On Tuesday, manufacturing data for March was released, rising 0.5, to 53.7. Although this fell short of the expectation of 54.0, this number is encouraging, as it shows the US economy is expanding, albeit at a slower pace than expected. The harsh winter likely impacted this number, so the April report will give us a better idea of the economy’s pace of expansion.
Today, the month-over-month job numbers were released and showed that employment grew in March as non-farm payrolls added 192,000 jobs. While this was just shy of the 200,000 that was anticipated, it still showed that the economy is growing. Still a factor, the harsh winter appears to have held back hiring, although economists noted that the pace of hiring put the economy on firmer footing for the spring. The unemployment rate remained unchanged at 6.7% as the number on new hires was offset by new entrants to the labor force, which increased to 63.2% (up from 63% in February). With the winter weather (hopefully) behind us, economists anticipate that we will surpass the 200,000 per month number, which should slowly drive down unemployment.
High Frequency Trading
We have seen a lot in the news lately regarding High Frequency Trading (HFT). High frequency traders use advanced algorithms and connection speed in order to “get ahead” of a large order coming into the marketplace. Their speed allows them to get ahead of the large order by microseconds. Their goal is to establish a position (long or short) and drive up/down the price, often by fractions of a cent. They profit when the large order hits the market and drives up/down the price further and they exit their position. This practice is nothing new, but it seemed to have gained a lot of notoriety with the release of Michael Lewis’s new book. Media personnel have come down on both sides of the argument. On 60 Minutes Sunday night, Michael Lewis stated that HFT have an unfair advantage, that they manipulate markets, and “front-run” investors and drive up the prices that are paid on a stock. While there are certain elements of truth to this, our opinion is that Lewis is trying to make a mountain out of a mole hill, so to speak, in order to sell his new book. HFT does certainly impact the market, but not in a purely negative way. We have seen the “nasty” side of HFTs, back on May 6, 2010. While HFTs did not cause what is now known as the “flash crash”, they certainly exacerbated it and were a large part of the reason everything happen so quickly. Today, this practice probably has the biggest impact on day traders and hedge funds. ETFs do trade in larger quantities, but generally still below the volume that tends to trigger the HFTs. Mutual fund traders are well aware of how HFTs work, and tend to place their orders in a way that won’t be negatively impacted by HFTs. Retail investors almost always trade in volumes too low for the HFTs to concern themselves with.
Although we agree that high frequency traders can get unfair price advantages on some short-term trades, we do not believe this materially affects long-term investors. Ultimately, we still believe that earnings drive, and will continue to drive, stock prices going forward.
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