"High Speed Computers? Common Sense is the Answer - At Least for Markets"

Sydney M. Williams

Thought of the Day

“High Speed Computers? Common Sense is the Answer – At Least for Markets”

June 2, 2010

An article in Yesterday’s New York Times cited the fact that China’s Dawning Nebulae based at the National Supercomputer Center in Shenzan has achieved a sustained computing speed of 1.27 petaflops, the equivalent of one thousand trillion (quadrillion) mathematical operations a second, making it, in terms of theoretical peak performance, the fastest computer in the world; however, in terms of a standardized test, the machine ranks second to the Cray Jaguar supercomputer located at the Oak Ridge National Laboratory in Tennessee. I doubt my stop watch could catch the difference.

Apparently this is not good enough. The article goes on to suggest a new system is being built to compute at exascale performance – a million trillion, which would be a “1” followed by 21 “0”s. Pretty soon these machines will be fast enough to attract a new breed of high frequency traders. While the last sentence was written facetiously, there is little doubt in my mind that they (high speed traders) have been a major source of the ebbing confidence among investors.

Their activity leads to the question – what weighs upon the market? The list of concerns is well known: besides high frequency trading, Europe, Iran, North Korea, Israel and its blockade, the oil spill in the Gulf, greater government intrusion into business, deflation, inflation, high levels of debt at both state and federal levels, forthcoming financial regulation and cap and trade, insider selling, tax increases – the list goes on.

But I suspect a significant part of the problem is psychological. A year ago everything seemed possible. We had a new President who was young, articulate, bright and confident. Granted, the Country and the world were in recession, having suffered a near-fatal financial collapse, but it was one which we had survived, and recession seemed a small price to pay. Anything and everything seemed possible. President Obama provided a sense of renewal, trust and belief, as we faced the future. While there were doubters, giant steps were taken, like the stimulus package. Unemployment would recede; jobs would be created. People believed, or wanted to believe in, policy initiatives, such as health care reform, financial regulation, cap and trade. The Muslim world would become our friends. It was a case of “out with the old (anything Bush) and in with the new (anything Obama).” And the Economic Cycle Research Institute (ECRI) omnisciently predicted, in May 2009, the economic recovery that began in the third quarter.

Then things began to turn. The very size of the stimulus package began to weigh on investors and people began to question its merits. Health care reform rallied opposition, like the Tea Party, and questions arose about too much government. Just as Macbeth, upon hearing of the death of Lady Macbeth, saw his hopes turn to ashes; investors soon became concerned that the principle of Murphy’s Law would prevail – “Anything that can go wrong will go wrong.”

Recent news lent credibility to those concerns. British Petroleum’s oil spill in the Gulf is becoming one of the worst environmental disasters in U.S. history; Iran, according to some studies, now has enough material to make two nuclear bombs. The “flash crash” on May 6 spooked investors. Europe appears incapable of dealing with their crisis, which is bound to result in even more bank write-offs. According to the West Coast’s Mechanics Bank, an estimated $8 trillion in federal, state, corporate and commercial real estate debt will have to be refinanced between 2012 and 2014. Data from ECRI suggests that the economy, while still in recovery, is showing signs of slowing.

However, things change. The time and the circumstances cannot be predicted. What would be nice would be a leader in the mold of France’s great World War I general, Ferdinand Foch, who, at the Marne, wired his commander: “My center is giving way, my right is in retreat; situation excellent. I shall attack.” Regardless, to borrow another line from Shakespeare, this from Henry VI, Part 3, “the smallest worm will turn being trodden on.” Bad and seemingly hopeless situations will reverse. I recognize that that provides cold comfort to the portfolio manager dealing with redemptions from dispirited investors. So we must resort to the things we can fathom – fundamentals: the study of companies, understanding their cash flows and determining values. Fear causes emotion-filled decisions. We can either abet the volatility of the market, or we can let that volatility work for us, to use “Mr. Market” speak.

High speed and performance computers will permit great advances in medicine and defense. But, in markets, the speed of the fastest computer cannot substitute for the common sense of the individual and I, for one, would always rather invest alongside common sense.