And In Other News
August 8th, 2008 by 
reality
Stock market action has become a series of violent whipsaws as the quant funds chase their tails. Tech stocks remain the darlings, apparently immune from economic weakness. Credit spreads are widening, with the KDP High Yield Index at 70.39, vs. a 52-week low of 70.14. The iTraxx Europe crossover is rising fast. Treasuries are strong, lots of foreign demand. The TED spread remains elevated, at 1.13 as I write.
Another record month for foreclosures in California (which is 40-45% of the US by value). Would-be flippers are snatching up the bank-owned properties at a rapid clip, causing median prices to crater, down 37.7% in the last year, although volumes are up. Watch for the CAR to switch back to average price. Many signs of weakness in commercial real estate. The GSEs are haemorrhaging, both Fannie and Freddie announcing huge losses. Fannie also announced this morning that it was ending Alt-A lending (no and low-doc, principally). Liar’s loans finally going away, also the recent legislation ended DPA (the “Down Payment Assistance” that allowed sellers to fund down payments, channeled through a non-profit). Good luck, you flippers.
Posted in Fixed Income, Real Estate, Stocks, Technology | 
August 8th, 2008 at 8:24 am
Reality,
The stock market defies logic at this point. I think you are right that the quants are responsible. Computer programs cannot be written to analyze news, only price movement. Hence they are entirely “technical”.
The question I don’t have an answer to is who do the quants make their money from?
August 8th, 2008 at 8:38 am
Everybody that they catch on the wrong side as they whipsaw the markets around.
Though I should add that they do have programs that “read” the news and trade on it. Fact. The news comes in a text feed. It is a simple matter to continuously scan the feed for company names or stock symbols, and then pick out associated keywords or phrases, although what they do is much more sophisticated than that. I could write a shell script to do that in a couple of minutes. Since the general subject matter is known, disambiguation is much simplified. You might be surprised how sophisticated automatic analysis of text has become. After all, you don’t think there is some guy at the NSA reading your e-mail in person, do you? No, it is all automated. And if you don’t understand that everything you put on the Internet is read by the government, you need to do a little research.