession is over. So has Finance Secretary, Timothy Geithner, as well as just about every talking head on CNBC
Problem is, the talking heads would have you believe it is the beginning of a bull market that is going straight up. My money is on the Stratfor intelligence report, because they are quite thorough in their research and have no real ulterior motive for promoting the recovery story, and their report is tempered by where the recovery won't happen (Japan for instance).
To give credit where credit is due, the CNBC crew, (Kudlow, Cramer , Fast Money) have all along been saying that the country that led everyone into the Recession, the USA will be the country that will lead the way out. Got to give them credit, it is the general consensus. However, this was not a hard call to make, as it is what has occurred in every major recession in the past.
So, what now! Well, as most investors have fled the market since the spring rally, many of them will miss the summer rally which is starting now. A summer rally is an anomaly. It doesn't often happen as many investors still cling to old habits and standards like "sell in May and go away". The problem with that mentality is the recent and powerful introduction of electronic trading systems that can be accessed from anyone's blackberry. In this new era of international investing, you can't just go on vacation and forget about your portfolio, because you stand to lose much of the gains for the year. (or losses, depending on the situation).
If you are coming back to the market in the fall, you may miss most of this years buying opportunities which exist right now! Yes, buying opportunities! Remember this:
1. Bull markets always climb a wall of worry.
2. No one sees a bull market until it is in mid to late stages.
3. Most profits are made in the first weeks/months of the bull market.
4. Bull markets "love" inflation.
5. A weakening currency always causes inflation.
6. Banks always lead a bull market rally. (Goldman Sachs just made their largest quarterly profit in history)
Some words of warning here. The United States will be fighting the Deficit Dragon for years to come, thanks to the Dubya's tax cuts and the gluttony on Wall Street. The jobless ranks now approach 10% and will go higher. Manufacturing in North America is still decreasing. Banks have been rescued by massive inflows of Government stimulus money which still has to be flushed out of the system. The Derivatives Debacle is still not solved and won't be anytime soon. As bad as this sounds, Europe's banks are in worse shape and their Governments are either in denial or are hiding their heads in the sand. Britain's Banks have virtually been nationalized. Japan is sinking further, and has been for over 10 years. The BRIC countries may be a bright light in all of this as wall street starts another glutenous party on the backs of U.S. Citizens.
Many companies will report great third quarters, due mainly to the massive job cuts, because they have already completed most of their write downs.
How all of this will affect your retirefunds is between you and your financial adviser. Hopefully you are talking to him/her this week.
Maybe a simple Index Fund which costs less than every other fund out there, and usually beats 60% of all fund managers, will do. Whatever you chose to do, DON'T sit on the sidelines, or you will miss a great party.
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