What Year is it? A talk by Michael Santoli from Barron’s magazine

Rating: A-

Yesterday I went to the local AAII chapter meeting and heard Michael Santoli from Barron’s magazine talk about What Year is it?. I was very impressed with Mike’s knowledge of the markets, his ability to tie the pieces of history together (he was a history major) and fluently speak about it to a group of about forty mostly white haired gentleman and a few ladies..

Have we been here before? Are we in a third year of a bull market or the first year of something else? He pointed out that an equal weighted S&P 500 index RSP has hit new highs but an index like SPY based on aggregate wealth in the S&P500 is flat, weighted down by the big ones. Right now the Fed is giving us the green light. The market has doubled from its lows, and is reacting to profitability by the companies in its index. He thinks this may last 3 to 4 quarters and after that could change. The emerging markets have been heating up and China has started raising interest rates. Europe is pulling back and raising interest rates and may find itself back in a recession. Bernanke and the Feds are still going through QE2 and is on a track different the rest. The economy and big businesses are still getting all the help it does not need. Big companies are flush with cash. Yahoo, IBM, MSFT, CSCO to name a few. Mike feels we are in for leveraged buyouts in the future. MSFT $8 billion buy of Skype is an example, and that makes hedge funds that short the markets wary. Everyone is selling you the things you missed buying in 2008.  Mike does not think we have a relapse coming. Expect choppiness as we anticipate the end of QE2 Fed’s quantitative easing program, and it is unlikely that there will be a QE3.

The function of the stock market is to capitalize the future value of companies. Big companies are still making profits and the rise in stock prices have been closely related to their profits. CEOs prefer to be cautious about profits in the future.  And being conservative is looked upon well. Still, companies that have been making good monies in emerging markets are having a hard time keeping their enthusiasm down.

Regarding commodities like Gold – he discussed that gold prices are based on market demand. The total gold in the world would fill two Olympic swimming pools. The ETF GLD now holds about 5% of the gold in the market. He thinks that the commodity bubble is not done yet. The ride down of the US dollar has brought manufacturing back to the US. The auto companies are now better sized. He finds commodity related stocks interesting.

He discussed several of the past crisis we have had and possible causes. This is the third consecutive jobless recovery. He felt that the ’87 crash might have been induced by Jim Baker saying we will not defend the US dollar. The 80s double dip recession was engineered by the Feds controlling interest rates. Regarding high frequency trading, he pointed out that the ideal high frequency trades occur during 11:00 AM – 2:00 PM where the index has low volatility and pings between two values, reverting to the mean. The speed of information transfer and ability to leverage it has changed and is approaching the speed of light. News pieces are being sent using algorithms that computers can understand and respond to, much faster that humans reading a news piece. Whereas before, a 20 second lead in news release was significant, they are complimented for a 400 millisecond lead … and the distance of servers from the trading locations are another battle frontier.

The individual trader cannot compete by scalping on a second by second basis. But for us a loss in opportunity is not a cost. Time arbitrage costs are not a problem – 1 month holding is an advantage for the individual trader, and our costs for trading have come down significantly. I gathered that he felt swing trading was still a good place for us to be. No one knows what the future holds. There will always be opinions and we should keep our eyes and ears open; but I was even more convinced that the best weapon I have is my market timing systems that will react to what the market is doing on a slower time frame, capitalizing on macro trends. Perhaps the better talking heads will give us a good idea of the WHERE to place our money instead of the WHEN.

- I thoroughly enjoyed Mike’s talk and will track his work and writings in the future.