Once more these are times like I've never seen before - I continue to wonder if this is a permanent change as the macro quant funds dominate more and more of the trading [Cramer - Quants and their Machines] , or if this is just a transitory period. I am hoping the latter as hedge funds had their worst 1st half performance in 20 years so as they stumble over each other trying to out trade one another, all they are doing is losing money for us all. But all you need to do in hedge funds is have 1 huge period of gains (levered up 20:1 or 30:1 preferably) and you have what I call "generational wealth" - the type that takes cares of your grandchildren's grandchildren. Remember a few hedge fund managers made over a billion dollars... in 1 year. [Apr 8: Hedge Fund Manager - Good Work if you can Get It] So why not take outsized risks, with huge leverage - if you are correct you can effectively take care of generations of your family. If you are wrong - you blow up. You close your fund, hang out for 6-12 months, then get the word out that you are starting a new fund and people start sending you money (because your "pedigree" is enough to convince them that the last blow up was a "Black Swan" event) and you play the game over again. It's the biggest craps table in the world. [Jul 12: Some More Hedge Funds Biting the Dust] [Mar 28: Founder of Long Term Capital Failing Again]
Here are some words from another "old timer" - maybe we are all just whiners; those of us who have been around markets for a while. Or maybe this is truly a very different market. My conclusion is if this is the new era - where nothing works off of logic for long periods of time - the retail money will give up. Many have already been (in their minds) fleeced from the early part of the decade when they chased into technology stocks (hand raised, I was one of those guys) and now again in the past year - many people I read anecdotally on message boards are incensed when a company like Flowserve (FLS) raises guidance by $1.25 and then loses $20 of stock value within days. That whole sector of money will simply hang it up. Remember, it's been a "Lost Decade" for investors - anyone buying "the market" has made nothing; and adjusted for inflation they have lost money. [Mar 26 - WSJ: Stocks Tarnished by Lost Decade] No easy answers here and I don't know if one can truly "adapt" to this market where everything is random and bipolar. For me, the advantage of the market over a gambling hall is "research" can give you better "odds" than going to Vegas - that's the selling point. But increasingly the odds are no different than Vegas. And we know in the end the house wins there.
Commodities -- like nickel and zinc -- have also fallen heavily as a result of thinking that a global economic slowdown and the continuing credit squeeze will hurt demand.
The reason that these price moves are so dramatic and occur within such a short period of time is that they're basically speculator driven. Hedge funds now speculate on anything and everything. And they do it from minute to minute, from day to day. Add "everything and anything" to the trading desks at Wall Street's investment bankers and you have a desperation willing to throw billions at "bets. -- many of which pay off spectacularly, if you can read the tea leaves and sharply limit your losses if the market moves against you and watch it hawklike. This is a game that most of us simply don't have the time, patience or stomach for. But we're the victims of it, as we see our long-term "logical' ideas get crushed.
I doubt that this situation will change. I suspect that with limited investment banking fees and rich clients soured on their brokerage houses (because of the auction rate securities freeze-up), the big Wall Street houses will spend more of their time gambling (also called trading). And markets will become even more volatile.
Look at the charts. No one can time when markets change direction. But you could. When it's going up, stay long. The minute you get a one or two percent pullback, sell and go short. Stay short until the market moves against you. Meantime, make sure you get on CNBC and argue "logically" that Gold or Silver or Oil is dead (or alive) for the following reasons. You can always find reasons. And you can always find lazy CNBC reporters who need someone with a shtick and a point of view on how to make their viewers their next bundle. CNBC is only interested in the next bundle. That's why viewers watch and hence, advertisers buy ads.
It's getting super hard to be a long term investor. In the old days, you could pick some "logical" positions, stay with them and eye your monthly brokerage statements with satisfaction. No more.I don't have a simple solution this morning. My wife's "solution" looks increasingly enticing, "If we have it, let's spend it. That way we get something for our money."
Note: I've received emails from people in "regular" (i.e. we actually pick stocks) hedge funds who also are extremely frustrated by the quant hedge funds, and they are suffering along with the rest. So perhaps we are just all a bunch of whiners and need to recognize it is best just to hand our money over to HAL 9000 since he is going to dominate us in the end. I hope not.
A reader sent me this audio link, here is a hedge fund manager who is giving up and returning money to investors, because he says there is too much volatility to meet monthly results. Note - he is a human being, not a computer.