REITs [Real Estate Investment Trust] are sold like stocks, and they’re held by many individuals and institutional investors. You might have a REIT in your retirement fund. REITs are trusts that own and develop property and earn rental income. […] “They are forced by law — a law created in 1960 — that provides that real estate investment trusts have to meet certain tests,” says Brad Thomas, editor of the Intelligent REIT Investor. “And if they do, they are forced to pay out 90 percent of their taxable income in the form of dividends.” Those dividends are a regular stream of income, and they’re what make REITs attractive to investors.

I put down $513.94 on a REIT index fund. It’s basically a smorgasbord of many different REITs. It contains what you might expect — REITs that own apartment buildings and shopping centers. But Thomas says the range of REITs today goes far beyond that, “from billboards to prisons to cell towers, campus housing. Even solar is on the horizon potentially.”

{ NPR | Continue reading }

related { Agents use a median 250 characters for homes listed under $100,000. For homes priced over $1 million, they go nearly twice as long, with a median 487 characters. }

related { If There Is A “Housing Recovery” Then This Chart Can’t Be Right }

In February 2012, a number of hedge fund traders noted one particular index–CDX IG 9–that seemed to be underpriced. It seemed to be cheaper to buy credit default protection on the 125 companies that made the index by buying the index than by buying protection on the 125 companies one by one. This was an obvious short-term moneymaking opportunity: Buy the index, sell its component short, in short order either the index will rise or the components will fall in value, and then you will be able to quickly close out your position with a large profit.

But February passed, and March passed, and April rolled in, and the gap between the price of CDX IG 9 and what the hedge fund traders thought it should be grew. And their bosses asked them questions, like: “Shouldn’t this trade have converged by now?” “Have you missed something?” […]

So the hedge fund traders began asking who their counterparty was. It seemed that they all had the same counterparty. And so they began calling their counterparty “the London Whale.” They kept buying. And the London Whale kept selling. And so they had no opportunity to even begin to liquidate their positions and their mark-to-market losses grew, and the risk they had exposed their firms to grew.

So they got annoyed. And they went public, hoping that they could induce the bosses of the London Whale to force him to unwind his possession, in which case they would profit immensely not just when the value of CDX IG 9 returned to its fundamental but by price pressure as the London Whale had to find people to transact with. And so we had ‘London Whale’ Rattles Debt Market, and similar stories.

The London Whale was Bruno Iksil [a trader working for the London office of JPMorgan Chase]. He had been losing, and rolling double or nothing, and losing again for months. His boss, Ina Drew, took a look at his positions. They found they had a choice: they could hold the portfolio and thus go all-in, or they could fold. They could hold CDX IG 9 until maturity–make a fortune if a fewer-than-expected number of its 125 companies went bankrupt, and lose J.P. Morgan Chase entirely to bankruptcy if more did. Or they could take their $6 billion loss and go home. What could they do if the bet went wrong and they had to eat losses at maturity? J.P. Morgan Chase couldn’t print money. So Drew stood Iksil down, and the hedge fund traders had their happy ending.

[…]

“Why did the interest rate on the Ten-Year Treasury peak at 4%? And why has it gone down since then? And why won’t it go back to its 5%-7% fundamental.” And they looked around. And they found Ben Bernanke. The Washington Super-Whale. […] From my perspective, of course, the hedge fundies’ analogy between the London Whale and the Washington Super-Whale is all wrong.

{ Brad DeLong | Continue reading }

{ Hedge-fund manager John Paulson’s wager on gold wiped out almost $1 billion of his personal wealth in the past two trading days as the precious metal plummeted 13 percent. Paulson started the year with about $9.5 billion invested across his hedge funds, of which 85 percent was in gold share classes. | Businessweek | full story }

Gold Sell-Off Biggest in 30 Years

Gold was diving 9.5%, reaching at its lowest level since February 2011 on Monday.

What Happened The Last Time We Saw Gold Drop Like This?

Why is gold plunging? The most important factor is that global inflation is falling, reducing gold’s value as a hedge against rising prices.

Did Goldman Sachs release a note encouraging clients to short gold right after receiving the Fed’s FOMC leak information, due to the leak itself?

So, it’s mid-March 2013 and, the S&P 500 is at 1550, right where I said it would be nine months ago. […] I see the S&P continuing to frustrate the majority (that is what markets do).  It may hit 1560-1580 prior to actually having a legitimate correction of 5-10%.  There is so much liquidity awaiting deployment upon a pullback that the pullback will be quick.  Later in the year, it’s very likely we’ll see 1600-plus on the S&P (September-November).  In my view, the market will be a good sell at that point, so will many credit products.  There is no way the Fed can shift its policy stance concurrent with having to immunize a $4 trillion balance sheet going into the end of a fiscal year.  2014 is likely to be challenging.
 
Enjoy this while it lasts. […]

The People’s Republic’s big issues will start in fiscal years 2013-2014.  China Merchants Bank, for example, is already seeing a bigger rise in bad-loan provisioning and lower good-loan growth than Western equity analysts think.  The CEOs of two large Brazilian companies, Vale and Petrobras, are starting to plan for China to “hit a wall” in 2015-2018. Essentially, China will look OK through April 2013 then big problems will hit the country.

Europe will not implode.

{ Secret top source/Minyanville | Continue reading }

Buffett’s Berkshire Hathaway and 3G said last Thursday they would buy Heinz for $23 billion in cash. Almost immediately, options market players noted there had been extremely unusual activity the day before the deal was announced.

On Friday, the U.S. Securities and Exchange Commission filed a suit against unknown traders who it said used a Goldman Sachs account in Switzerland to trade on purported inside knowledge of the transaction.

On Tuesday, the FBI said it was joining in as well.

{ Reuters | Continue reading }

A single mysterious computer program that placed orders — and then subsequently canceled them — made up 4 percent of all quote traffic in the U.S. stock market last week, according to the top tracker of high-frequency trading activity. The motive of the algorithm is still unclear.

The program placed orders in 25-millisecond bursts involving about 500 stocks, according to Nanex, a market data firm. The algorithm never executed a single trade, and it abruptly ended at about 10:30 a.m. ET Friday.

{ CNBC | Continue reading }

One of the many consequences of global warming is that it’s now, for the first time, possible to drill under the sea bed of the Arctic ocean. The oil companies are all there, of course, running geological tests and bickering with each other about the potential environmental consequences of an oil spill. But they’re not the only people drilling. Because there’s something even more valuable than oil just waiting to be found under the Arctic.
What is worth so much money that three different consortiums would spend billions of pounds to retrofit icebreakers and send them into some of the coldest and most dangerous waters in the world? The answer, of course, is information.

A couple of days ago, I called a friend in Tokyo, and we had a lovely chat. If he puts something up on Twitter, I can see it immediately. And on the web there are thousands of webcams showing me what’s going on in Japan this very second. It doesn’t look like there’s any great information bottleneck there: anything important which happens in Japan can be, and is, transmitted to the rest of the world in a fraction of a second.

But if you’re a City trader, a fraction of a second is a veritable eternity. Let’s say you want to know the price of a stock on the Tokyo Stock exchange, or the exact number of yen being traded for one dollar. Just like the light from the sun is eight minutes old by the time it reaches us, all that financial information is about 188 milliseconds old by the time it reaches London. That’s zero point one eight eight seconds. And it takes that much time because it has to travel on fiber-optic cables which take a long and circuitous route: they either have to cross the Atlantic, and then the US, and then the Pacific, or else they have to go across Europe, through the Middle East, across the Indian Ocean, and then up through the South China Sea between China and the Philippines.

But! If you can lay an undersea cable across the Arctic, you can save yourself about 5,000 miles, not to mention the risk of routing your information past a lot of political flash points. And when you’re sitting in your office in London and you get that dollar/yen exchange rate from Tokyo, it’s fresh from the oven, comparatively speaking: only 0.168 seconds old. If everybody else is using the old cables and you’re using the new ones, then you have somewhere between 20 milliseconds and 60 milliseconds when you know something they don’t.

Those are periods of time so short that humans can barely notice them. This essay, for instance, is about 900,000 milliseconds long, and it takes me hundreds milliseconds just to say the word “cable”. Which is a word with more than one meaning. To you, it probably means some kind of wire. But to City traders, it means 1.6254, or something very close to that number. Because in the City, “cable” means the pound/dollar exchange rate. And it’s named that after a transatlantic cable which was used to telegraph the exchange-rate information from London to New York as far back as 1858. […]

Obviously, only computer algorithms can make money from an information advantage which is measured in milliseconds. It’s computers which are making the decisions to buy and sell: if they had to wait for a human to sign off on those things, they’d never make any money at all. […] The more obvious problem with exchanges run by computers is that computers don’t have any common sense.

{ Felix Salmon/Reuters | Continue reading }

photo { Edward Weston }

Mr. Arnuk is a professional stockbroker. But suddenly, and improbably, he has emerged as a leading critic of the very market in which he works. He and his business partner, Joseph C. Saluzzi, have become the voice of those plucky souls who try to swim with Wall Street’s sharks without getting devoured. […]

These two men are taking on one of the most powerful forces in finance today: high-frequency trading. H.F.T., as it’s known, is the biggest thing to hit Wall Street in years. On any given day, this lightning-quick, computer-driven form of trading accounts for upward of half of all of the business transacted on the nation’s stock markets. […]

Proponents of high-frequency trading call them embittered relics — quixotic, old-school stockbrokers without the skills to compete in sophisticated, modern markets. And, in a sense, those critics are right: they are throwbacks. Both men say they wish Wall Street could go back to a calmer, simpler time, all the way back to, say, 2004. […]

The two want to require H.F.T. firms to honor the prices they offer for a stock for at least 50 milliseconds — less than a wink of an eye, but eons in high-frequency time. […]

Mr. Arnuk then eyed the stock’s price on dozens of other trading platforms — private ones most people can’t see. Known as the dark pools, they help hedge funds and other big-money players trade in relative secrecy.

Everywhere, different prices kept flickering on the screens. Computers at high-speed trading firms, Mr. Arnuk said, were issuing buy and sell orders and then canceling them almost as fast, testing the market. It can be hell on human brokers. On the tape, the stock’s price was unchanged, but beneath the tape, things were changing all the time. […]

On the afternoon of May 6, 2010, shortly before 3 o’clock, the stock market plummeted. In just 15 minutes, the Dow tumbled 600 points — bringing its loss for the day to nearly 1,000. Then, just as fast, and just as inexplicably, it sprang back nearly 600 points, like a bungee jumper.

It was one of the most harrowing moments in Wall Street history. And for many people outside financial circles, it was the first clue as to just how much new technology was changing the nation’s financial markets. The flash crash, a federal report later concluded, “portrayed a market so fragmented and fragile that a single large trade could send stocks into a sudden spiral.” It turned out that a big mutual fund firm had sold an unusually large number of futures contracts, setting off a feedback loop among computers at H.F.T. firms that sent the market into a free fall. […]

Since the 2010 flash crash, mini flash crashes have occurred with surprising regularity in a wide range of individual stocks. Last spring, a computer glitch scuttled the initial public offering of one of the nation’s largest electronic exchanges, BATS, and computer problems at the Nasdaq stock market dogged the I.P.O. of Facebook.

And last month, Knight Capital, a brokerage firm at the center of the nation’s stock market for almost a decade, nearly collapsed after it ran up more than $400 million of losses in minutes, because of errant technology.

{ NY Times | Continue reading }

At least four law suits have been filed as of Wednesday, including one suit by a Maryland investor alleging that Nasdaq OMX Group “badly mishandled” the IPO such that trades were delayed and orders couldn’t be canceled. […]

For example, according to his complaint, Goldberg himself tried to make a series of limit buy orders via an online account. When the trades failed to execute, he tried to cancel them. His cancellation orders were reflected as pending for much of the day, and one trade, to purchase Facebook shares at $41.23, was executed three hours after the order was made, when the stock’s price had dropped to around $38. […]

Meanwhile, three other suits have been lodged against Facebook and numerous financial service firms who underwrote or otherwise took part in the IPO.

For example, Lieff Cabraser Heimann & Bernstein, announced that it had filed a class action lawsuit on behalf of all persons and entities who purchased the securities of Facebook, Inc. in connection with its $16 billion initial public offering of common stock on May 18, 2012 (the “IPO”).

The action was brought against Facebook, some of its officers and directors, and the underwriters of the IPO for violations of the federal securities laws.

Meanwhile, Los Angeles law-firm Glancy Binkow & Goldberg LLP, filed its own class action lawsuit on behalf of investors. The complaint, captioned Lazar v. Facebook, Inc., et al., was filed today in the Superior Court for the State of California, County of San Mateo, on behalf of a class consisting of all persons or entities who purchased the securities of Facebook.. It alleges, among others, that the offering materials provided to potential investors were negligently prepared and failed to disclose material information about Facebook’s business, operations and prospects, in violation of federal securities laws.

{ Securities Technology Monitor | Continue reading }

Fri May 18, 2012 11:44am EDT

“A 15 to 20 percent pop is in the realm of possibility,” said Tim Loughran, a finance professor at the University of Notre Dame, before the start of trade. […]

Some expect shares could rise 30 percent or more on Friday, despite ongoing concerns about Facebook’s long-term money-making potential. An average of Morningstar analyst estimates put the closing price for Facebook shares on Friday at $50.

{ Reuters | Continue reading }

related { Morgan Stanley told brokers on Wednesday it is reviewing every Facebook Inc trade and will make price adjustments for retail customers who paid too much }

photo { Joel Barhamand }

The 50-year-old [David Harding] runs Winton Capital, one of a secretive but influential band of computer-driven hedge funds that bet tens of billions of dollars on the world’s financial markets using algorithms - mathematical instructions to computers - which consume everything from bond price moves to rainfall statistics.

For Harding, whose business attracts mainstream pension investors from the world over, all of human knowledge is relevant. Rivals are circling, and data is becoming an increasingly strategic weapon.

Winton’s collection of funds is now worth more than $29 billion. It has returned 14.8 percent a year in its main fund over the past decade - one of the best records over that period in the UK - and Harding is now likely to be Britain’s highest-paid person, according to this year’s Sunday Times Rich List. It says his wealth almost doubled last year to 800 million pounds ($1.27 billion).

Funds like his are known in the industry as trend-followers, managed futures funds or Commodity Trading Advisors (CTAs). Now run almost entirely by scientists, their ‘black box’ trading has entered popular culture: Robert Harris’s latest thriller, “The Fear Index”, features a fictional physics expert like Harding and rogue computer code.
But as algorithmic hedge funds have become better known and sucked in investors’ money, returns have started to falter. Managed futures funds on average have lost money in two of the past three years, gaining just 4 percent in aggregate while the S&P 500 rose 49 percent.

The funds are struggling to cope with skittish markets. But they’re also being squeezed by a more mundane fact: their basic techniques aren’t so hard to copy, and can be worked out with a few internet searches.

{ Reuters | Continue reading }

Whenever we get a day like today — down more than 500 points on the Dow at one point — my phone begins ringing with inquiries from various media.

They always ask the same question: What should investors be doing NOW?

That is the wrong question. The proper one is: What should investors have done in the past to prepare for an event like TODAY?

The bottom line remains that investing is a proactive — not reactive — endeavor. If you respond to every twitch, every news story, each turn of the wheel, you will become whipsawed.

That is no way to invest. And its no way to live life, stressing out over things that are out of your control.

What you can do is anticipate events that are cyclical in nature. These major shudders repeat every few years, so we should not be surprised by them. Construct a plan that allows you to ride out these events without panic or forced errors. You need a plan that anticipates these regular occurrences.

{ Barry Ritholtz | Continue reading }

Why is it that men so often self-destruct? (…) We men just make bad decisions. We can’t help it. We’re men.

Women, on the other hand, do almost everything better. We’ve known this intuitively for a long time. If you didn’t, just ask your wife or your mother. But now there’s a raft of evidence that suggests women are better at everything — including investing.

A new study by Barclays Capital and Ledbury Research found that women were more likely to make money in the market, mostly because they didn’t take as many risks. They bought and held. Women trade this way because they aren’t as confident — or perhaps as overconfident — as men, the study found.

{ MarketWatch | Continue reading }

photo { Katy Grannan }

What goes on in stock markets appears quite different when viewed on different timescales. Look at a whole day’s trading, and market participants can usually tell you a plausible story about how the arrival of news has changed traders’ perceptions of the prospects for a company or the entire economy and pushed share prices up or down. Look at trading activity on a scale of milliseconds, however, and things seem quite different.

When two American financial economists, Joel Hasbrouck and Gideon Saar, did this a couple of years ago, they found strange periodicities and spasms. The most striking periodicity involves large peaks of activity separated by almost exactly 1000 milliseconds: they occur 10-30 milliseconds after the ‘tick’ of each second. The spasms, in contrast, seem to be governed not directly by clock time but by an event: the execution of a buy or sell order, the cancellation of an order, or the arrival of a new order. Average activity levels in the first millisecond after such an event are around 300 times higher than normal. There are lengthy periods – lengthy, that’s to say, on a scale measured in milliseconds – in which little or nothing happens, punctuated by spasms of thousands of orders for a corporation’s shares and cancellations of orders. These spasms seem to begin abruptly, last a minute or two, then end just as abruptly.

Little of this has to do directly with human action. None of us can react to an event in a millisecond: the fastest we can achieve is around 140 milliseconds, and that’s only for the simplest stimulus, a sudden sound. The periodicities and spasms found by Hasbrouck and Saar are the traces of an epochal shift.

As recently as 20 years ago, the heart of most financial markets was a trading floor on which human beings did deals with each other face to face. (…) The deals that used to be struck on trading floors now take place via ‘matching engines’, computer systems that process buy and sell orders and execute a trade if they find a buy order and a sell order that match. The matching engines of the New York Stock Exchange, for example, aren’t in the exchange’s century-old Broad Street headquarters with its Corinthian columns and sculptures, but in a giant new 400,000-square-foot plain-brick data centre in Mahwah, New Jersey, 30 miles from downtown Manhattan. Nobody minds you taking photos of the Broad Street building’s striking neoclassical façade, but try photographing the Mahwah data centre and you’ll find the police quickly taking an interest: it’s classed as part of the critical infrastructure of the United States.

{ London Review of Books | Continue reading }

A dragonfly doji pattern is a relatively difficult chart pattern to find, but when it is found within a defined trend it is often deemed to be a reliable signal indecision among traders and that the trend is about to change direction.

The pattern is formed when the stock’s opening and closing prices are equal and occur at the high of the day. The long lower shadow suggests that the forces of supply and demand are nearing a balance and that the direction of the trend may be nearing a major turning point.

{ Investopedia | Continue reading }

Laws that criminalize insider trading cover corporate insiders and those they tip, but not specifically Congress. (…)

This week the Wall Street Journal reported that during the past two calendar years, 72 congressional aides from both parties made trades in companies that their bosses’ help oversee. Among them are top advisers to Senate Majority Leader Harry Reid and House Speaker Nancy Pelosi. Their timely investments proved profitable, but the staffers deny the trades sprung from inside knowledge, the Journal reported.

{ Bloomberg | Continue reading }

{ How a Trading Algorithm Went Awry | Continue reading | More: May 6 Crash Minute by Minute }

Japan’s surprise intervention in currency markets has caught some of the world’s largest hedge funds by surprise, with big names suffering sharp reversals as the yen tumbled.

The Japanese currency saw its biggest daily fall this year on Wednesday, dropping more than 3 per cent from a 15-year high of Y82.88 against the dollar after the Japanese ministry of finance said that it had staged an intervention in the market, the first such action by Tokyo in six years.

Three London-based hedge funds suffered on their bullish yen positions, according to people familiar with the funds’ performances. All three funds use computer models to automatically spot and ride market trends, making them vulnerable to unexpected events including surprise action by governments and central banks. Other funds understood to have been hit by the intervention include several large global macro hedge funds and currency trading specialists.

{ Financial Times | Continue reading }

Mysterious and possibly nefarious trading algorithms are operating every minute of every day in the nation’s stock exchanges.

What they do doesn’t show up in Google Finance, let alone in the pages of the Wall Street Journal. No one really knows how they operate or why. But over the past few weeks, Nanex, a data services firm has dragged some of the odder algorithm specimens into the light.

The trading bots visualized in the stock charts in this story aren’t doing anything that could be construed to help the market. Unknown entities for unknown reasons are sending thousands of orders a second through the electronic stock exchanges with no intent to actually trade. Often, the buy or sell prices that they are offering are so far from the market price that there’s no way they’d ever be part of a trade. The bots sketch out odd patterns with their orders, leaving patterns in the data that are largely invisible to market participants.

{ The Atlantic | Continue reading }

artwork { Jean-Michel Basquiat }

related { Quants: The Alchemists of Wall Street | video | Thanks Douglas }

Above the Restoration Hardware in this Jersey Shore town, not far from the Navesink River, lurks a Wall Street giant.

Here, inside the humdrum offices of a tiny trading firm called Tradeworx, workers in their 20s and 30s in jeans and T-shirts quietly tend high-speed computers that typically buy and sell 80 million shares a day.

But on the afternoon of May 6, as the stock market began to plunge in the “flash crash,” someone here walked up to one of those computers and typed the command HF STOP: sell everything, and shutdown.

Across the country, several of Tradeworx’s counterparts did the same. In a blink, some of the most powerful players in the stock market today — high-frequency traders — went dark. The result sent chills through the financial world.

After the brief 1,000-point plunge in the stock market that day, the growing role of high-frequency traders in the nation’s financial markets is drawing new scrutiny.

{ NY Times | Continue reading }