Opportunities During Panic

The Dow Jones Industrial Average (DJIA) dropped almost 900 points yesterday, or roughly 1.9%. Compared to most days, this was a sizable drop.

Some reporters in the financial press referred to the tariff-inspired selloff as having caused investors to "panic". When I read statements like these, I have to laugh at the ignorance of the media!

About 75% of all stock trading today is driven by algorithms on computers. In other words, "automated program trading". Even individual investors can set up automated trading rules to manage a small portfolio using commonly available software supplied by their discount brokers. And the last I checked computers do not "panic". They simply execute their instructions based on the criteria configured by programmers/traders.

So why did all the computers decide in unison to sell yesterday? The answer here rests with the bigger Wall Street firms who operate very sophisticated automation, even leveraging artificial intelligence to make the trading decisions.

These computers consume as inputs real-time news feeds from thousands of media sources, including more recently social media sources and message boards, and especially those posts by influential persons such as the President of the United States or a Saudi Energy Minister. Message boards are also littered with insider information since many employees anonymously cannot keep their mouths shut and will disclose nuggets of information about their companies across the internet, and those nuggets can be reassembled into the larger strategic picture.

As the computers digest the media, formulas will assess each article based on its topic. Topics might include tariffs, taxes, energy, oil, gold, etc. The news source is given a reliability weighting. Is it highly reliable or less so, such that I act on it with confidence? An impact weighting is also assigned. If the article is about U.S. taxes, that subject carries more impact to American markets than does a labor strike taking place in Nigeria. There are also measurements as to the tone of the articles. If many news sources are reporting something with a negative tone, the public will typically also respond negatively, and vice-versa.

I have repeatedly stated that tariffs are generally a positive thing for America. But when President Trump announced yesterday that China was not negotiating in good faith and he was placing 100% tariffs back on Chinese imports, the Wall Street computer algorithms were already in place to interpret tariffs as "heavily weighted bad news", and the algorithms said to sell, with stronger focus on some sectors and less on others.

Once the larger Wall Street firms sent the markets lower, this triggered limit orders for many smaller traders, who in turn will also sell. In other words, it is all computers making the decisions. Virtually no human beings are staring at their phones and monitors itching to press the sell button!

That said, as a person heavily experienced in software engineering, I can state with certainty that the old computer programming mantra, "Garbage In, Garbage Out", applies equally to these situations as well!

If the traders' assumptions about tariffs being a "highly bad" thing are incorrect, then those computers all sold and sent the market lower erroneously, which in turn creates opportunity for those who recognize the error.

The tariff announcement, interpreted as bad news, was also likely more a catalyst than a cause. Some stocks had already been selling down in the two weeks prior to yesterday. AT&T for instance has dropped almost 10% over the past two weeks on absolutely no negative news whatsoever. It was not overpriced at all. That said, even with the drop, it is still up 21% over the past year, and 75% over the past two years, on increasing market share and earnings announcements, all while they continue chipping away at debt and refocusing on their core business.

Another dividend bellwether, Altria, has similarly sold, but to a lessor degree, and again on no negative news.

Yesterday during the selloff, AT&T actually closed higher on the day, and Altria was virtually unchanged.

When I see irrational activity like this, I don't panic at all. Instead, I am looking for the irrational bargains. As fate would have it, I had just received some sizable dividend payments, and I reinvested those yesterday in additional shares of Altria having a dividend yield of nearly 6.4%, and earnings that continue growing strong. And if we suppose we accumulated just $1 million of Altria shares, a 6.4% yield gives us $64,000/yr of income without ever touching the principal. In fact, the value of the shares continues growing as well, providing a raise every year along with that income!

Tobacco and vaping technology have absolutely no impact from tariffs since most of these products originate here in the States. As for AT&T, nobody is going to shut off their cell service because cheap Hasbro toys just got an import duty slapped on them. In other words, the panic based on false assumptions is overdone. I can't say Wall Street won't continue being irrational for some time, but I can say I see better prices and more opportunity.

Because the Wall Street computers "panicked", there are several high quality stocks that have now gone on sale. Even though some sectors of the market may have gotten a little rich with higher valuations, I am still a regular buyer looking to accumulate quality companies at better prices. Thanks to Wall Street's "Garbage In", my job in finding those is now much easier!