CWS Market Review – June 4, 2024

(This is the free version of CWS Market Review. If you like what you see, then please sign up for the premium newsletter for $20 per month or $200 for the whole year. If you sign up today, you can see our two reports, “Your Handy Guide to Stock Orders” and “How Not to Get Screwed on Your Mortgage.”)

Trading Glitch Rocks Wall Street

Yesterday, shares of Berkshire Hathaway (BRK-A) dropped 99.97%. I realize this news may have given some of you a panic attack, but I’m happy to report that the stock was the victim of a trading glitch.

Fortunately, the glitch was quickly repaired, and the stock is back to its normal range. Yesterday, the NYSE sent out a message declaring “all systems are currently operational.”

Whew! Here’s a High-Low-Close chart you don’t see every day:

That’s good news that everything’s back to normal, but still, how exactly does this happen? In an instant, one of the largest companies on Wall Street was trading at less than one-three-thousandths of its correct price. We’re talking about hundreds of billions of dollars vanishing in an instant. It wasn’t just Berkshire either. The trading glitch impacted a few dozen stocks.

The NYSE busted all trades for Berkshire between 9:50 am ET and 9:51 am ET. The exchange confirmed that it wasn’t a cyberattack, but that makes it even more worrisome. At least with a cyberattack, we know there’s an enemy. With this, we don’t know. The NYSE claimed it was a “technical issue” and it caused trading halts in about 40 NYSE-listed stocks.

It didn’t take long for a blame game to get started. The trading glitch was apparently due to a problem with the trading bands, meaning the triggering prices that can instigate a trading halt. The NYSE said they don’t control that but rather, it’s due to Consolidated Tape Association’s (CTA) Security Information Processor (SIP).

The CTA said this happened during a software update. They were able to use a backup system that runs on different software. Trading on the Nasdaq wasn’t impacted.

It gets even stranger because this glitch comes at the same time that Wall Street is moving to one-day settlement, otherwise known as T+1. That these changes happened at the same time appears to be a coincidence, but some traders aren’t buying the NYSE’s story:

Joe Saluzzi, co-founder of Themis Trading, told CNN that the NYSE’s explanation is hard to square with the bizarre trades that hit the tape.

“I’m not buying that explanation. That doesn’t make any sense to me,” said Saluzzi, a market structure expert and author of “Broken Markets.”

Trading data provided by Refinitiv shows that Berkshire Hathaway changed hands at $620,700 as of 9:44:32 on Monday morning. And then, without any explanation, the stock crashed to just $185.10.

“All of a sudden, there was a $185 print. But there was nothing to take it down level by level, which you would expect to see,” said Saluzzi. “It makes no sense.”

What’s especially troubling is that this is the third trading disruption in the past week. On Thursday, there was no live pricing for the S&P 500 for more than an hour.

This isn’t the first time Wall Street has been the victim of computers and big data. In fact, getting fast, accurate pricing has been an important driver in the technology behind markets.

The Rothschilds famously used carrier pigeons to get the news from Europe that Napoleon had been defeated at Waterloo. It’s a great story but it’s most likely a myth.

In the 1860s, the first ticker-tape machines came about. In 1869, Thomas Edison developed his own version when he was just 22. (Edison didn’t precisely invent the ticker tape as is sometimes claimed, but he added important improvements.) The inexpensive tape soon became part of American culture when heroes were feted with ticker-tape parades.

At the same time as the first ticker-tape machines, engineers had laid a trans-Atlantic cable. Now, information could be transmitted quickly between London and New York. One of the first uses for the cable was transmitting financial prices. This was so important that even today, the Dollar/Pound exchange rate is known as “cable.”

The Titanic had a wireless radio on board and passengers could place stock trades from the comfort of first class.

In the go-go 1960s, trading volume surged, and the back offices couldn’t handle the flood of orders. Clerks had to stay long after closing to properly settle all the trades. For several months, the NYSE was closed on Wednesdays so the back-office people could catch up.

Some firms started to buy these newfangled computers, but they were expensive and hard to use. The back-office work was so unyielding that organized crime moved in and looted hundreds of millions of dollars.

In 1969 and 1970, trading volume plunged, and one-sixth of brokerages either merged or went out of business. The industry responded, and in 1971, the National Association of Securities Dealers started the Nasdaq and in 1975, the NYSE finally ditched fixed commissions.

Wall Street has always been a place of technological innovation. As we learned this week, that change isn’t always so smooth.

The Upcoming Jobs Report for June

The next test for the stock market will come this Friday with the May jobs report. While the unemployment rate has been below 4% for several months, the pace of new job creation has slowed. Earlier today, the Bureau of Labor Statistics said that in April, the number of job openings fell to 8.1 million.

For Friday, Wall Street expects to see job gains of 190,000. That would be an increase over April’s gain of 175,000. Wall Street also expects the unemployment rate to stay at 3.9% and for average hourly earnings to increase by 0.3%.

Yesterday, the ISM Manufacturing report for May was 48.7. That was below expectations of 49.6. The Census Bureau said that construction spending fell by 0.1% in April.

I doubt the jobs report will have a major impact on the Fed. The FOMC meets again next week and it’s very unlikely that they’ll raise interest rates. The earliest a rate cut would come is probably September.

In last week’s issue, I talked about how Growth stocks have been outpacing Value stocks. Nice timing. Right after I said, Value went on to cream Growth for two days in a row.

Each day, trading usually leans one way or the other regarding Growth versus Value. Lately, however, the market has very strongly leaned in one direction or the other. Value has had several false starts in the last year, but this latest bit of outperformance could last for some time.

Stock Focus: Oil-Dri Corporation (ODC)

Here’s a neat one. Are you familiar with Oil-Dri Corporation of America (ODC)?

Don’t worry, you’re not alone. Based in Chicago, Oil-Dri is leading maker of “specialty sorbent products for the pet care, animal health and nutrition, fluids purification, agricultural ingredients, sports field, industrial and automotive markets. Oil-Dri’s largest principal product is cat litter.”

Within the United States, Oil-Dri is the leading manufacturer of lightweight cat litter in units and the largest producer of private label coarse litter in both units and dollars.

Oil-Dri has 884 employees and a market value of $610 million. Last year, the company had revenues of $413 million and net income of $28 million. Oil-Dri has increased its dividend each year for the past 20 years.

The stock has been a huge winner. In 2002, ODC was going for less than $6 per share. Today it’s at $83 per share. Including the dividend, the stock has soundly beaten the market. Since late 2000, the S&P 500 Total Return Index is up 481% but ODC (with divs) is up 2,486%.

Did I mention this was kitty litter?

Given the success of Oil-Dri, you might guess that lots of Wall Street analysts follow it. Or, if you’ve been a reader of mine for any amount of time, then you probably know: Oil-Dri isn’t followed by a single Wall Street analyst.

Who knew kitty litter could be so profitable?

That’s all for now. I’ll have more for you in the next issue of CWS Market Review.

– Eddy

Posted by on June 4th, 2024 at 5:18 pm


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.