Randomly Noted

Sen. Charles Schumer, D-NY, is concerned about a name. So is a Congressman from Florida. But they’ve got it wrong. Whether a name is kept or not, the world it represented already is gone.

Schumer and Rep. Ted Deutch, D-Fla., and no doubt other U.S. politicians yet to be heard from are hell-bent that if a merger between Deutsche Borse and NYSE Euronext takes place, as expected, the New York Stock Exchange name be preserved.

Schumer even went so far Sunday as to say the New York Stock Exchange name has to come first in the combined and so far undeclared title of the new entity, which would be the planet’s largest exchange. This despite the fact that Deutsche Borse shareholders would have 60% of the new entity.

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It wasn’t a good day for Chinese stock markets on Monday. And unless U.S. companies unleash some positive earnings news on Tuesday, stock markets in the U.S. could be under pressure as well.

The Shanghai Composite Index closed down 3.0% while the Shenzhen Composite Index fell 4.3%. Both were reacting to Friday’s news from the People’s Bank of China, which said it will raise the share of deposits that banks must keep on reserve by half a percentage point. this is the seventh time in a year the bank has done so and follows two interest-rate hikes since October.

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Standard & Poor’s made some tweaks to its S&P 500 stock index in the U.S. based on market cap sizing. But when you look at the companies headed into the index – and those headed out – it makes a statement about how much the corporate world we live in has changed.

On its way out is Eastman Kodak, a company that didn’t see the digital revolution coming to the camera and film business and moved too late to try to recapture a business it owned. Also is out is warehouse superstore Office Depot who has lost business to placed like Amazon. And then there is the old gray lady, the New York Times. The newspaper business has been in a recessoin much longer than our economy has been in one.

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The FX market is hot. About $4 trillion of currencies are traded every day – a number seen hitting $10 trillion in 10 years. Banks around the world are bulking up their trading desks. And Mrs. Watanabe (the proverbial Japanese housewife who day trades while her husband is at work) continues to do more business than ever all over the world.

So, it is with that backdrop that two of the platforms that cater to the retail investor are looking to go public. Gain Capital, which runs the Forex.com website, is hoping to sell 11 million shares for a maximum $190 million, while FXCM is hoping to sell 15 million shares from $13 to $15.

And while there is no question that FX is hot, investors may approach these IPOs with a little caution.

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These are tough days for stock pickers.

“Macro” is everything. Broad trends in economics, risk, regulation, currencies, monetary policy and trade are sweeping stocks in one direction or another.

It’s been mostly up lately, but up or down, ‘macro’ has for now made a mockery of the careful study of individual companies and industries to discern the best investment bets.

To be sure, no investment trend lasts forever, but this one has been hanging on for a while.

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Could the ‘flash crash’ of last May hurt the Federal Reserve’s effort to reflate the U.S. economy? Below is a wholly speculative connect-the-dots execricse that will, if nothing else, report on a disturbing trend in stock market investment.

Let’s start with the Fed’s presumed goals in embarking on another round of so-called quantitative easing, which the central bank is widely expected to launch after its November monetary policy meeting. The Fed is expected to resume purchases of Treasury securities, thereby pumping more money into the financial system.

Some of that additional money is expected to be invested in riskier assets (since bond returns will be held down by Fed buying). Those riskier assets include stocks. Higher stock prices would mean more wealth (at least on paper) and presumed increased consumer spending, leading to more demand, more job creation and lots of other good things.

Even at best, there are a lot of co-dependent events in this scenario.

The new concern is that individual investors appear to be staying out of the U.S. equities markets, despite the third quarter share price run-up that ususally draws them in.

“In the past 25 years, there has never been a three-month gain in the S&P 500 of 10% or more that was not accompanied by net inflows into equity mutual funds and Exchange Traded Funds,” wrote Jeffrey Kleintop, chief market strategist of LPL Financial, citing data from the Investment Company Institute.

Yet so far in the second half of 2010, Kleintop wrote, the S&P 500 is up about 15% and individual investors have been net sellers every week.

Kleintop thinks it has a lot to do with the “flash crash” of May 6, when stock prices swooned historically only to mainly snap back before the day’s trading was done. Individual investors “remain distrustful of the integrity of the U.S. stock market,” he wrote.

Others have cited signs of an increased professionalization of the U.S. stock market, with volumes pumped by high frequency traders. “Without the return of the individual investor to the U.S. stock market, further gains in the current rally may be hard to come by,” Kleintop said.

That brings us back to the stretched causal relationship mentioned up top. A “flash crash-” traumatized individual investor sector might keep stocks from continuing to climb, upsetting the Fed’s strategy for a bit more inflation and more noticeable economic growth.

Let’s imagine you are an investor of certain but not overwhelming means who researches and buys the common shares of specific U.S. companies.

You read the securities firms’ research reports on these companies, you know how to navigate balance sheets, perhaps you have your own ideas about societal trends that will influences companies’ success and failure.

You are supposed to be one of the mainstays of the stock market, the fundamental, long-term individual investor who tries to apply research and reason to stock picks.

Then, concerned about what caused the “flash crash” of May 6, 2010, you plow through the recently released 104-page report compiled by the staffs of the Commodity Futures Trading Commission and the Securities and Exchange Commission.

Early on, you come across this lengthy paragraph: “HFTs (high frequency traders) and intermediaries were the likely buyers of the initial batch of orders submitted by the Sell Algorithm, and, as a result, these buyers built up temporary long positions. Specifically, HFTs accumulated a net long position of about 3,300 contracts. However, between 2:41 p.m. and 2:44 p.m. HFTs aggressively sold about 2,000 E-Mini contracts to reduce their temporary long positions. At the same time, HFTs traded nearly 140,000 E-Mini contracts or over 33% of the total trading volume. This is consistent with the HFTs’ typical practice of trading a very large number of contracts, but not accumulating an aggregate inventory beyond three to four thousand contracts in either direction.”

And you think, is this the same market where your research and thought goes into picking companies whose earnings you believe, over time, will grow? Moreover, can these two ideas of stock markets co-exist?

The SEC and CFTC joint report on the May 6 stock market “flash crash” was released today and among other things, it confirms the complexity that surrounds how financial markets work today. And, it introduces a little bit of irony into what happened that day, when the stock market cratered in a matter of minutes: the trade that kicked off the chaos was executed through a mechanism often meant to reduce volatility, not create it.

The report said the mayhem began at 2:32 p.m. that day when a mutual fund (since identified as Waddell & Reed) began a hedging strategy to offset risk in its equity portfolio. It wanted to sell $4.1 billion of e-mini futures contracts (these replicate the S&P 500). And it was to be done through Algorithmic trading.

Algo has become more known as computer-executed orders meant to time the market. A piece of economic data is released and an algo traders computer quickly starts selling based on programs that the trader created. But the original algo was meant to take somewhat large orders to buy and sell, split them up and execute them into the market so as not to create disruption or tip off others that a big order was being placed.

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As an asset class, private equity is a losing proposition.

That bald assertion comes not from an outside critic, but from an insider, Erik R. Hirsch, the chief investment officerof Hamilton Lane, a private equity asset management firm with more than $100 billion managed and advised.

Private equity, from the point of view of investors, or limited partners, is expensive, it is illiquid and often doesn’t beat returns from equity markets.

So what’s the punchline from Hirsch, who was interviewed today at the Dow Jones Private Equity Analyst Conference in New York by Laura Kreutzer of Dow Jones? (Dow Jones employees write for this blog.)

While the industry taken as a whole might not be a great deal for institutional investors (Hirsch said he wouldn’t want to own an index of the private equity asset class), Hirsch talked of a “brass ring,” s certain club of private equity managers who consistently outperform public markets. If investors find them, long-term rewards will allow them to put up with high fees, the significant length of investment and lack of liquidity.

In the same interview, Hirsch bemoaned the fact there’s no agreed-upon benchmark for the private equity sector. It allows for a variety of measures and more managers than warranted to refer to themselves as top performers.

As for the health of the sector, Hirsch said that as a class, private equity is adding capital. That fact means this is not an industry in trouble, not an industry in “a death spiral.”

A lot has happened in the past few years to discourage individual investors in U.S. stocks.

Credit crunch, recession, weak economic recovery, still-slumping house prices and more have taken their toll on small investors’ psyches.

More fundamental is the sense that the stock market, as even knowledgable investors used to know it, no longer exists. Not in a  world of high-frequency traders, drak pools that make up significant amounts of daily trading liquidity and all the rest.

So it’s not necessary a causal relationship, but worthy of note, that since the “flash crash” of  May 6 every single week has seen an outflow of money from stock-based mutual funds.

Securities and Exchange Commission Chairman Mary Schapiro made that point in a speech today. “Retail broker-dealers have told us that their customers – individual investors – have pulled back from participating in the equity markets since May 6,” Schapiro added.

It’s hard to find fault with that inaction given the still hard-to-understand nature of that wild spring afternoon aptly named the “flash crash,” when stock prices took an amazing free fall only to recoup much of those losses minutes later.

Though Schapiro employs a lot of question marks in her prepared remarks for the Economic Club of New York speech, you get the sense from the speech that the status quo of stock market structure in the U.S. will not last.

 One essential notion raissed by Schapiro is compelling. In days of yore, market specialists had obligations that in the SEC chairman’s words supported the “stability and fairness of the markets.”

Now the firms that are the most active don’t bear the titles or responsibilities of those specialist firms, whose role became “obsolete.”

And this quote sums it up. “The issue, however, is whether the firms that effectively act as market makers during normal times should have any obligation to support the market in reasonable ways in tough times,” Schapiro said.