Last week I highlighted some of the reasons behind the recent market sell-off: rising bond yields; algorithmic trading; robo advisors and the Dodd-Frank Act Volker rule. Rising bond yields are due to strong economic growth. Algorithmic trading only benefits a very few trading firms and hurts the rest of the market. Robo Advisors are an ill-conceived concept targeted at the lazy investor. Finally, the Volker Rule (and for the most part Dodd-Frank) was the single worst financial law ever passed.
However, as the post mortem began on Wednesday, it became clear that some esoteric pseudo-financial instruments played a huge role in the recent market debacle.
First, there were volatility products which are based on theoretical mathematical constructs. I have warned about the risks in these instruments for years, but as always, it fell upon deaf ears. These instruments which are propagated by the Chicago Board Options Exchange (CBOE) are nothing short of financial heroin. By last Tuesday, the financial markets overdosed on these products. Some of these instruments were closed and liquidated; however, many are still in existence and should be outlawed. They are so complex that nearly anyone who put capital into those instruments were clueless as to what risk they were assuming.
Second there were the cryptocurrencies, another form of esoteric financial opiates. As the cryptocurrency mania hit a fevered pitch, many naïve individuals poured billions of dollars into Bitcoin and Ethereum. As these pseudo-financial esoterica nearly halved in a few days, traders were forced to liquidate and then in turn tried to make up for capital shortfalls by selling stocks.
There are no benefits to the financial markets from continuing to allow volatility and cryptocurrencies to exist. Furthermore, while we are at it, please let’s reinstate the Uptick Rule, Failure to have one in place also negatively impacted stocks in past few trading days.
Equity markets are now in the stabilization phase of a correction. An important element of market stabilization is a failed rally and retest of the correction lows. That took place last Thursday and Friday.
To repeat with emphasis; there is nothing unprecedented in the recent correction. The timing may have been premature, as I was looking for such an event at the end of March or in April. Furthermore, as is usually the case, non-stock market events trigger stock market corrections. This time around it was the bond market.
So, the damage was done to the stock market, but not to the economy. In the fullness of time, markets will return to their old highs. As history has taught us, that might take a few weeks or months.
I the meantime, there was plenty of “Alpha” or stock specific / non-diversifiable money to be made last week. Two such examples in our portfolios are GrubHub (GRUB) which surged over 20% last week and Nvidia (NVDA) which rose nearly 7% after reporting quarterly results last Thursday afternoon. NVDA is our second largest position in the growth portolios.
Finally, there are some housekeeping matters to bring to clinets’ attention. TD Ameritrade’s acquisition of Scottrade has been consummated. Client accounts currently at Scottrade will be migrated over to TD Ameritrade in the next few days and weeks. The process will not require that clients execute any new documents or applications with TD Ameritrade. Existing clients at Scottrade will be receiving new account numbers, checkbooks (if applicable) and online access. By now you should have received a welcome package from TD Ameritrade. If not please contact me.
Disclosure: At the time of this commentary Scott Rothbort, his family and/or clients of LakeView AssetManagement, LLC was long GRUB & NVDA — although positions can change at any time.
Scott Rothbort is the President & Founder of LakeView Asset Management, LLC, a registered investment advisor specializing in high net worth private wealth management. For more information on investing with LakeView Asset Management, LLC call us at 888-9LAKEVIEW or request more information by clicking on the contact button on the top right hand corner of the website. LakeView Management, LLC is a Nevada LLC, with its principal office located in Henderson, NV and branch office located in Millburn, NJ
Scott Rothbort is also the publisher of the LakeView Restaurant & Food Chain Report, a newsletter focusing in on food, restaurant, beverage and agricultural stocks. An individual subscription to the newsletter can be ordered at www.restaurantstox.com Furthermore; Scott is also a professor at the Seton Hall Stillman School of Business in South Orange, NJ.
– Read Scott’s intra-day thoughts and comments on Scutify for which he is a co-founder of its parent company Wall Street All-Stars, LLC
– You can email Scott at firstname.lastname@example.org
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