Doug Kass: The quant bubble

AGA7d

http://www.thestreet.com/story/1 ... e-quant-bubble.html

"Over the course of the past few weeks, I have investigated the increased role of momentum-based and high-frequency-trading quant funds. Though hard to "quantify," I believe that the disproportionate role of these funds, which use algorithmic formulas in their directional trading strategy, is shockingly influential in the current momentum-based climate and is serving as an "invisible hand."

By some estimates, this price-momentum-based quant trading now has doubled in significance since early in the year, to more than two-thirds of the average day's trading. Trades initiated by these funds are insensitive to an underemployment rate approaching 18%, signs of an unsteady recovery in housing, the prospects for higher marginal tax rates and how we are going to finance our budget deficit, which hurdles ever higher. Really!?!

The trade of shorting the U.S. dollar, buying long-dated assets like bonds and stocks, and barreling into commodities (read: gold) and other non-dollar assets is impervious to fundamentals and is likely contributing (in part) to bubble-like conditions in several asset classes. And stocks have benefited from this wave, but it is making many look smarter than they are and making many look stupider than they are!

If you don't believe me about the growing quant fund influence, speak to any prominent institutional trader or salesman: They will tell you that their business with plain vanilla institutions is weak and that the quant funds are the ever growing whales of trading. "

So Kass said "quant funds" are behind the "asset bubble" as money supplier, while the 0-interest rate of Fed is the root cause.

Though I respect Kass - but I think this time he may have put too much emphasis on the "quants". Even if the quants increased their share of trading, the overall volume should be down. Just look at the volume now and two years ago, and the price of NYX and NDAQ. A friend who works at a mid-sized hedge fund said the managed assets are generally down, also they are playing longer-term investment instead of short-term trading - which I can feel somewhat from the market action recently.

I believe the "asset bubble" is somewhat justified at the moment given the long-term prospect of the dollar. It is not just the gov deficit or the trade deficit - the coming entitlements like social security and healthcare will certainly force more money-printing by the central bank.

For the stock market, it is really surprising to see how 'cuts' can boost the bottom line - Autodesk is the latest example. So the earnings will continue to be good, but won't match several years ago due to revenue slack. How high can it go? DOW 11000 is looming. But I doubt we can see 11500 this year.