Call Of Markets VIII

Some Thoughts:

What is the role of the stock market? I had always learned from my educational and work experience that markets have an important role in free market capitalism. That role is to provide liquidity and minimize friction as much as possible, so as to give confidence to the providers of capital, so that there is an easy, efficient, and cost-effective way to move their capital around as they desire. When this role is being fulfilled, capital is raised and allocated for new wealth-creating industries, which grow, create jobs, create economic growth, and raise standards of living. Those with capital are courted by merchant and investment banks that generate ideas with them, and put them in touch with entrepreneurs with vision. They invest in those entrepreneurs via seed capital, and eventually in initial public offerings, or IPO’s. You remember IPO’s? There used to be this thing called the IPO Calendar, and it is typically a great barometer for how the economy is doing. Today nobody in our industry knows what an IPO is. I actually saw one High Freak on TV three days ago tell MC Cabrera that he thought an IPO calendar was a maintenance schedule for a trade-engine server. Ok, I actually did not, but you get the point. David Weild of Grant Thornton sure does. Please read, perhaps over the weekend, his research piece: Why are IPO’s in the ICU:

(And for the High Freaks… that is ICU and not CPU). And if you work for the SEC, please read this piece twice.

The image I picked for today’s Thoughts is pretty bleak one. It is from a war-themed video game, and those of you with teenage kids have probably seen similar imagery as you walk through the family room while they are playing. I am amazed at the graphics, and I am even more sadly amazed at how desolate, bleak, and shell-like the cities are that serve as the battlefields for our well-armed teens. You see where I am going with this. Our secondary markets have become like that game.

Massive firepower and resources are devoted to the activity of evolved trading (scalping). Huge financial institutions called Exchanges cater to this activity so myopically, that they have lost all perspective of the real role of financial markets. And sadly, our regulators have allowed them to do so. In the name of evolution and “adapt or die” mentality, our markets have been hijacked and stripped of its most important role and function. We need to all adjust our thinking, because our economy demands it. We need to adjust our perspective, because our economy demands it. Markets need to be fair, and inspire confidence! That confidence is needed so that those with capital can feel confident in investing. This confidence is unfortunately on the wane. You hear it at parties, and you hear it on the street. Amazingly you hear it from brokerage firm executives (one who yesterday wrote an article suggesting that the source of our markets problems is the market order! Yes… he thinks the solution is to eliminate the market order and tell the world that our “most efficient and liquid markets” can’t handle the 100yr old market order!)

The confidence must be restored or investors (the owners of the market) will continue to flee, and then our markets will be left to the high freaks (the renters of the market), and exactly like the war video game pictured above, complete with shelled out buildings populated by well-armed kids.

Joe is back in DC today, telling those who will listen how to restore that confidence. Wish him luck.

The Euro has been weakening since 4am, by the way. I have already seen the futures go from flat to down 1.8%. They are now below that all-important 200 day moving average. The Euro is still what the markets are keying off of, but note that our markets caught a bounce from noon onwards yesterday. From that point we saw the financials catch a bid and outperform, which I think is a good sign. HF GO!

Oh… and supposedly there was another Fat Finger in the Eurostox futures just a little while ago, that sent them limit down. Fat Finger is the new goto blame thingy apparently. Kind of like the dog ate my homework.