Many years ago, when I was a daily reader of the Wall Street Journal, I read an opinion piece that impressed me enough that it stuck with me over the years. The piece began on the front page, and continued several full-length columns and at the end concluded with something like this: and in the end, no matter how ‘free’ something looks, there is no free lunch.

Not all that many years ago, it was fairly expensive to buy or sell stocks. We’re not talking about PE ratios or the value of the assets being bought and sold. What we are talking about is the cost of acquisition: the fees associated with the trade. Nearly all forms of investments had some form of a fee attached to them. And then, thanks to capitalism and competition, the fees became smaller and smaller. The race to the bottom has gotten us to a point now where stock and mutual fund purchases have become ‘free’ (of fees).  Or have they?

Last week there was a congressional hearing at which Gary Gensler, the chairman of the Securities and Exchange Commission was in the hot seat as there were discussions about more regulation- particularly as related to crypto-currencies, meme stocks, and ‘zero-commission’ trading.  As you can imagine, Gensler was quick to explain that there are two sides to this coin.

Gensler believes that zero fees, while nice for the retail investor, also hurt the traders who use them, as their transaction data is being sold to market makers/companies who match buy and sell orders.  In theory, these market makers can ‘front-run’ orders for very small profits.  BUT these profits can add up quickly partly from the vast volume of retail traders and high-frequency trading.  And these profits for the front-runners reduce the profits of the final trades of the retail investor and perhaps the institutional investor as well.

On the other side, an argument can be made that people have the right to choose between zero commissions and paying directly a small premium to hide their order flow.

Senator Pat Toomey (R-PA) questioned Gensler on the need to restrict access to order flow, as buy-and-sell orders are closely matched showing that the market provides a highly efficient place to execute trades for both retail and institutional investors.

So, both sides have valid points, the market COULD easily exist with both trading fee structures.  What concerns us is the lack of a clear upfront policy from companies showing how their customer’s data is used (and profited from). Gensler’s approach could add more regulation to what market makers can buy in the form of customer’s data.  This might not be a good approach as it further complicates the matter and could take away free trading.  AND, though retail traders would rather not have their order flow tracked, many traders prefer the zero-fee option compared to paying a small price.

No matter how ‘free’ something looks, in THIS world, there is no free lunch.

Ron’s Market Minute – A Quandary

It’s typical for investors, particularly those who lean toward technical analysis, to try to jump in on trade when a particular investment has been trending up but then pulls back to the 50-day moving average. And lately that’s certainly been the case with the S&P Index*. Each time it’s pulled back to the 50-day since last November, it’s been down to meet a relative low. And that is widely regarded to be a signal that it’s a decent time to add to S&P stocks. This time, however, the market has been wobbling around that 50-day mark, and not immediately turning back up: so, we look for other clues.

One area has sold off more than any other sector: Utilities. It is absolutely the biggest loser. At the same time the energy sector (that’s OLD energy the dirty oil, gas, and coal energy) has been rocking.  This seems wrong somehow. Why? What’s going on? Where’s all of that famous green energy growth that we were promised?

A guess is that as utility input costs soar and interest rates turn up, the utilities face pressure (downward) on their financial statements.  I note that the UK has seen multiple utility companies fail in recent months and many more are on the edge as prices, particularly natural gas, have gone up as much as four-fold. Along with many of you looking for the burst from the green energy stocks, I too, am disappointed. 

But Dirty energy investing seems to be benefitting from those tight inventories for natural gas and oil: It seems that despite government jawing about increasing oil prices, a problem is that government inaction is not allowing the metals used in green energy to be mined. 

Now, as we look towards the near future, it appears that this might be an interesting winter. Germany and the UK are looking at very serious shortfalls in energy. Inventories are already low as a result of last year’s surprisingly cold winter. US oil and gas inventories are sticking tight, and Hurricane Ida seems to have reduced production flows from the Gulf of Mexico. I say this as Hurricane Sam has now appeared and has captured the attention of oil companies — and oil traders.

I also note that coal prices are soaring. Wind, solar and hydro isn’t working (financially) as a model for many countries. Indeed, a big contributor to the energy shortfall in the UK has been a lack of wind to turn the clean energy windmills. They have some renewable energy success stories but the escalation in coal prices suggest that the time for renewables is not yet here.

Where am I going with this?  Although the Index is in a little bit of a quandary as to where it’s going, you can guess that we’ve been excluding utilities, and adding to our energy holdings. 

Remember that the last quarter of the calendar year is traditionally a strong one for equities.  We’re working for you to find the strong baskets of equities.  

Ronald P. Denk, CFP®
Investment Advisor
Denk Strategic Wealth Partners
10000 N. 31st Avenue, Suite C-262
Phoenix, AZ 85051
Phone (602) 252-8700
Fax (602) 252-8701
Toll-Free (877) The-Denk


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