April 7, 2014

Artificial Intelligence

 Although from the title you may be thinking already that this is another descriptive directed at our gleefully disruptive culture, you'd be half correct. With todays follow through of the week that just ended with all of the familiar stock indexes having moved decisively lower, the inclination of the customary observers is to blame something. And with the help of our passionate reporters at the various financial news services there never a shortage of judgments that spring forth, the more bombastic the better, unfortunately at the risk of being less accurate, or even relevant.

Last week hyperbole reached new levels with the release of a book, which I'd rather not plug here, about High Frequency Trading, or HFT. First of all, in my experience the markets are not rigged. Not all of them anyway, but for the purpose of understanding both the aims of investment opportunism and the implications of illegal acts such as front running* the differences shouldn't be lost on anybody who has ever questioned the industry participation of financial engineers, those geek like brainiacs that the press love to call "outstanding in their fields", a description I agree with for less obvious reasons. And while the din of abstract accusations dominated the headlines I believe that today's problems are similar to those which took hold during recent displays of Wall Street greed. Namely that technology could mine both the behavior if not the outright activities of daily market makers, or that such technology is adaptable, and scalable, to any industry interested in maximizing the financial market model. I'm often frustrated when technology is used for mischief, such as the snooping of contacts on your phone while decrying the activities of the NSA, or my favorite that each ambition is not for money but to make the world is a better place. I always see that answer along with many of the solutions as nothing but an effort to reintroduce the elusive claims of artificial intelligence as the key to remove judgmental bias from daily life. Yea right

Never mind that there were many companies that have come to market in the past year without those pesky necessities we portfolio managers look for, such as profits or a practical business plan. Rather the idea that the exquisite promises of perfection that we artificially imagine of our tech is obscuring the problems the lofty biotech companies might have with stock prices soaring ahead of completion of a given study. Likewise faith in energy legislation has given a boost to oil and gas companies while the real catalysts await government action. Or the typical defensiveness that often proceeds the period when companies release their earnings, removed from overly optimistic street expectations. Or dare I say maybe even profit taking to pay a tax bill or a simple, and long overdue, correction.

In short, it's hard to define the reason for a market to decline. Even last week's employment statistics revealed consistent job growth, increased civilian participation in the economy and a stable (as in not rising) unemployment rate. Patience is required for the time being, as a market correction is rarely described as a correction, especially when it can be described in language that carries more emotional punch.