Changing the 'lockup' rules... Who will benefit from the government's changes?... Get ready for more and bigger 'Flash Crashes'... An arms race based on speed... How you can protect yourself from this situation... Poor Vladimir... Putin knows his math... 'The king isn't leaving the Kremlin ever'...
A leg up for those who need it least...
This story hasn't made big news yet... but this morning, news service Bloomberg reported on a governmental change that could create a huge shift in how markets receive key data.
And more important, this move could give the most sophisticated traders one more leg up...
According to the report, the federal government is altering its longstanding practice of giving credentialed financial reporters early access to market-moving economic data. This information includes reports on things like jobs growth and unemployment... retail sales... the producer price index... and gross domestic product ("GDP").
For nearly 40 years, U.S. governmental agencies like the Bureau of Labor Statistics would lock reporters in a room for about 30 minutes before the official release of their monthly data. That would give reporters an opportunity to break down the complex data sets and prepare their stories ahead of time.
As technology advanced over the years, the government's security has followed suit to ensure fair and equal access to the data. Today's so-called "lockup" rooms have Internet connections severed by central switches. Reporters' smartphones are bagged up and locked away. The system has largely worked and resulted in very few leaks over the years.
That all appears to be coming to an end... Now, at least for some agencies, reporters will get the data at the exact moment it's posted publicly on the government agencies' websites.
The Department of Agriculture made a similar decision under the Obama administration in 2012. It resulted in posting delays to the department's website and shifting trading to later in the day.
It's unclear why the government is changing the lockup rules now...
According to the Bloomberg report, "The government has cited security risks and unfair advantages for news media in prior changes to lockup procedures."
Some speculate it's a direct shot at Michael Bloomberg, founder of the news service. Bloomberg has announced that he's running for president in this year's election, and he's spending millions of dollars on ads attacking President Donald Trump.
Others have pointed out the current administration's contentious relationship with the media in general.
But one thing does seem likely... The decision will be a big help for a group of investors who need it least...
Get ready for more – and bigger – 'Flash Crashes'...
We know one veteran journalist who told us that 20 years ago, he was doing well if he could publish his story 10 seconds or so after the government's official data releases.
Today, that's considered glacial... hardly worth publishing at that point.
The reason is the rise of algorithmic trading.
Now, trading is done in fractions of seconds. The most sophisticated traders scrape the key data right off the government's websites the moment the numbers are released. That gives them the opening to place trades that anticipate how the market will react to the information. Everyone else has to follow up a second or two later... when the news agencies publish the data.
If you have any doubt about the new era of algorithmic traders' ability to create volatility in the market... just think back to the "Flash Crash" on May 6, 2010. That's when the Dow Jones Industrial Average plummeted 998.5 points – about 9% – and then snapped back in roughly half an hour.
As author Michael Lewis detailed in his book Flash Boys, the cause was algorithms...
Back then, more and more of Wall Street's heavyweight hedge funds and institutional investors were starting to use quantitative models to determine which sectors and asset classes to invest in. So as different markets hit key "trigger" levels, their models would automatically initiate trades... either buying, selling, or selling short stocks and sector funds.
The problem is that the way these models were set up, a surge of buying could trigger more buying... and selling could beget more selling. Stansberry Research founder Porter Stansberry wrote about the phenomenon in the Digest back in February 2018...
What's driving the market action today is a panic based on math, computers, and futures – not rational thinking...
Various algorithms and models are driving decisions based on the rules of [exchange-traded funds] and other models. Dealers are engaging in forced selling to balance their books (buying puts). Unfortunately, most folks didn't understand the correlations between so much money following pro-cyclical actions.
The situation has only gotten more extreme over the years, Stansberry NewsWire editor C. Scott Garliss told us in a conversation earlier today. Wall Street continues to employ vast quantitative computing power and proprietary trading algorithms. In particular, these institutions use a class of asset managers called "commodity trading advisors" ("CTAs").
According to Scott, these CTAs as a group have seen assets swell by 36% to roughly $360 billion over the past 10 years. And because they're hedge funds, Scott said, you have to assume they're roughly three to five times levered on those assets... meaning they really have a market impact of roughly $1.1 trillion to $1.8 trillion.
Milliseconds turn into billions...
Today, these CTAs are engaged in a sort of arms race based on speed, Scott explained. They're trying to gain millisecond advantages over everyone else in capturing time-sensitive data to make money.
These groups have rented out space to place their servers as close as possible to government data centers and major exchanges around the world. So when the rules for reporting the data change, you can bet it will alter the way the market works...
Imagine you're in New York and are waiting on data from the Federal Reserve bank. Your competitor in Baltimore is waiting on the same thing... If the information only has to travel down a corridor to where you've "co-located" your server – but has to travel 200 miles to your competitor – you win.
We're talking milliseconds of a difference, but that's big enough for one algorithm to get a leg up on another. As Scott told us today...
The time difference isn't much, but that split-second is just enough for your models to latch onto key words or numbers that trigger indiscriminate buy or sell programs to take advantage. By the time the investor in Baltimore has received the same information, you've already bought or sold the same ideas ahead of time.
Hedge-fund titans, like Point72 Asset Management and Citadel, make more than $1 billion a year mining this data before anyone else, Scott noted.
That's where the changes in information releases come into play...
More from Scott...
Before the announcement, these programs were competing for milliseconds against everyone else. Now, with media-lockup rules being changed, it will take even longer for investors without entire research teams to discern what the data means.
The advantage goes to the big-league hedge funds that have built investing strategies around the releases.
Now, the lag time between their execution and everyone else's increases, making their advantage even more considerable.
And because everyone else will have to chase, the market's volatility may increase as well, Scott said.
What does this mean for you?
Obviously, the individual investor won't be involved in a high-speed algorithmic arms race.
But this situation reminds us how important it is to rely on strategies that protect your portfolio from volatility... and follow the guidance of "been there, done that" experts like Scott and our other editors, who know the ins and outs of how the hedge-fund world moves the markets.
You can protect yourself in a few specific ways... Focus on income investments... Dedicate a portion of your portfolio to gold and gold stocks... and generally concentrate on the stocks of high-quality, enduring businesses.
That should all sound familiar to regular Digest readers. As Scott told us...
By drilling down on companies with great business models and concepts, you can avoid the ups and downs of algorithmic-driven market swings.
And more important, instead of putting all of your eggs into one basket, by spending all of your resources on a single idea, you want to diversify it across a number of ideas.
That way, you can sleep better at night knowing a hiccup along the way doesn't spell disaster for your retirement.
This is exactly why we urge subscribers to take a closer look at Stansberry Portfolio Solutions...
In these services, our Director of Research Austin Root draws from a broad range of our leading individual advisories to create balanced, diversified, and fully allocated portfolios based on our best ideas and investing philosophies.
We designed the Portfolio Solutions products to take the work out of combing through the volume of research we produce. You sign up... follow our recommendations... and don't have to read another thing. They're one-stop-shops, run by Austin... someone who has worked with some of Wall Street's biggest names and hedge funds.
To learn more, be sure to check out the replay of our live event from earlier this week...
Austin sat down for a live conversation with Porter and editors Dr. Steve Sjuggerud and Dr. David "Doc" Eifrig... They focused on their market outlooks for 2020 and shared their predictions for the year ahead.
But they also discussed how our Portfolio Solutions services can help individual investors like you navigate what they see on the horizon. The event happened on Tuesday night, but if you missed it... we encourage you to tune in to the FREE replay right here.
Meanwhile, another headline broke yesterday that isn't getting enough attention for what it could do for markets and investors...
Poor Vladimir...
It was overshadowed – impeachment and a major trade deal will do that – but there was big news yesterday out of Russia... one of the world's best-performing stock markets last year.
As the Financial Times reported, President Vladimir Putin has "started a sweeping revamp of Russia's leadership, replacing his long-serving prime minister with a little-known technocrat and launching a constitutional overhaul that could allow him to wield power after the end of his presidential term in 2024."
In his annual state of the nation address, Putin outlined plans to "curb the powers of the future president and boost those of parliament," according to the Financial Times. Those plans may sound well-intentioned, but the result could "pave the way for Putin to extend his 20-year rule in a new capacity."
Our international editor, Kim Iskyan, spent nine years in Moscow...
He worked as a stock analyst, investment banking research head, and hedge-fund manager. We reached out to him this morning to get his thoughts on what it means. He told us...
Being an autocrat is tough. Sure, there are plenty of perks – dirty money beyond your dreams, near-absolute power, and the impression that the entire country adores you – but there's only one problem: You're stuck for life.
That's because if at some point you decide that you want to retire to your country palaces to count your gold bars, a new would-be autocrat will step into your old throne. And his first order of business would likely be to throw you in jail... wreck your legacy... and undo your life's work. That's because he wants to be you – and he can't do that without destroying you.
Putin knows his history – and also knows his math...
He's 67 years old, and has been in power for 20 years. His current term in office ends in 2024.
As Kim pointed out, Putin skirted the Russian constitution's term limit before in 2008... Putin installed his prime minister, Dmitry Medvedev, as president for a term before returning to the Kremlin.
Like pretty much every other dictator in history, Putin doesn't want to give up power...
And Kim said Putin isn't really setting up his new prime minister, Mikhail Mishustin – a political nobody who was the head of Russia's tax service – to succeed him. (Can you imagine the head of the IRS – whoever it is – becoming president of the U.S.?)
"Whatever he does, I'm pretty confident Putin won't be yielding power or handing over the reins to someone else," one of Kim's old Moscow banking colleagues who trades Russian stocks out of London told him earlier today.
Putin's proposed changes to the constitution will pave the way for him to remain in power for as long as he wants. Maybe he'll have a different title – for example, as head of an advisory body called the State Council that would get more powers under proposed changes. Maybe someone else will be president in name.
"But make no mistake – if Putin gets his way (and he will), the king isn't leaving the Kremlin, ever," Kim said, "except in a rectangular box."
Putin's decision to pass on retirement is bad news for the Russian economy...
Despite multiple stillborn attempts at diversification, Putin is mostly stuck in the dinosaur days of the 1990s, Kim said. Commodities prices – oil and gas, especially – dictate economic growth, which has averaged around 1.9% per year since 2010. That lags the growth of the U.S. GDP of around 2.3% over the same time period. It's a minor-sounding difference that can quickly add up over time.
With a few exceptions, state-owned companies dominate most sectors of Russia's economy. "There's very little innovation in the economy," one of Kim's Moscow friends recently told him. "And pretty much everyone who wants to do something interesting has left."
There's a reason that Russia-born Sergey Brin founded Google in Silicon Valley – not Moscow.
Despite that, Putin's move is likely good for Russia's stock market in the near term.
Always remember – markets love certainty...
And few things seem as certain today as Putin's authority in Russia.
However Putin eventually leaves the world stage, that change will create a huge upheaval – and even chaos – in Russia. But the recent moves kick that can down the road for whatever it is that comes next.
For now, knowing that Putin isn't going anywhere will probably help Russian stocks continue their hot run.
Our colleague Chris Igou pointed out the opportunity in Russia in the January 8 Digest. He cited the VanEck Vectors Russia Fund (RSX) as a simple, one-click way to play it.
The Russian stock market is still cheap... It currently trades at a price-to-earnings (P/E) ratio of around 6.7 times (depending on the index you use). That's a 50% to 80% discount to the rest of the world and compares with a P/E of 22.1 for the S&P 500. That discount has remained about the same for about the past 15 years, and it won't close anytime soon.
But as long as commodities prices don't collapse, and something funny doesn't happen – like more U.S. sanctions on Russia or massive protests against Putin's power grab – the Russian stock market will likely continue to rise.
New 52-week highs (as of 1/15/20): AllianceBernstein (AB), American Express (AXP), Booz Allen Hamilton (BAH), Becton Dickinson (BDX), Bristol-Myers Squibb (BMY), iShares Select Dividend Fund (DVY), Editas Medicine (EDIT), New Oriental Education & Technology (EDU), Equinox Gold (EQX), Franco-Nevada (FNV), Hannon Armstrong Sustainable Infrastructure Capital (HASI), Hologic (HOLX), iShares U.S. Home Construction Fund (ITB), iShares Russell 2000 Fund (IWM), Johnson & Johnson (JNJ), Coca-Cola (KO), Lennar (LEN), Leagold Mining (LMCNF), Lockheed Martin (LMT), Novo Nordisk (NVO), NVR (NVR), Invesco High Yield Equity Dividend Achievers Fund (PEY), Aberdeen Standard Physical Platinum Shares Fund (PPLT), ResMed (RMD), ProShares Ultra S&P 500 Fund (SSO), TAL Education (TAL), ProShares Ultra Utilities Fund (UPW), ProShares Ultra Russell 2000 Fund (UWM), Vanguard S&P 500 Fund (VOO), and Aqua America (WTR).
In today's mailbag, a few subscribers write in about our big event on Tuesday night... including their thoughts on Porter poking fun at some of Doc's charts during the discussion. Share your feedback with us at feedback@stansberryresearch.com. We can't respond to every note, but we do read them all.
"I just watched the replay of last night's presentation by Porter, Steve, and Doc. I'm already a subscriber (Alliance), but I still found the presentation delightful, especially the banter. I have to let you know that Doc's charts were very clear and helpful – some of the clearest technical charts I've seen. I would agree, though, that [infrastructure as a service ("IaaS")] could have used a parenthesis or subtitle that defined it and made it clear that it has mostly to do with 'cloud computing.'" – Paid-up Stansberry Alliance member Mike H.
"I got your charts, Doc! Porter, you are hysterical. I love to watch you cajole your buddies! 'Congratulations guys, a stock nobody will buy, and a stock everyone already owns!' Too funny!!" – Paid-up subscriber Stephen O.
"Kudos to Austin Root and the three main partners on the 2019 portfolio results and also for the sage advice [Tuesday] night. I think most of us appreciate your collective efforts to steer us into more rational stock choices and long-term holdings.
"I enjoyed the big differences in personality and speaking style, almost in an Alice in Wonderland sense: Austin, a crisp and careful Delineator of Assets; Porter, enthusiastic motormouth; Steve, a born storyteller painting a canvas or two for us; and Doc, the quiet man...
"I know I had a wonderful time in the stock market in 2019 (including gold), and I'm grateful. Thank you all." – Paid-up subscriber Margaret H.
Regards,
Carli Flippen
Baltimore, Maryland
January 16, 2020