“An investment in knowledge pays the best interest.” — Benjamin Franklin


Kerr Financial Group

Kildare Asset Mgt.

Jeffrey J. Kerr, CFA


March 8, 2024 – DJIA = 38,791 – S&P 500 = 5,157 – Nasdaq = 16,273

“An investment in knowledge pays the best interest.” — Benjamin Franklin


The financial markets have greatly changed.  The days of reading through financial statements and economic reports as a part of investing might be going the way of pay phones and fax machines. In a world of video clips and tweets, investors have decided that reading a 10-page earnings report is unnecessary.

Of course, Wall Street, who is always trying to sell stuff, is happy to offer quick and easy solutions that fit our shortened attention spans.  Over time, Wall Street accommodates investors’ demands with new strategies and products.  This has led to the development and popularity of passive investing.

Passive investing is the approach where inflows into a security have a predetermined strategy.  For example, one of the most popular passive investments is buying funds and ETFs that mirror the S&P 500.  These vehicles deploy their assets across the components of the index according to the proper weighting.

Passive investing can be implemented across many asset classes.  Within the stock and fixed income markets, there are multiple indexes many of which have passive vehicles.  Also, indexing can be done for international markets.  Here is a chart which shows the largest inflows to the various passive funds in 2023.  As you can see, the S&P 500 funds took in well over $100 billion in the top three funds.



These investing options have gained enormous popularity and these securities have seen the assets invested in them skyrocket.  Bloomberg recently reported that passive investing mutual funds and ETF has exceeded over 50% of all mutual fund and ETF assets.  This chart shows how the passive ETFs and mutual funds have grown vs. all investment assets in ETFs and mutual funds.



Not only have passive and indexing approaches increased, but it is not just from new investment dollars.  This graph shows the shift of assets from global active funds to passive and indexing products during the past decade.



Despite the many offerings that the industry has created, passive investing is heresy to traditional Wall Streeters.  Brokerage houses spend a lot of time and resources on research.   Indexing and passive strategies don’t consider these efforts as constructive.  Things such as the economy, interest rates, inflation and corporate earnings are irrelevant.

When a passive security receives new investment dollars, they are put to work immediately.  There is no analysis on whether it’s a good or bad time to buy.  There is no thought process on upcoming events (inflation report, earnings announcement, etc.) which could provide a better entry point for this fund’s inflow.  The money is invested on the day of receipt, and it goes into the components of the index in the same amount as the weighting of the index.

This leads to another passive investing characteristic.  The S&P 500 is weighted upon the stock’s market capitalization (the total value of a publicly traded company’s outstanding common shares).  Microsoft and Apple are the two largest stocks in the index and account for 14% of the index.  The top 10 stocks make up over 30% of the index while the bottom 250 only make up around 15%.

This is hardly the diversification that most people sign up for when they invest in an index.  Further this concentration is self-fulfilling.  The top companies get more of the incoming money which makes their stock value rise further which means that these stocks will get more of next week’s flows, and so on and so on.  It becomes a cyclical process where the big get bigger which could lead to an extremely concentrated and overvalued market.

The growth of indexing and passive investing has its critics.  David Einhorn founded and president of Greenlight Capital, a leading hedge fund, recently referred to the markets as “fundamentally broken” by passive and quantitative investing (Bloomberg, February 8, 2024).  Einhorn and Greenlight were noted for their value and deep analytical investing approach.  Einhorn has adapted his approach because of the growth in passive and algorithmic trading.  He is partially implementing indexing and similar strategies.

While things like dial up internet go out of style, passive investing and computerized trading are likely here to stay.  They may even continue to become a bigger part of the capital markets.  As they do, it’s important that investors better understand these strategies, their widespread influence, and the risks that they contain.






St. Valentine’s Day

Happy St. Valentine’s Day.  The day is associated with love, courting, marriage, romantic dates, and chocolate.  In addition to these, the day is in honor of Saint Valentine.  Here are some facts about him.

St. Valentine was a 3rd century Roman – he died in 269.  According to Catholic.org, he is the Patron Saint of affianced couples, bee keepers, engaged couples, epilepsy, fainting, greetings, happy marriages, love, lovers, plague, travelers, and young people.

The details about Saint Valentine’s life are limited, but there are stories about his accomplishments.  Again, this is from Catholic.org.  St. Valentine was Bishop of Temi, Narnia, and Amelia, and was under house arrest with Judge Asterius. While discussing religion and faith with the Judge, Valentine pledged the validity of Jesus. The judge immediately put Valentine and his faith to the test.

St. Valentine was presented with the judge’s blind daughter and told to restore her sight. If he succeeded, the judge vowed to do anything for Valentine. Placing his hands onto her eyes, Valentine restored the child’s vision.

Judge Asterius was humbled and obeyed Valentine’s requests. Asterius broke all the idols around his house, fasted for three days and became baptized, along with his family and entire 44-member household. The now faithful judge then freed all of his Christian inmates.

St. Valentine was later arrested again for continuing to try to convert people to Christianity. He was sent to Rome under the emperor Claudius Gothicus (Claudius II). According to the popular hagiographical identity, and what is believed to be the first representation of St. Valentine, the Nuremberg Chronicle, St. Valentine was a Roman priest martyred during Claudius’ reign. The story tells that St. Valentine was imprisoned for marrying Christian couples and aiding Christians being persecuted by Claudius in Rome. Both acts were considered serious crimes. A relationship between the saint and emperor began to grow, until Valentine attempted to convince Claudius of Christianity. Claudius became raged and sentenced Valentine to death, commanding him to renounce his faith or be beaten with clubs and beheaded.

St. Valentine refused to renounce his faith and Christianity and was executed outside the Flaminian Gate on February 14, 269. However, other tales of St. Valentine’s life claim he was executed either in the year 269, 270, 273 or 280. Other depictions of St. Valentine’s arrests tell that he secretly married couples so husbands wouldn’t have to go to war. Another variation of the legend of St. Valentine says he refused to sacrifice to pagan gods, was imprisoned and while imprisoned he healed the jailer’s blind daughter. On the day of his execution, he left the girl a note signed, “Your Valentine.”

I hope you enjoyed this note and had a great St. Valentine’s Day.

“This is Not Your Father’s Stock Market”

“This is Not Your Father’s Stock Market”

Kerr Financial Group

Kildare Asset Mgt.

Jeffrey J. Kerr, CFA


October 9, 2023 – DJIA = 33,407 – S&P 500 = 4,308 – Nasdaq = 13,431

Once upon a time, economic news and business headlines were big stock market influences.  Such things as inflation news, earnings reports, employment data, and merger announcements moved markets.  Things have changed.  New securities, new trading strategies, and advanced technology have combined to change the landscape on Wall Street.

Certainly, fundamental developments still matter.  Economic awareness is essential and understanding the corporate landscape remains critical.  But these factors have a much lower effect on day-to-day activity as new trading vehicles have grown in both size and trading volume.

Reportedly, JP Morgan has estimated that 90% of the market trading is not based on fundamentals.  This trading is partially based on such things as algorithms, fund flows, periodic/systematic investing, and index arbitrage.  An important point is that the financial media’s economic narrative has no influence on these approaches.

There are estimates that 80% to 85% of 401k contributions are invested in target dated mutual funds.    Target date funds are mutual funds or ETF’s that invest in a mix of stocks, bonds, and other securities.  The fund periodically rebalances and shifts the portfolio from aggressive to conservative investments over time.  At the target date of the fund, the investments should be in a money market or other similar positions.

Looking under the hood at these funds, it’s crucial to understand that contributions to target funds are immediately invested.  There is no judgement on whether it’s a good time to invest.  There is no analysis if an investment is an overvalued security.  The money is put to work as soon as it is received by the fund.

Target dated investments are not the only funds that act this way.  Index funds do the same thing.  As soon as an S&P 500 index fund receives money, it buys shares in Apple, Microsoft, Amazon, Nvidia, etc.  Combining index and target dated funds, there is a sizable and steady flow of money into the market, and it is invested automatically regardless the economic backdrop.

Beyond these systematic investing programs, derivative trading, and dealer flows have grown in stock market trading.  These have been more in focus since the addition of daily options on the SPY and QQQ ETFs in 2022.  These options have exploded in usage in 2023.

Again, these strategies are very short term and have little to do with economic fundamentals.  0 DTE options (the daily options or zero days to expiration options) have partially replaced use of S&P futures as a trading tool.  These options cost a lot less and can provide the same level of exposure for a portfolio.

The mechanics of these trades result in the options dealers with unwanted risk which they hedge through buying and selling the market.  This is a complex strategy that looks at both the option price and the SPY.  These are non-linear relationships which require many constantly changing mathematical calculations to measure the rapidly shifting landscape.     Despite these intricacies, it has not prevented 0 DTE trading from being a force in the stock market throughout 2023.

The main conclusion is that these strategies are a large piece of the capital markets and have very limited connection with economic data.  A recent example of how the day’s trading can be separated from the news flow was last Friday (October 6, 2023).

The Department of Labor released September’s employment data and the report was stronger than forecast and the stock market fell.  Any sign of an expanding economy (such as a healthy job market) is a negative because it will likely force the Fed to keep interest rates higher for longer.

Last Friday, the morning retreat reversed by midday and stocks rallied the rest of the afternoon.  There were no headlines behind the market’s direction change but short dated call option buying played a significant role.  The financial media were forced to change the narrative from ‘too strong of a report’ to ‘moderate wage pressures’ which equals everything is fine.

For those who were too busy to follow Friday’s market and were only able to check the closing prices, it was another good day in the stock market.  These types of rallies on seemingly bad news have been happening all year.  And there have been plenty of selloffs on good news as well.

The biggest danger within this environment is that risk becomes camouflaged and mispriced.  When markets rise, it’s easy and natural to conclude that it’s a sign of a good economy.  But what if the rally is not a reflection of any fundamental data?  This is what an algorithm or dealer flow can do.

Wall Street is continually looking for an edge to make money and developing new trading strategies to accomplish this.  0 DTE option trading and the related algorithms is the latest chapter in the story.  And as these new products are implemented it can breakdown established correlations especially in short term durations.  Over the long term, the economic data and fundamentals will direct the capital markets.  In the meantime, the adjustment period could be volatile.

It’s Greek to Me

Copy of the 2nd Quarter Review Letter



45 Lewis Street, Lackawanna RR Station

Binghamton, NY  13901

Phone: 607-231-6330                                              email: [email protected]


The following is a copy of the 2023 2nd quarter letter sent to clients. It reviews the markets and the client account’s activity and performance for the 2nd quarter of 2023.


August 16, 2023

The financial markets are constantly changing.  This happens through adopting innovative technologies as well as offering new and different securities to trade.  For example, the New York Stock Exchange had thousands of floor traders at the Big Board in the 1990’s.  They conducted trades, provided liquidity, and managed bid-offer spreads.  Today, there are a couple hundred traders on the floor as most trading is done electronically.

Once upon a time, mutual funds were groundbreaking and, as the industry grew, it became a big part of the Wall Street landscape.  As the public learned about them, the money flowed in and everyone rushed to open a mutual fund.  Then mutual funds morphed into other products such as exchange traded funds.  ETF’s have exploded in popularity with offerings that match sectors, industries, counties, and strategies.

This evolution is continuing, and the latest version is stock “baskets” that Goldman Sachs is allowing institutions to trade.  These are “unique vehicles to track and trade thematic baskets” (Goldman Sachs website).  They have 38 thematic baskets and 10 sector baskets.  Here are some of the offerings –

·        “Interest Rate Sensitive”

·        “High Hedge Fund Concentration”

·        “Low Hedge Fund Concentration”

·        “Mutual Fund Overweight Positions

·        “Mutual Fund Underweight Positions”.

Besides the Goldman Sachs baskets, Wall Street has another creative security that is related to another widely traded one.  In 2022, the markets began trading stock index options on the S&P 500 and Nasdaq 100 that expire every day.  These became known as “0 DTE” or 0 days to expiration options.  Regardless of the lack of history, 0 DTE’s are playing a very big role in daily and short-term trading.

Institutional investors have dominated the 0 DTE market.  They discovered that they could gain market exposure (long call options) or hedge risk (long put options) quickly and at a much cheaper cost as compared to buying futures or individual stocks.  And as they got experienced with this market, traders increased their sizing of 0 DTE positions.

Another key part of this strategy is the option dealer’s role.  When the dealer sells the institution a call options on the S&P 500, they have risk to a rising market.  They hedge this risk through buying the S&P 500 futures or the stocks that make up the index.  Naturally, these dealer purchases give the stock market a tailwind and prices can climb.

Due to the short timeline of the 0 DTE strategy, the motivation behind the trades may have little to do with the economic and fundamental backdrop.  Dealer positioning appears to have a role in these trades which then influences the overall market direction.  As the market rises, dealers need to hedge further which drives prices higher.  This potentially becomes circular as higher prices force dealers into more buying.

This appears to be happening in 2023.  The stock markets have been resilient despite many economic difficulties.  Inflation, although lower than 2022, remains a problem.  The Federal Reserve is still raising interest rates.  Corporate earnings are declining.  Banks have failed and the system is stressed.  Despite this, the U.S. stock market has had a good year.  Here are the major averages performance in the 2nd quarter and year-to-date.



In addition to the growth of 0 DTE trading, 2023’s stock market has had very narrow leadership.  Seven stocks (Amazon, Apple, Google, Meta/Facebook, Microsoft, Nvidia, and Tesla) represent the vast amount of the year’s performance.  These seven stocks are up 58% in the first half of 2023 and, if they are removed from the S&P 500, the index would be up 4% instead of 15%.  Please see the chart below from the Kobeissi Letter.



As this narrow leadership and new option trading have dominated the markets, it introduces additional risks.  The seven stocks that are leading the rally trade at expensive valuations.  If there is an earnings hiccup in any of these, it could lead to a rush to liquidate these positions.

While change and innovation are a constant in the capital markets, they don’t always reduce risk.  I believe that a cautious and defensive approach remains the best strategy as we work through the second half of 2023.  I will look for opportunities as the various crosscurrents work through the economy and the markets.

Please contact me with questions or comments.  As always, thank you for your support and confidence in Kerr Financial Group.