How High-Speed Traders Outraced the Profits

For the last few years, the stock market has been a race among high-speed traders. The game was simple: The fastest traders won the most profits. Since speed was all that mattered, trading got exponentially faster. In the last five years, the time it takes to trade a stock went from being measured in milliseconds to microseconds. The fastest firms can now execute a trade in under 10 microseconds. It takes 350,000 microseconds just to blink your eye.

Now it appears the advantages of speed are starting to dissipate, and being the fastest trader isn’t worth what it once was. High-frequency trading profits are expected to fall 35 percent this year, 74 percent below their peak in 2009. In an ironic twist, high-frequency traders have gotten so fast, they seem to have outrun their own profitability.

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ThinkEquity LLC is closing its stock-trading business today amid a market slump and preparing to transfer its remaining investment-banking unit to another firm, Chief Executive Officer Greg Wright said.

ThinkEquity, which employs a total of about 100 people, is determining how many jobs will be cut, he said in a telephone interview. Wright said another firm, which he declined to identify, has offered to take over San Francisco-based ThinkEquity’s investment-banking business and hire some workers. Details may be announced as soon as tomorrow, he said.

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Nothing heralds the decline of an empire quite like the construction of an expensive new headquarters.

Louis XIV built Versailles after his power had peaked, and before much of Europe united against him. Park Avenue’s Pan Am Building went up not so many years before the iconic company went under. Enron was still completing its postmodern skyscraper in Houston when it filed for bankruptcy in 2001.

All of which brings us to the New York Yankees and their $1.5 billion-plus stadium, baseball’s monument to America’s pre- crash hubris. Entire sections of the ballpark, opened in 2009, sat empty during the opening two games of the American League Championship Series last weekend against the Detroit Tigers. Those fans who did show saved their boos for the home team. “This is a very easy place to play now,” Tigers outfielder Quintin Berry said after Game 2, issuing the ultimate indictment.

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According  to Obama, he was still protesting the Innocence of Muslims video.

A suspected terrorist parked a van packed with what he thought was a 1,000-pound bomb next to the Federal Reserve building in Lower Manhattan and tried to detonate it Wednesday morning before he was arrested in a terror sting operation, authorities said.

The suspect, 21-year-old Quazi Mohammad Rezwanul Ahsan Nafis, is a Bangladeshi national who came to the U.S. on a student visa in January for the specific purpose of launching a terror attack here, authorities said. He allegedly told an undercover agent last month that he hoped the attack would disrupt the presidential election, saying “You know what, this election might even stop,” according to the criminal complaint against him.

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This is really the big story of the moment: The full-on comeback in everything related to consumers and households.

Let’s just break it down really fast.

“Many cycles analysts talk about the “long cycle” of the stock market being the 54-year Kondratiev Wave, named for the Russian researcher who wrote about long economic cycles in 1925.  My own research shows that it is a 40-year period which matters more for the stock market.  The 40-year period also shows up in other economic events like gold rushes, real estate bubbles, and economic wars.

The stock market has had important bottoms in 1861 (Civil War), 1903 (Rich Man’s Panic), 1942 (WWII), and 1982 (Cold War climax).  There were also other important bottoms along the way, but these were the bottoms which match up with the 40-year cycle.  Perhaps more importantly, these were the bottoms that the market went up from, as opposed to the rogue wave sorts of bottoms that merely see a return to the old equilibrium.

The bull market of the 1980s and 1990s was stronger than earlier ones if measured just in nominal changes to the major indices.  But it was similar to the bull market of the 1940s and 1950s when we account for differences in dividend payments.  This week’s chart helps us to see that point.  It compares the performance of the DJIA with dividends reinvested (total return) for two different periods, with the 1942 and 1982 bottoms aligned.

The scaling on the chart is logarithmic, which allows us to better compare the two price series which would otherwise look like parabolic up swings if posted on a chart with arithmetic scaling.  The vertical scaling of each Y-axis is equivalent, so that similar percentage price moves get equal treatment.

The first interesting observation is that…”

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“Liz Ann Sonders of Schwab says we’re at an inflection point in the US economy.  That’s right.  She says we’ve missed the recession entirely, diverged from Europe and are now in an environment that reminds here of 1998.   She offers 6 supporting points for her bullish thesis:

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“The modern record

Some 25 years ago, Wall Street saw its biggest one-day percentage slide ever sparking familiar worries about small investors and depressions. The long-term damage wasn’t as severe as the 1929 crash, but the 1980’s bubble pop was spectacular by any measure. Here’s a look at 10 other great market crashes and some of their unusual consequences.”

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Is another ’87 crash possible? Some think so. See what analysts are saying.

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The big takeover is happening by hook or by crook….

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“(Reuters) – Bank of America Corp eked out a third-quarter profit even after taking $1.6 billion of litigation charges, as the second-largest U.S. bank set aside less money to cover bad loans.

The results show Chief Executive Brian Moynihan is still haunted by acquisitions forged during the financial crisis. The bank last month agreed to pay $2.4 billion to settle claims that it hid crucial information from shareholders when it bought investment bank Merrill Lynch & Co at the height of the financial crisis.

Bank of America had already set aside some money for the settlement, but it said last month that the pact, a UK tax charge and an accounting charge related to the value of its debt would reduce third-quarter earnings by 28 cents per share.

To boost profits, the bank launched a broad cost-cutting program in 2011 that aims to eliminate $8 billion in annual expenses and 30,000 jobs.”

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Behavioral science suggests investors are normal and not rational. A new study takes a look at why we lose money in the markets from a behavioral standpoint.

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“MILAN/MADRID (Reuters) – The International Monetary Fundcalled on the eve of a European Union summit for both Spain and Italy to seek euro zone assistance to draw a line under the bloc’s debt crisis, but Rome has rebuffed the idea and Madrid seems likely to apply alone.

The two-day Brussels summit will debate steps towards a single banking supervisor and proposals for closer euro zone integration, including German Finance Minister Wolfgang Schaeuble’s idea of a super-commissioner with veto powers over national budgets.

No decisions are expected this week and there is no certainty as to when Spain will come off the fence.

Spain dodged a bullet on Tuesday when Moody’s maintained its credit rating at investment grade, with a negative outlook, on the assumption that Madrid will trigger European Central Bankintervention soon to lower its borrowing costs.”

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“(Reuters) – American Airlines parent AMR Corp reported a wider quarterly net loss on Wednesday, as it took charges tied to worker severance costs and its Chapter 11 bankruptcy reorganization.

But excluding the special items, the company had a profit of $110 million for the third quarter as fuel costs fell and revenue edged higher.

The company, which had pilot absences and maintenance issues that led to flight cancellations and delays at American in the second half of September, said those incidents had no material effect on third-quarter results.

AMR, which sought U.S. bankruptcy protection last November, said its net loss had widened to $238 million, or 71 cents a share, from $162 million, or 48 cents a share, a year earlier.

Revenue rose 0.8 percent to $6.43 billion. Total operating expenses were up 0.6 percent, but fuel costs fell 3.3 percent.”

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“(Reuters) – Halliburton Co said third-quarter profit fell due to the high cost of a key ingredient used in its operations and a slowdown in U.S. drilling, which showed no signs of picking up as corporate budgets for the year were largely spent.

Halliburton, the world’s No. 2 oilfield services company, said Wednesday that a drop in North American margins ended up even bigger than the company warned of last month.

Profit from continuing operations matched analysts’ estimates.

Revenue in North America fell 5 percent from the second quarter, mainly on weak demand forhydraulic fracturing services and also due to disruptions caused by Hurricane Isaac.

Oilfield services companies have had far less pricing power in the United States this year as depressednatural gas prices reduced the number of rigs targeting gas to a 13-year low.

The company said that although the U.S. oil-directed rig count rose 3 percent from the second quarter, the increase was not enough to offset the 18 percent drop in natural gas rigs.

“We are also seeing activity reductions by some of our customers as they continue to moderate activity to operate within their stated 2012 budgets,” Chief Executive David Lesar said in a statement…..

Net income fell to $604 million, or 65 cents per share, in the third quarter from $685 million, or 74 cents per share, a year earlier. Revenue rose 9 percent to $7.1 billion.

Income from continuing operations, on an adjusted basis, was 67 cents per share, in line with what analysts expected, according to Thomson Reuters I/B/E/S.”

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“Reuters) – PepsiCo Inc stood by its full-year forecast on Wednesday despite beating earnings expectations in the third quarter as it pours money back into its business.

The maker of Diet Pepsi, Frito-Lay snacks and Tropicana orange juice also reported weaker-than-expected revenue, hurt by the stronger U.S. dollar and the exit of certain businesses.

Its shares moved higher in early trading.

PepsiCo is rounding out a transition year in 2012. It ramped up marketing and streamlined its workforce and portfolio to improve performance, particularly that of North American drinks, which had lagged those of Coca-Cola.

In the just-ended third quarter, sales in that business were hurt by decisions to stop selling unprofitable drinks, including some juices and bottled water packages where Chief Executive Indra Nooyi said there was “a hell of a price war.”

“We won’t chase volume growth at all costs,” Nooyi told analysts. She said moving forward, PepsiCo would focus on categories that were growing profitably.

Third-quarter net income was $1.90 billion, or $1.21 per share, down from $2.00 billion, or $1.25 per share, a year earlier.

Excluding restructuring and other charges and a gain on commodity hedges, earnings were $1.20 per share. On that basis, analysts on average were expecting $1.16 per share, according to Thomson Reuters I/B/E/S.

Revenue fell 5 percent to $16.65 billion, below analysts’ average estimate of $16.90 billion.”

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Gapping up 

CYMI +69.0%,  MANH +10.1%, WTFC +3.7%, MT +3.3%, SONC +3.1%, RIO +3%, RBS +2.9%, BP +2.9%,

BHP +2.6%, TEF +2.6%, CREE +2.4%, VHC +1.9%, CSX +1.2%, CHRW +4.3%,  PANL +2%,

CPT +0.4%,  ALU +6.1%, BP +3.8%, TOT +1.3%, GOLD +1.7%, VALE +1.4%, AUQ +1.1%,

KCG +5%,
Gapping down 

FTNT -11.3%, APOL -10.5%, ISRG -5.1%, LLTC -4.8%, OSG -3.5%, IBM -3.3%, POT -3.1%,

INTC -2.5%, HCP -1.8%, ESI -1.7%, ASML -1.5%, FIRE -1.2%, CSCO -0.8%, IMAX -0.6%,

KRG -3.7%, DV -4.7%, ESI -2.2%, LOPE -1.5%,  VVUS -0.7%

ADT, ADTN, APOL, C, CSCO, DISCA, EQR, INTC, IBM, IP, MAA, MUR, NWSA, PSX, RYL, SON, S, TWX, TOL, DIS,

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In Play ,

On the Wires 

Permits up 12%

“ASML Holding NV (ASML), Europe’s largest semiconductor equipment maker, agreed to buyCymer Inc. (CYMI) for 1.95 billion euros ($2.6 billion), its biggest deal ever, to help satisfy customer demand for more advanced technology.

Cymer investors will get 1.1502 ASML ordinary shares and $20 in cash for each stock, ASML said in a statement. That’s 72 percent more than Cymer’s close at $47.83 in New York yesterday. ASML shares fell as much as 5.6 percent today after the Veldhoven, Netherlands-based company said second-half sales will be at the lower end of the previous guidance of 2.2 billion euros to 2.4 billion euros.”

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