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Algos R Us

02-14-2019

The indices decided to take the day off from rallying and were lower through midday, led by the Dow, which lost 0.5%. Today's proximate cause for disappointment was the horrendous retail sales report, which was dramatically worse than expected for the month of December. However, that data is quite old, so I think the reaction points up how silly these algos are, which -- at the margin -- set prices on a daily basis. Of course, when psychology changes on any topic and human beings become more of a factor, they can swamp the computers, but on some of these rather dull days from a participation standpoint, the algos rule.

Algo See, Algo Do Another illumination of the simpleton nature of the algo "analysis" is the fact they were buying semiconductor stocks today again (initially) thanks to a Wall Street Journal story indicating the Chinese would be making big chip purchases. The reality, however, is far less than meets the eye: "The CEO of the semiconductor association described the offer as an inside 'accounting gimmick' designed to help China make its Made in China 2025 goals" (thanks to Fred Hickey for noting this on Twitter). In other words, there is no substance to that story.

Meanwhile, the chip bulls ignored an interesting nugget from Texas Instruments CFO, Rafael Lizardi, at an investment conference yesterday (thanks again to the reader who sent this, and Fred Hickey). When asked about the fact that some folks were guiding Q2 up sequentially, he said, "We get pretty good visibility at one point ahead on our supply chain. But beyond that, no one has any level of visibility. So it's surprising to hear some of our competitors are making these things up" (emphasis mine). That not only sums it up, it explains why there has been so much insider selling at that company.

In any case, that level of dot-connecting seems to be way above the paygrade of the average algo or modern-day portfolio manager, née asset collector.

Turning back to the action, in the afternoon the indices ground their way a bit higher but finished mixed, with small changes. Away from stocks, green paper was slightly lower, fixed income rallied, and the metals were higher: five cents for silver and a 0.5% gain for gold. In the mining department, Goldcorp reported its results (without a conference call) and they were about in line, although they did take a large write-off triggered by the merger with Newmont.

New High Needed New Gold took a huge write-off as well (which I didn't find surprising) and updated their costs, and it turns out their all-in sustaining costs were higher than I think folks might have hoped, which shows that it is going to take much higher prices to really help them along, and that will also facilitate their repayment of the debt. Said differently, New Gold needs higher prices to be able to do well, so in some ways it is essentially an out-of-the-money call option on the price of gold, with a strike price of about $1,400 or $1,500.

Positions in stocks mentioned: long GG, long GG calls, short TXN, long TXN puts.