A few years ago, one of the theories about why the markets were rigged against the small investor was high-speed trading. In a recent article by Annie Massa and Charlotte Chilton of Bloomberg News, the high frequency traders are making less money. In 2009, high frequency trading produced $7.2 billion in revenue, last year it was $1.1 billion. The basis reason is high frequency trading loves choppy markets and the markets have been relatively calm with trading volumes down.

Virtu trades more than 12,000 stocks on 235 markets around the world with relatively few people. It is trying to buy KCG Holdings which has 5 times as many employees. The pure speed trades are squeezed on two sides, by rising cost of infrastructure (computers and microwave towers) and low volatility, which gives you less reward for being the fastest said Eric Pritchett, CEO and head of risk at Boston based Potamus Trading.

Ari Rubenstein co-founder of Global Trading Systems said high frequency traders will move into areas they were not in before to find greater revenues.

Linking to dividend paying stocks, think about High Trading firms, there was a market (and still could be) where the fastest make extra money; the other firms learned to do the same thing and profits fall to while profitable it is not as profitable as it once was. For a dividend paying company to pay dividends in a very competitive markets is good thing and to do it consistently over a long period is a remarkable achievement. Learn and profit from their knowledge.

There are more questions than answers, till the next time – to raising questions.

According to Trevor Hunnicutt of Reuters Blackrock second quarter results failed to impress Wall Street as the world’s largest asset manager cut fees to lure a wave of investor cash into its exchange-traded funds. What is great for the retail buyer is not also great for the retail seller. Blackrock has assets under administration of $5.7 trillion which means it should make money, even if it did nothing. Thanks to Vanguard and other companies, fees on ETFs have steadily going down because they are not actively managed and the less the investor pays in fees, the more money he/she makes. Large fund managers have to continually lower their fees to be competitive, but they do not make as much money because the fees are lower. Ideally, with the lower fees, the asset manager has to sell more funds. In the case of Blackrock, the ETF fees were reduced from $27 for every $10,000 to $9.

For Blackrock the hope is technology will continue to drive down the costs of executing the trades (back office costs). Blackrock made $857 million in the quarter which is an increase of 8.6%.

Linking to dividend paying stocks, for investors paying for funds, they do not mind paying high fees as long as the performance of the fund is high performance; often times there is a mismatch high fees for low performance. Because the indexes are adjusted quarterly by the exchanges, the dogs are changed for the stars, the index tends to rise over the long term. Fees should be low and over the long term your index fund will rise.

There are more questions than answers, till the next time – to raising questions.

If you are a baseball fan, the biggest news in New York is the Yankees are near the top of their standings and Aaron Judge is hitting home runs. In an article by Billy Witz of the New York Times he examines why is Aaron Judge hitting home runs this year as opposed to his last year. Mr. Judge is a big baseball player 6 feet 7 inches, most ballplayers are closer to 6 feet, but that alone is not the reason. In the minor leagues and college baseball ballplayers are drafted they have skills to play baseball, but to stay and lead in the major leagues, the players need to work on their technique. To hit the baseball the strength does not come from the arms, it comes from the hip and legs. The arms help, but brut strength will not be consistent and through a schedule of 162 games, consistency is the name of the game. Mr. Judge worked on his technique during the winter and through video watched the really good hitters – what do they do that I can do? It also helps that Aarone recognizes what is being thrown at him and although he strikes out a fair amount, it is less than he did last year. The adage a base on balls is a good as a hit means you have to have patience at the plate to find the pitch you want. If you watch videos on baseball, there is only a few tenths of a second to do this (or it is hard). One of the methods is to determine each time the batter goes to bat, what are you looking for and what does the pitcher normally do? A good pitcher besides throwing as fast he can is doing the same thing as the batter.

Linking to dividend paying stocks, everyone has skills and a capacity to learn, doing your homework to improve your knowledge is what life is about. Take your time, there is no need to rush in, remember in the marketplace there are lots of people trying to find an edge or try not to play their game. Start with the best companies that will tend to last for 10 years or more and if they pay a dividend so much the better. Individuals can be better than the professionals but generally not for a long time, however understanding how Wall Street works allows you to stay away from the bad pitches.

There are more questions than answers, till the next time – to raising questions.

The Medici family were successful bankers and at this time in the life of Europe, it had recently come out the Black Death (where a 1/3 of the population of Europe died), people were looking for something else. There began a Humanist ideas – where does the individual human fit in? prior to this the theory people had was to live a good life and you will be rewarded in the afterlife. After the Black Death reign of terror, people were asking where do I fit in? Florence was the place for a variety of reasons and it started with the Medici family for they had wealth. It was easily possible to keep it to the family, but the Medici’s family starting with Cosimo spent time reading philosophy and engaging in artists to reflect the new era. Cosimo was the one who loved reading and collecting books, understanding at the time much of Europe did not read, as his library grew he opened it to the public which brought in more ideas and people to Florence. Eventually he endowed a university in Florence to teach about Humanism. At the same time Cosimo Medici was connected to some of the greatest artists of the time. In many pictures of Florence you will see a large dome over a church, the church is Santa Maria del Fiore and the architect was Brunelleschi who discovered how the Romans did what they did and brought the technique to Florence. Along the way he had to invent new methods and try, but he had a good idea of where he was going and was a friend of Cosimo. When you are on the streets one of the masterpieces is the Lorenzo Ghiberti’s bronze doors on the Baptistery of San Giovanni which took over 20 years to complete – new techniques had to be discovered but when artists saw it, changed their lives to what could be done.

Cosimo passed has beliefs to his sons including Lorenzo who was a patron and friend of Botticelli, Leonard da Vinci and Michelangelo whose art people still love to this day and counting. At his time of the world, the scientist was the artist. The empirical method allowed Leonardo to looking at everything in the world and trying to see how it worked. Machiavelli (author of the Prince) examined politics of the day and maybe still today. The Humanists method started with art, poetry and philosophy and moved into politics and science.

Linking to dividend paying stocks, the Renaissance was about seeing the world and the individual differently, in order to happen it needed a patron and the Medici’s were the biggest patron but in a movement there were others. Everyone at one point tries to understand where they fit into it and some will change; some with change it at the borders and others will be content with what is. There is no correct method, but looking at stocks is similar, some you buy for growth; others you buy with income in mind and others will try to find a happy medium which can be dividend stocks – profitable stocks over time leads to higher stock prices and an income (dependable and ideally increasing) which allows you to buy more; be patient and see.

There are more questions than answers, till the next time – to raising questions.

 

If you read books about the Renaissance and Florence, eventually a name will come up that was not an artist but a benefactor. The name is Medici and their profession was banker. Florence is in the northern part of Italy and for a long time there was a healthy wool trade. There was sheep, shearing stations, the wool was made to cloth and fabrics to be shipped across Europe, the center was Florence, Italy. Part of the shipping of the wool was the need of a banker and various banks supplied the trade. This was the origins of the Medici Bank and to serve its customers had a operations across Europe, although the branches in Rome and Venice made the most profit. According to Paul Strathern author of the book The Medici – Godfathers of the Renaissance published by Vintage Books, London, UK, 2007 the secret to the bank was caution, do not overreach themselves or the bank. Some of the loans were to kings and when Kings went into debt, they often threatened the lives of bankers and did not pay their loans – loans were written off to start again because the King was the King. The Medici Bank never had a large expansion, unless they had clients already; they were steady bankers. The Medici Bank did not invent the bill of exchange, though they likely had a hand in the invention of the holding company. As the Medici Bank was profitable and remained one of the leading banks of Florence, it did have larger ambitions. In Italy at the time, the Pope and the Church were the leading income source for Europe was Christian. The Cardinals of the day lived similar to Hedge Fund Billionaires and the Medici Bank serviced the Cardinals. The big money was made if the bank was the banker to the Pope and the Church, however given the competition, the object was to ensure the Cardinal(s) the bank backed became Pope and thus would give the bank the lucrative job. The task was to ensure the Pope saw the bank was loyal in good and bad times. Eventually, the Medici’s backed many Popes and had the account for 20 years.

Another source of revenues was the control of Alum trade was is a mineral salt used in the textile industry to fix dyes on cloth. For many years, the principal supply was a mine in Asia Minor now Izmir originally controlled by the Genoese until the Ottoman Turks took control. They raised the price of the ore and papal authorities reacted by suggesting anyone dealing with the Turks would be excommucated from the Church. Eventually an amendment was found as the Alum mines were depriving the Turks of income, they were technically being used to further the cause of Christianity; the end justified the apparent illegal means and in this case monopoly trading was therefore not a sin. The Medici Bank gained the monopoly and imported Alum for the textile industry. The first thing the bank did was to double the price and for many years was guaranteed a source of income.

Linking to dividend paying stocks, the Medici Bank had many opportunities and exercising caution or saying no to the many opportunities is and was very hard to do. In your everyday life there are many opportunities but you can not say yes to everything. For the Medici is was to concentrate on what you know and add as time goes by. The Alum trade came about because the bank had offices in countries due to the textile trade. To gain the Alum trade, needed the Pope’s permission and the bank had backed him. The cards were in place to take advantage of the opportunity and perhaps that is the lesson.

There are more questions than answers, till the next time – to raising questions.

 

Warren Buffett has a traditional pattern to buy companies, he waits patiently, his insurance companies build up cash reserves, he buys a company at decent price which tends to have a monopoly or near monopoly and then waits till the company regains its growth as the stock rises. One of the cases which fit the Oracle fashion according to Tara LaChapelle and Liam Denning of Bloomberg News is Berkshire Hathaway Inc purchase of Oncor – an electrical distribution company in Texas.

Oncor has an interesting history its parent company is Energy Future Holdings Corp formerly known as TXU Corp and back in 2007 was one of the biggest leveraged buyout in history. This means a lot of debt and since 2008 energy prices have soared, collapsed and flatten out. Berkshire group owns a number of utilities in the Midwest and Oncor is expected to be integrated into them. The 10 million Texans who are customers will be reasonably happy the company is doing what it is supposed to do; the energy regulators will see Berkshire as a well capitalized company and will not fleece the customers and will continually invest in infrastructure.

In terms of Berkshire Hathaway stock a $ 9 billion dollar deal is wonderful, but with an estimated $100 billion in cash to buy acquisitions, the street was looking for something bigger to be announced.

Linking to dividend paying stocks, Oncor has 10 million customers and distributes electrical energy to those homes and businesses or is a plain utility. There is consistency in customers; consistency in energy usage; the regulators will give an inflation plus increase every year; the company can be boring but highly desirable to own. Boring often works.

There are more questions than answers, till the next time – to raising questions.

 

In a column in Bloomberg News Dani Burger and Sid Verma examined quant funds. These funds are built to look for momentum in the markets and take advantage of short term fluctuations. They work well when there is high uncertainty in the financial markets. Unfortunately this year has been relatively calm and at the moment they are down money. According to Pravvit Chinawongvanich, head of derivatives strategy at Maco Risk Advisors the funds are not living up to return and diversification expectations. Three reasons for this change are: overcrowding (many firms chasing the smallest of changes); the continuing central bank stimulus which wants some growth but not too much volatility; and lows in cross-asset volatility.

The money managers continue to attract funds for over $350 billion in assets are being managed and a recent decision by Retirement System of the State of Illinois invested $100 million with KeyQuant SAS a Paris, France based company. The reason is research by AQR Capital Management going through the annual reports of the Chicago Board of Trade shows since 1880, time series momentum – having a long positioning in markets with positive returns and short positions in those with negative returns – has on average posted gains with low correlations to traditional asset classes. The Quant funds look forward to the Federal Reserve lessening so volatility in any market begins and profits can be made.

Linking to dividend paying stocks, with the markets there are all kinds of strategies, some work better in choppy markets, some work better in smooth markets, and some work best knowing how the market has performed. The reality is we do not know, but we do know the market tends to pay more for profitable companies and if they have a dividend so much the better for the investor.

There are more questions than answers, till the next time – to raising questions.

 

Ben Carlson works for Ritholtz Wealth Management and Bloomberg columnist in mid July wrote a column called this time really is different. Sir John Templeton of Templeton Mutual Funds wrote 16 Rules for Investment Success and one of them is this time is different. Often when people do not know they tend to say, well this time it is different to reflect something has fundamentally changed. What has changed is the metrics the street tends to use:

The CAPE (cyclical adjusted price-to-earnings) ratio is above what it tends to be. The CAPE has been used since 1871 and started at 16.7. The average from 1960 moves to 20; the average in 1980 is 21.7. The current reading is 30, is that too high or normal?

Now consider the composition of the corporate and financial markets – they are different

In 1957, the S&P 500 consisted of 425 industrial stocks, 60 utilities and 15 railways

1988, the S&P 500 consisted of 400 industrials, 40 utilities, 40 financials and 20 transportation stocks.

In 1902, US Steel was the biggest US Company with 170,000 workers generating sales of 3,340 sales per employee (90,000 in today’s dollars). Today Facebook generates $2 million in revenue per employee.

50 years ago, retail investors had 90% of the market; now 95% is professional investors.

The first stock market index fund was not created until 1976.

All the above illustrate things change and things changed rapidly in the investing world. Most of them are good, but the street decides. This means making mistakes is a normal, but learning from them is what can be the difference next time. In the market with hindsight everyone can beat the market, but in reality the landscape changes and we are all mere mortals.

Linking to dividend paying stocks, in general the street will value profitable stocks higher than non profitable stocks and those that pay a sustainable dividend will be in business longer than those that do not pay dividends. Part of investing is try not to lose money, a sustainable dividend helps accomplish that goal. Within the dividend world there are many alternatives, the world changes but some things tend to remain constant.

There are more questions than answers, till the next time – to raising questions.

In mid July Vitaliy Katsenelson of Investment Management Associates in Denver recently wrote an article that when you buy a stock even high quality dividend stocks you must remember there are two parts of a stock. The Price/Earnings Ratio and the Dividend, when the PE Ratio rises the stock price rises and that is a good thing, however at some point investors have to look back and think is this a growth stock or a dividend stock. Mr. Katsenelson used the example of Coca-Cola and you may have drunk some of its beverages this summer. The stock pays a 3% dividend but similar to many stocks the PE Ratio has risen to 23 times earnings. Should you buy it for the dividend? Mr. Katsenelson says while the stock is a secure one with a global franchise, it will likely decline in price to reflect its growth prospects to a PE Ratio of 13 to 15 times earnings. At that range, because the stock is mature and will continue to be profitable, you are not paying for growth but collecting the dividend. For Mr. Katesnelson this is a stock is to be bought when the price moves downwards and at the present ratio can be partially sold and other alternatives bought.

Linking to dividend paying stocks, all dividend stocks have a dual role – growth and dividends and it is up to you to choose which is the better role. If you pay a high price, at some point the price should fall perhaps with a market correction. If you are going to hold the stock for a long period of time, the PE Ratio becomes the less important for eventually the street will pay more for profitable companies.

There are more questions than answers, till the next time – to raising questions.