April - 2015
Sunday
Monday
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Wednesday
Thursday
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Saturday
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 S&P -7.70
 USB +1.30
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 S&P +6.40
 USB -1.08
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 S&P +13.70
 USB -0.26
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 S&P -5.40
 USB +0.28
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 S&P +8.10
 USB +0.10
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 S&P +9.80
 USB -1.22
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 S&P +9.80
 USB +0.08
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 S&P -9.00
 USB -0.01
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 S&P +4.40
 USB +0.29
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 S&P +8.90
 USB -0.09
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 S&P +1.00
 USB +0.01
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Apr

18

 "Steel rain" was the tactic developed by both the British and Germans in WW I (it was eventually copied by the French and Americans after they surrendered their illusions that elan could have much effect against enemies who kept their heads down). It was–literally–the idea that exploded artillery shell fragments and bullets would fall from the sky directly on top of the enemy's trenches. The British developed their techniques of indirect fire to the point that Lewis guns were aimed not like rifles but like mortars so that the bullets would arc up into the air and then come down on the Germans.

In his memoir "Storm of Steel" Ernst Junger writes about how he found comrades being killed by bullets striking the tops of their skulls. Trench mortars were even more effective; they could be fused so that they exploded just before hitting the ground, turning the enemy's own defensive wire into shrapnel.

Hollywood shows wars with rifles and gas bombs (those fireball explosions that never happen when artillery shells and rockets strike home); but, going back to Napoleon, most of the killing and maiming of the other guys in uniform got done not by individual firearms but by the explosions delivered from large tubes. (Aerial bombardment was spectacular but woefully inaccurate.)

There is a good argument to be made that the Allied Air Forces helped defeat the German Armies not by their actual bombardments which killed mostly civilians (more French civilians died from Allied bombardments in the weeks up to and immediately after D-Day than Allied soldiers on the beaches at Normandy.) Where the Allied Air Forces succeeded was in diverting so much of the German artillery from the Eastern front to anti-aircraft duty defending Berlin and other cities of the Reich.

Steel rain is not going away; but the large tubes are. It is difficult to fit GPS guidance onto shells that have to withstand the heat and pressure of being shot out of an artillery piece; but with rockets there is no problem. Two hundred years after Congreve's rockets were a miserable failure, his idea has become THE ANSWER.

Apr

18

In the GE conference call yesterday, the word "organic" was used 28 times.

anonymous writes:

The plant is a complex organism, the fruit of biological evolution occurred over hundreds of millions of years. Each genetic modification caused by man in it, however small, will still produce irreparable damage that often can not be recognized, because we know with certainty only a few dozen vitamins and pro-vitamin substances. There are tens of thousands of vitamins and other substances contained in plants which are the responsible for the proper functioning of the complex biochemistry human and the human genome (DNA).

Apr

17

This does seem to correlate with tax levels in each of the states. [Note that California, a warm weather high tax state is losing not gaining].

Apr

17

 One of the frustrating things about going against price action is sitting there watching the various markets' movements align to eventually produce a constantly changing level to buy or sell at. It's like a dog-fight between two state of the art fighter jets.

A really good analogy is the pilot looking through the HUD (Head up display) in which he can see at least three variables operating in more than one dimension all working to get the red dot on the target that is then augmented by a beeping sound (more multidimensional input).

Getting back to markets then, whilst all this is happening the reversalist is watching the price action move towards the zone… Waiting, waiting…The thought that eats away at me is this–why aren't I 'on' this move that is occurring NOW (as we approach my zone of interest).

Today is a perfect example. The market mistress allowed me to sell GBP USD at a much less worse than usual moment. However, I watched it climb in a straight line for 3 1/2 hours from the London open before it got there.

For the life of me, I cannot find repeatable techniques that will allow me to trade both sides of the market (using the same model) over the day. (I am excluding My high frequency activity here).

I know it is greedy, but I don't see why I can't have the cake and eat it.

Another tidbit that reversal types will identify with: During winning periods isn't it horrible that the moves that lead up to your taking risk are relatively more smooth and pleasant than those subsequent….

Which leads me to this:

I speculate that market moves which, after the fact, look beautiful, calm and smooth are relatively substantially more difficult to predict than subsequent horrible messy volatile reversals.

principiis obsta (et respice finem)

And the reverse.

anonymous writes: 

All 100% true in my limited experience. Its feels like a great irony that you wait for key moments, and then your key moments in a sense seem more difficult vs. what you had just witnessed… If you think it is going to "get there" why the hell is one not already long (or short)?

Consider a military ambush. The enemy might be in field of vision for a shot for quite a while before they enter the "kill zone". In fact the shot might be more clear as they (the prey) are in the open. They wonder about predictably, or so it seems, strutting or driving forward in a linear fashion. So why wait for "the kill zone" to make a shot? The difference is when they are in the kill zone, they are cornered and their reactions to that first shot are predictable - they are trapped and you can gun them all down much more reliably. I see waiting for the key moments as identifying points where the competition is off balance or trapped vs. just having a guess at market direction. It seems like it should be the same, but maybe it isn't.

By the way If my analogy is off-base I apologize to anyone with actual knowledge of how military ambushes are constructed. 

Apr

17

I haven't read the paper that apparently says that trend following at certain times in the past made profits. However, I have read many trend following papers, including one from 5 mathematicians in France that came up with a significant to based on millions of observations. And I pointed out that the funds that follow trend following are tracked by many services and they have inferior performance unless they somehow gravitate into buy and hold in stocks.

Apr

16

Some time ago someone posted a link related to backtesting strategies. I believe the idea was that prior familiarity with the data can cause one to over-assess the signifigance of a strategy, as one can very easily tweak a strategy or come come up with a rule set already knowing how it will turn out. Statistically (and I'm sure I described the issue poorly) I'm sure that this critique makes all the sense in the world. I have seen similar critiques in other places, all suggested that prior familiarity with the data is a bad thing.

The problem i have with the above is that in actual application it seems to suggest that having zero knowledge of how markets function might is an advantage, as then our tests would not be using our prior knowledge of what has already been discovered.

In practice I have found the opposite. In my experience, the more new strategy fits into one of my learned or pre-existing conceptual frameworks, the more likely it is to work in real application. In other words it is more signifigant vs. a random rule that might also test well statistically.

I wonder if the purely statistical critique of such things misses the fact that some regularities or price behavior have tended to persist over time and are related to other rules - meaning it is not just a grab bag of unrelated "ineffeciencies" one is looking for. Rather than being a disadvantage, knowledge of these things is actually a significant advantage, in my opinion. I'm considering if a classification system similar to what is used for the animal kingdom might be a useful way to classify relationships between strategies, and clear up some of the confusion (Perhaps only mine!). Then a test for significance could be done against this smaller subset, vs. (say) the average for all 24 hour periods. Judged this way it might be found that so many different "strategies" (what quantitative hedge fund does not employ at claimed 100,000 or more?) are basically all the same thing.

anonymous writes: 

I concur with what Ed said, and also found that critique confusing. Lately I come to think that it is more meant for data scientists who research on data but don't actually trade. Scientists chew the data hard and can find all kinds of regularities (I have been just through that route). And actually many of these regularities can be due to chance only leading to the situation where one can not tell which are valid and which are not. But I don't think the critique poses as a solution. I think the solution lies in bridging the mentality of scientists and that of traders in a nice and delicate way. One should start from a pure trader's mind and then proceed on to a scientist's way but doesn't get carried away. 

anonymous writes: 

I am agnostic (or given the hyperbole, that should be atheistic) as to the past returns of strategies that seek to position themselves for large, lower probability outcomes over extended periods and those that seek to profit from fleeting latency dependent methodologies.

By the nature of markets that I have studied including the early grain markets of the 19th century up to the new 'Crypto-currency' phenomenon of recent years (Are you reading this Satoshi?), the prospective probabilities of large or small moves keep changing and so must those that manage money.

Here are a few thoughts:

1. It is very instructive to start ones millisecond, second, minute, hour, day, week, month, quarter, year or decade with a view of what strategies worked well and what didn't and think of why that may continue or not. In terms of markets I would refer SpecListers to EdSpec pp (94 - 100) & pp (316 - 319). There is another email from the chair not in this thread re: Trend.

2. In terms of strategy returns (and only looking at the Survivors obviously ) the returns are HUGELY reversionary. It is quite stunning to see the names at the top and bottom of the performance tables over 12 and especially 18 months.

3. It is fully right that some firms in the self declared trend following space have made high double digit returns given the straight line moves experienced in many of the assets in their universe. I leave it to the reader to consider that whether or not these moves (or rather the internal 'structure' of these moves) will continue. Maybe they will!

4. Anyone on this site who thinks testing a set of trend following factors, applying a backtest, going live and then trading things unchanged for the next 20 years has a different view of reality than I.

5. A note from the trainers stable. Over 1/2 the returns from many trend strategies come from the choice of the volatility target and the 'sector weightings'. Whilst there is science behind the volatility target piece, the sector weightings thing is a pot luck gamble–which is just fine–but it should be noted that if a fund continues to apply a 60% weighting to the commodity space (for example) after it has experienced a massive straight line trend then, well, read the disclaimer.

6. If it is about making money and surviving well… Put it this way, three consecutive losing years until the second half of last year for some of the brand names in the space… One wonders how many investors were there left standing for the last 12 months' spectacular returns.

7. Given the above the pro-cyclical nature of flows into alternative investment strategies continues to astonish me. Gotta keep backing those winners…. right?

8. Taking a reasonably long time frame one believes that most of the time the markets behave like a casino and then there are spectacular periods that capture the imagination like recently that skew the thinking. The best combination is the two together but usually what happens is that the guy who had done well recently gets all the assets from his manager despite the negative correlation so the effect is not allowed to work.

Apr

16

The reasons trend following doesn't work are myriad including ever changing cycles transactions costs, and bid asked spreads, the opportunity to game the system against them, and the ease of triggering mechanical rules and the fact that markets are homeostatic, and supply curves change as prices move up or down.

Ed Stewart writes: 

In my opinion, part of it is that people who mostly trade their own money look at IRR or "cash on cash" returns, and thus see issues of gains and losses more clearly vs. those who only look at marketing documents and time-based returns of recently hot funds.

Larry Williams writes: 

Trend following does not work on just one (or 2, 3, or 4) instrument. Trend followers have to have a large basket of 'bets' on the assumption that someplace in the world a market will trend and that one massive trend—think CL this year and last—pays off the other bets.

It's like betting on all the numbers in Roulette one number pays big odds. Trend followers say they cannot predict which number will show or market will trend, but with enough numbers bet, one will win.

Stefan Martinek writes: 

Larry, you make a great point. TF is more risk/exposure management on a basket than trading. Argument that benefits of diversification end after ~20 markets is such a nonsense (my teacher said that too together with other corporate finance theories; they probably never tested anything outside of equities).

Diversification across groups, styles, markets, and time frames improves risk adjusted returns in a long run. Of course in a short run concentration is great - let's bet all on Apple. TF has a nice barrier of entry which is good: First, some money is needed; second, most operators cannot run 2 years without rewards if necessary. They quit. Philosophically it is somewhere between "systematic macro" and "private equity". In PE you expect that most bets will be a crap unless you are in LBOs and other later stage deals. You expect that some areas will be in slumps maybe for years. Patience is such a great thing if one can afford it.

Orson Terrill adds: 

Well if I hadn't unnecessarily deleted all of my old code I would just spit out some examples… I wrote several functions that tested trend following, and mostly what was observed was that the number of intervals (days, weeks, whatever) in which a trade would be open generally follows an exponential distribution.

For those that do not know what that implies: Lets say trend "A" has been going for 5 days, the probability that the next day will be the end of trend "A" is roughly the same as if trend "A" were 1 day old, or 20 days old. The next day the probability of "A" ending is generally the same, regardless of its age (like a Poisson process for the arrival of the end). The general notion that longer trends are more, or less likely to end, due to their age, is not backed up.

Just because a run is multiple days old/young does not mean it was profitable. In many markets nearly half of the period's range is traded through during the next period, on average (I think this is true on almost all scales in the EUR/USD, but its been a while). This means getting in on momentum greatly increases the likelihood that a trade is entered at such a point where near term downside is slightly more likely than near term upside (assuming its a long equity position).

There were marginal improvements through adding responses to measures of volatility(mostly changes in absolute ranges), rates of change of price medians from multiple length of time intervals, and most significantly in the general case: reversing intra-trend can garner a couple tenths of 1%. Specifically applying those while using several time series which switch regimes in the sharing of strength of running correlations in percentage changes like SPY, TLT, and GLD, might have some interesting results (I eat what I kill, so I had to leave it there).

Apr

16

 24 DAYS: The True Story of the Ilan Halimi Affair

Directed by Alexandre Arcady

Usually, when you think of going to the movies, it's usually something fun or adventurous, sci-fi dazzle or romantic razzle, something you can immerse yourself in harmlessly for a few hours while nibbling on popped kernels of your favorite salty air-popped corn snack. And it is slightly gruesome to see films like this, which are thinly scripted true stories of a grisly episode in Paris 2006. It was there that a telephone salesperson, lured into a honeypot assignation by a pretty moll of one of the gang men paid to seduce a specific fellow, captured the prey a gang of thugs in the banlieux were seeking: A single male, Jewish, abductible for money from his presumably "rich Jewish family."

The entire sordid plan was premised on the absurd belief that every Jewish family, you name them, has millions stashed away, ready to convert into liquid assets and cash at the drop of a cell phone call.

The title tells it all. For 24 days, this gang of motley ne'er-do-wells, North African émigrés, street criminals, aimless Muslim 20-nothings, hangabouts and grafter losers tortured Ilan Halimi, kept him tied up and near starving, while the head tough, a nasty piece of work from cote D'Ivoire, called Halimi's family every few minutes demanding first one ransom, then another. Even with the French constabulaire brought in, these men and women seemed more like Keystone Kops, Paris variety, than thoughtful professional crime-fighters. They resolutely failed, after endless evidence to support the theory, that the thugs were perpetrating a specifically anti-Semitic act. It took months, almost, for the calls and notes and ancillary evidence to finally penetrate that this was no "random" act against just anyone.

The family and Ilan's fiancée steam, worry, weep, plead and simmer in its pain and anxiety about their beloved son. The police direct the father to respond, not respond, answer the clamoring calls, hundreds and hundreds of them, not answering.

It is more harrowing because we already know from the outset that no matter how stalwart and stiff upper lip the Halimi family may be, there will be no happy ending. Even if there is no payoff. Even if the execrable perpetrators get no satisfaction.

Awful epilogue: Like the unlikely but true Kitty Genovese story that occurred in NYC decades ago, March 1964, where hundreds of people heard her cries for help not once but over many minutes, yet could not bestir themselves to call the police. Here, over 700 people lived around the apartments where Halimi was being tortured and abused. No one called the cops. No one reported strangulated sounds or the goings and comings of darkly unwholesome men over three and a half weeks. In Paris, one of the supposedly sophisticated capitals of the world. In the 21st century.

There were psychobabble theories brought into the language to accommodate the shocking desensitization and failures of neighbors to help: They call it "the bystander effect" and "diffusion of responsibility."

Somebody else will help. Me? I'm going to watch the tube….

Apr

16

 Glenn Beck is Savanarola withut political control; he is no more reactionary than Huey Long. Beck also admires Jefferson; he is the Father Coughlin of our age–full of righteousness in the name of the common people.

As for Thomas Paine, few of the people who made the United States into a country had any quarrels with his ideas. They did find him to be a pain in the ass personally because he never could accept the fact that other people also had interests and sometimes he would have to come second. He was–like so many of the people who despise Americans for wanting to keep their own religions–convinced that the state could ultimately get them to think straight. All it would take was some benevolent central authority. The French Revolution would have killed him but for Morris and Washington's intervention, yet it was the American one he repudiated.

Apr

16

The markets have a plethora of different structures and associations with numbers. Some examples are:

1. Round numbers

2. Opening & closing times

3. Limits

4. Constantly changing magnitudes and significance placed thereupon (for example there were extended periods last summer when the SPU futures had daily ranges in the mid single digits and now it's a score (20) per day).

Much work is done splicing and dicing numbers and looking for statistically significant positive expectations based on various past conditionality.

As another part of that, I wonder whether or not the first, or second or third instance of some stimuli is more or less predictive than the other or others.

This has been brought up in my mind by the recent dance of the seven veils of many markets with many round numbers.

As a start, how about this:

1. Is the first break of a round more or less predictive than the second (assuming the market has reversed intermediately)?

2. Are moves of the same magnitude in the same or opposite directions of interest within a given timeframe?

3. More qualitatively, when a market breaks some predefined barrier (a round, a magnitude, a correlation coefficient et al) and subsequently does so again later, is this last move more likely to have the same sign/ opposite sign and will the magnitude be greater or lesser?

One might start today with a live test case to think over.

Gold Futures traded 1199.7 earlier after opening above the 1200 round in Asia… The market rallied up to 1208.8. If we break the round again we may start observing things like those set out above that may lead to a testable heuristic.

Apr

15

 I'll just throw this out.

Intuitively, I suspect that if a fraction X gets better on a placebo, and if a fraction Y (which could overlap with X) gets real physiological benefit (as determined the by the deities), then the fraction that will REPORT being better would be something like sqrt(X^2 + Y^2). (The "reasoning" is that the real effect and the placebo effect are probably uncorrelated and therefore "add" in an orthogonal way, like the Pythagorean theorem.)

So if X is 0.6 and Y is 0.4 then 72% of people in the study would say they were better.

Of course this won't be valid if X^2+Y^2 gets close to or exceeds one.

Anyway, if that formula is right, and if 40% of people really do benefit as determined by the deities, then we'd see 72% reporting that they're better, which is not much more than the percent that "respond" to the placebo, 60%. So it's probably hard to smoke out an effect, even if it's kind of big.

anonymous writes: 

Before any marathon or ultra, you hang around in the corral of runners waiting to go, (towards the back. towards the WaaaaaAAAaay back, with the jockeys, fat ladies, kids dribbling basketballs) and ask practically ANY old guy if they take it, they will tell you affirmatively. I've done that at least dozens of times. Then look around at who has had a knee replacement and is in that category. No one.

Now that does not mean that the prevalence of old guys running marathons now (whereas two or three decades ago you didn't see that, may be a function of fad, but I remember old guys who ran two or three decades ago stopped running– almost all of them because "their knees couldn't take it anymore," or they "wore out their knees.") is a result of G&C consumption, or the fact that there are so many more older people running now, the fad effect.

There is a tendency to mock anecdotal evidence such as this– but our entire lives are spent accumulating anecdotal evidence and attempting to draw conclusions, from what we consume, what the "best" route to get to a certain destination is, what time we ought to wake up, to how we trade, etc. Everything we do in life is an attempt to solve an optimization problem based most often on a statistically insignificant number of data points.

David Lillienfeld writes: 

First, I'm a physician and among my areas of expertise is the evaluation of drugs (pharm, not abuse). If you want to use anecdote, then you must have little use for regression to the mean. Anecdotes are subject to publication bias, small numbers, inadequate control of bias, among others. It is human nature to work off of anecdotes. It is also misleading.

Based on anecdote, radical mastectomy would still be the standard of care for breast cancer. Based on anecdote, rehab after a heart attack would consist of sitting on one's butt for six months "for healing." Based on anecdote, there are any number of medications one might use for treating pulmonary fibrosis. They actually don't do much. None of them. Based on anecdote, laetrile would be the nectar for cancer. Guess what—it isn't. So if you want to run on anecdote, go right ahead. But don't be surprised if your results are random, because that's what's happened in medicine based on anecdote. It's the reason why evidence-based medicine has emerged from the shadows. And don't forget that regression to the mean. Relying on anecdote goes right up there with physician self-treatment of disease. BTW, my uncle treated himself for a heart attack. Wrote the orders for morphine (it was 1960). Managed to kill himself with an overdose. In the hospital.

Second, vitamin C has been looked at for any number of diseases. For the common cold, there's lots of hedging by the Cochrane Collaboration, but I'd hardly call it something where they see compelling evidence—at least for the common cold. Linus Pauling may have thought he was onto something. He was brilliant, some would say he was a genius. That doesn't give him a pass on evidence. Ronald A. Fisher believed cigarette smoking wasn't—couldn't be—a cause of lung cancer, and he was mystified by the increasing mortality rates from it. The same was true for Jacob Yerushalmy. There's a fellow in San Francisco, generally acknowledged as brilliant (he may even have a Nobel) who maintained that HIV wasn't the cause of AIDS. Genius isn't immunity from being wrong. Conjectures in science, even from geniuses, need evidence to be considered worthy of incorporation into the corpus of scientific knowledge.

I had two good friends, Bill Cochran (he of Cochran's Theorem and Abel Wolman talking at a symposium on the history of epidemiology. Cochran observed that "Evidence is a bitch." Wolman replied, "At least evidence is visible. It's the non-visible things that will get you every time." Wolman made his reputation in sanitary engineering (as it was then known) on figuring out how to get sufficient chlorine into tap water as to kill the cell present in it while maintaining that water's potability. Threats that weren't visible was his stock in trade, so to speak. But these were philosophies of science, not specific research questions.

Third, the pharmacokinetics of vit C do not suggest that more is better, ie, always gives a higher serum concentration.

Sorry about the length of this message, but it's worth noting that saying, "Guessing is a capital crime, and if you engage in it, you will lose your capital and become a criminal." I wish I could remember who said it. Can't though.

Ralph Vince writes: 

I don't disagree with you (more specifically, I'm not qualified to disagree with you on this even if I were inclined to), however, as infants we learn to speak, and before that even, in our earliest life hours, we learn to learn by optimization based solely on the sparse data set of anecdotal evidence.

It's a platform that has certainly served us well, should not be disparaged, but rather ought to be acknowledged as perhaps not always best when other determination making platforms are available.

Jim Wildman comments:

Properly done full squats are excellent for strengthening knees (assuming no preexisting damage, only weakness). One of the surprising things I've found since starting powerlifting 4 years ago, is that a lot of 'knee pain' can be corrected through better mobility (ie, stretching). New power lifters of all ages typically have to work on hip and ankle mobility before they can successfully squat. Once you have the mobility issues corrected, building strength is a matter of patience and diligence.

Russ Sears adds: 

My wife, a RPh, thinks it MAY help, because it does seem to increase the lubricant on the joints.

However, firstly, this effect takes 2-3 months of use to develop this effect, The placebo effect is much more immediate. And most users think it works much quicker than the measurable effect to the body.

Secondly, it may simply be self selection, since as Jim and others suggest. Those willing to stick to taking 3-5 large pills a day are usually the ones willing to exercise. Diet also effect it.

Thirdly, many drugs help cause the desired response to the body, but create other problems to produce that effect. For example lowering cholesterol, but also side effect of lower calcium/electrolyte for the heart. (this is why I avoid supplements in general)

Fourth, it is not a "cure" but a MAY prevention future flare-ups, it MAY mask the symptoms. And people with arthritis have various rate of deterioration. Hence, needing a large group to determine if it helps.

With this said, many doctors and pharmacists do recommend using it. 

Apr

15

 Kyle Bass recently opened a new strategy against drug companies: short their stock and then attack their patents, using a law from three years ago that basically opens the door to such things.

"Hedge Funds Found a New Way to Attack Drug Companies and Short Their Stock"

Even if the challenge results in no action by the PTO, it will take a while for that to come to closure. In the meantime, there's some discounting of the presumed NPV of the portfolio as those wily masters of earnings estimates on the Street (who are never ever wrong) conclude that the company's earnings will be adversely impacted in this way or that. Stock drops, shorts cover, and PTO denies the claim. If the patent is for a cytokine, the challenge may be upheld based on recent SCOTUS rulings, but that's about it.

Some patents may seem absurd (and some are!), such as Schering's (now Merck's) patent on interferon alpha (used for Hep C) dosing—how many times a week, and so. That patent was challenged, and the challenge was denied. That doesn't stop the perceived value of the company from dropping, though.

For big pharma, this may be more of a pain than a major matter. Sure, they will go to Congress to get the law repealed or at least reformed. And the structure of matter patents key to industry are probably intact so long as they are not straight copies of a naturally occurring molecule (I think that's been the new SCOTUS standard). After all, if they were at risk, the chemical industry would be at risk, too. And the capitalization of the majors is such that a drop, while unwelcome, can be weathered.

However, for the start-ups, this may be a bigger problem. Not only is there usually tight spending already so that paying attorneys' fees has a potentially major impact on the budget (could it mean needing to raise more capital, likely with significant dilution??), never mind management's attention more productively spent on product development.

Then there's the stock price. Many start-ups look forward to being acquired as an exit strategy for investors in the company. However, they prefer to do so when the company is in Phase 3, when the valuation has considerably risen. (Including product failures and the like, peak valuation of start-ups is midway through Phase 3). However, if the stock drops because of shorts piling on the company, the market cap will drop, potentially enough to attract the attention of a major pharma looking at the company's assets as priced at a bargain. If this is early enough in development, the market cap isn't going to be that great to begin with. Consider, InterMune's valuation about a decade ago was 100 mil. Pirfenidone, the stuff it's marketing now (whether it's worth using is a different matter), was in Phase 1 / 2. Early development. Go ahead 9 years, and Roche bought the company for 8.5 bil. (Roche is a conservative company; someday, I want to get the BD fellow responsible for the deal off to a quiet corner of a bar and ply him/her with enough cognac to understand the thinking behind the purchase—but that's just my view of it).

So while the biotech frenzy continues (there may be a bubble, except there are real products generating real earnings (and lots in the pipeline from acquisitions) that's supporting much of the valuations. And while you can say that Celgene is a bit stretched, but Gilead sure isn't. Take a look at its PE, its revenues, its products and therapeutic areas and then its pipeline. Not stretched at all. So, is there a bubble? If you look at Valeant, you might be pardoned for thinking so. At some point, Valeant is going to be big enough that the M&A isn't going to support the company's valuation anymore. Kind of like what happened to PDL before the Facet spin-off. At that point, Valeant has to start functioning like a pharma (and not an PE enterprise) and generating some increases in earnings to support its market cap. Either that or watch the air come out of its balloon (guess where I stand on that assessment).

So back to the patents. I think Congress will do something at some point, just not the current Congress, which could barely pass a bill mandating that Reagan National should remain open. In the meantime, there will be some raids by the shorts until everyone else starts to discount rumors of invalid patents. At that point, it's Game Over. Until then, though, while the big pharmas aren't going to be bothered much, there may be some significant damage on the start-up front. And before you pooh-pooh that sector of health care, it's worth remembering that the amount of productive research in big pharma labs is pretty poor these day. Innovation is taking place in the start-up world (not for big pharma, which may get some bargains, but for the investors in those start-ups, who may decide not to invest as much in the area, or in any given company, citing this "play" as a major risk and lowering RoI as a result. in VC terms, that RoI has to be high enough to cover the costs of the all-too-prevalent product failures).

Stefan Jovanovich writes:

I don't think BIOTEK will go upper 162 (hope).

anonymous writes: 

Not to insist, but this latest bounce on BioTek is particularly strong on the numbers/ participation. Will be a maximum of less? The swan song? 

Apr

15

 "The Surprising Downsides of Being Clever" :

The first steps to answering these questions were taken almost a century ago, at the height of the American Jazz Age. At the time, the new-fangled IQ test was gaining traction, after proving itself in World War One recruitment centres, and in 1926, psychologist Lewis Terman decided to use it to identify and study a group of gifted children. Combing California's schools for the creme de la creme, he selected 1,500 pupils with an IQ of 140 or more – 80 of whom had IQs above 170. Together, they became known as the "Termites", and the highs and lows of their lives are still being studied to this day.

Stefan Jovanovich writes: 

Francis Galton had raised the question of intelligence measurement in the 1860s, and it was one that absorbed people's attention because it raised an important issue: could "society" - i.e. civil servant bureaucracies and charitable organizations - make the common people smarter. For the English-speaking world this was a topic for endless debate because it was really about how much more money Progressives could get spent on public schools. The French, with their universal childhood conscription (no child was allowed to avoid public schooling), did not have to debate the issue; they brought their usual scientific rigor (at least in that period) to bear and had Alfred Binet create a standardized test for all elementary school age children in 1905.

By the Jazz Age (sic) the IQ test was anything but "new-fangled"; on the contrary, it was old hat. When Terman's book, The Measurement of Intelligence, was published in the U.S. in 1916 (it was an almost complete rip and translate from Binet's work), it had been "new-fangled" and was wildly popular. One important reason for its popularity was that it was the first book in American education history that allowed parents the opportunity to test their own children. But, ten years later, when Terman began his longitudinal study, people were sour enough on the question of "I.Q." to make jokes about it. For one thing, they had already suffered through the comedy of seeing the U.S. government try to apply the test results to winning the war. (When the U.S. Army hired Terman in 1917 to use the Stanford-Binet test, it was not a "recruiting" device. The Army took everyone who was drafted now matter how stupid; the test was given to people after they were inducted to try to figure out what MOS they should be trained for.)

This article has a decent summary of what Terman did, but you will have to ignore the usual retrospective judgments that have become part of all current academic writing.

Apr

15

I took the various sectoral indices trading more than 5 mil avg vol, with entry set at the close of tax day (15 Apr 2014 close in this year) and exit set to various 1/2/3/4/5/ trading days.

Top instruments for five day holding period, with win % > 80% , with data points >= 15 , avg expectation > 2%

Instrument    Exit    #    Wins    % Wins    Avg%    Avg Win %    Avg Loss %    Pay Off
QQQ              t+5    15    13           87        2.20        2.83             -1.85            1.53
XLU               t+5    15    13           87         2.01        2.47             -0.95            2.60

XLE                t+5    15    13           87         2.19        2.73            -1.28            2.14

Gary Phillips writes:

i must confess, i’d rather just guess
than be duped and fooled, by randomness
i rather think twice, than just roll the dice
these random studies, do not drive price

rather think like a fox, not be put in a box
as the markets are, a recursive paradox
if not arc sine laws, then ever-changing-cycles
if you are in denial, it can be almost suicidal

these damning effects, must be circumvented
but not with the invented, nor the misrepresented
not with tools that are myopic, or simply synoptic,
lest the retail hypnotic, not benefit the agnostic

a causal understanding, is certainly demanding
but in-or-out of sample, it sets the best example
there’s so much more, than just trade and win
like adding to profits, when others are cashing in

immune to the tout, trading without any doubt
entering trades, where others are stopped-out
not stepping out-on-the ledge, with an illusory edge
there’s no need to hedge, this is my solemn pledge

Kora Reddy responds:

whether it was working by fluke or not… a reminder at today's close!

Apr

14

 In the US, coal is on the ropes for several reasons. First, the strong dollar is making exporting coal [and LNG] relatively uneconomic.

Second, coal has become uneconomic. Coal burners are turning to lower-cost natural gas or renewable energy. In fact, no US utility is seriously considering building a new coal-fired power plant. To make matters worse, most utilities who own coal-burning assets are seeking exit plans.

Then, there's this:

"Recent report reveals dramatic decline in number of active W.Va. miners"

The article describes declining mining activity in WVA. They report that 2,596 WVA miners lost their jobs in the first quarter. It should not be a surprise. What they do not say is more jobs will be lost in 2015 as dozens of uneconomic power plants exit from the nation's deregulated power markets.

The article is exaggerating when it suggests the root cause of WVA's mining woes is a federal war on coal. There's no federal war on coal. There is federal [and state] war on carbon.

Just ask the natural gas burners. Ask oil burners. Ask nuclear burners. Ask state regulators. But, don't ask the media. And, for heaven sakes, don't ask a politician.

Victor Niederhoffer asks: 

If all this supply is coming off the market, isn't that bullish? 

Carder Dimitroff writes:

Interesting question. The answer is not simple.

Coal mining will struggle. Coal transportation will struggle. Gas boilers will struggle. Manufacturers supporting these types of assets will also struggle.

Turbine manufacturers are gaining. General Electric, Siemens and other turbine manufacturers are seeing growth in high technology turbine sales (combined cycle gas turbines). They offer turbines that are 60 percent fuel-efficient (coal burners are approximately 20 to 30 percent fuel-efficient). The combination of high fuel efficiency, low fuel costs and low labor costs offers buyers a significant competitive advantage.

Energy prices are unlikely to improve. Market-clearing prices for wholesale power are challenged as low-cost gas turbines enter the market. Ohio alone expects six new gas turbines (the equivalent of four new nuclear power plants). These turbines will likely lower average market-clearing prices by displacing less competitive sources (coal).

Energy prices are also challenged as renewables and energy efficiency programs take hold and grow. As California demonstrates, it only takes a small amount of renewable energy (or energy efficiency and demand-response) to shave off average market-clearing prices.

Nuclear power is winning on the carbon war argument. The State of Illinois recently passed a carbon bill, which helps existing nuclear power plants (Exelon) and renewable energy sources.

While existing nuclear power is a winner, new nuclear plants are losers. It appears no new nuclear plants will be built for a long, long time. Yes, there are nuclear construction projects underway. Yes, nuclear power displaces carbon and other air pollutants. However, it's not enough. After watching TVA, SCG and SO struggle with spiraling nuclear construction costs, it's unlikely other utilities [or state regulators] will repeat their mistakes. In fact, it appears most other applicants have put their nuclear ambitions on the shelf.

Capacity markets are improving. Old and inefficient plants cannot compete. Some assets are failing to clear auctions. As such, it shouldn't be a surprise that the market's losers are forced into permanent retirement. They can blame the "war on coal" if they want, but it's mostly operating economics that are driving retirement decisions. Those decisions are also capturing other types of plants; not just coal plants.

In the spirit of markets, there appears to be clear winners at the expense of losers.

Stefan Jovanovich writes:

Thanks to another part of my misspent youth, when the U.S. Navy wasted its money teaching me about marine propulsion systems, turbines continue to fascinate me. So, any pretense of knowledge here is restricted to that subject only. The inefficiency of what Carder calls "coal burners" comes from the fuel, not the gas that moves the turbine blades. Steam is actually slighty more efficient than natural gas in its isentropic efficiency because it is easier to capture the residual heat energy from steam after it passes through the first (and second) turbines. (Note: "isentropic efficiency" is the ratio of a turbine's actual power output to those of theoretical turbine with perfect physics with the same inlet conditions and discharge pressures. Or, to put it in engineering speak - actual enthalpy drop divided by the isentropic enthalpy drop).

So, "coal burners" - i.e. plants that burn coal to generate steam - are "inefficient" only because coal has a much lower energy density than other fuels. (This why the British Navy switched from coal to bunker oil; the same ships could go much farther without refueling using the same fuel storage spaces.)

As to how prices for fuels will arbitrage the energy density differentials, beats me; but List members should not take the relative electrical generating efficiency numbers to be a statement about the obsolescence of steam turbines. This is not a repeat of the fate of the railroad steam engine.

Apr

14

 I do not look for one dimensional geometric shapes in visual manifestations of historical data. Not because there is nothing there but because I have no edge in doing so against the market.

However, it is fascinating how, occasionally, a market puts in an act of such beautiful symmetry that one is moved to ask further questions about multidimensional geometrical solutions to market forecasting.

Yesterday is a case in point. I will use New York time for the following and I refer to the S&P 500 futures (June).

The market at 3am opened the hour at 2093. Soon after the floor opening it topped out at 2101.25, an 8.25 point rally. Next the market declined to 2085.25, a 7.75 point decline from the 3am rate. The rate at 3 am this morning was 2092.50.

The flow and symmetry was beautiful and the old adage "The bookie always wins" comes to mind.

I do not know quite what–but there is something to be gleaned from the referenced 24 hour period.

Apr

14

 The 2015 baseball season is now into its second week, and some interesting patterns are appearing. For instance:

1. The Orioles may have some weaknesses in pitching. It's still way too early to hit the panic button, and Jimenez is doing so much better than last year that memories of Steve Stone's 1979/1980 performance come to mind. Base stealing has not been an Orioles strength, and there's either a more aggressive view to the base paths than in the past or some blown hit and runs. On the other hand, Jonathan Schoop gave a nice clinic on Sunday on sliding into second base and avoiding the tag.

2. The Cubbies may have a pitching problem with Mr Lester, who is having some trouble connecting with his first baseman. Hard to get a pick-off if you can't throw to the first baseman. And that hasn't prevented the Cubs from a strong opening to the season in 1st place.

3. The Astros are performing better than I had expected, even if it is early in the season.

4. On the other hand, the Padres are not. Again, though, still early in the season.

5. And the Braves, signer of former Oriole Nick Markakis over the off-season, are sitting nice in first place, 5 games over .500. Quite a strong start in Hotlanta.

Two items of note:

First, MLB instituted some rules to speed up the game. They seem to have worked. The impact on the game itself, though, isn't clear—maybe we'll have an idea by the end of the season. On the other hand, if the MLB really wanted to speed up games, they'd eliminate the challenge provisions. That seems unlikely, though. Does anyone know how many decisions on the field have been overturned by the challenges?

Second, there are some increasing concerns being raised about head trauma among catchers. One of the big differences between football and baseball is the lack of similar collisions among persons of high body mass with consequent transfer of energy often manifesting in the skull as a concussion or just trauma. Unlike football, in which it is difficult to imagine how the game might be preserved in something akin to its current form without such transfer of energy, in baseball, such collision are relatively rare. The exception is the catcher. Backstops do not, generally speaking, experience head trauma so much from efforts to tag a runner at home (though there is some of that) as from the foul tips/foul balls, and even an occasional hit with the tip of the bat (not often though, fortunately). The former though can impart much energy to the catcher, usually through the catcher's mask. That mask has been around for almost 110 years, and it's hard to imagine how the battery operated before those masks became prevalent. The amount of evolution in the mask during that time hasn't been nil, but it hasn't been that great, either. More recent versions of the mask have been somewhat more protective, but the basic problem of how to dissipate the energy imparted through contact of the ball and the mask remains. How soon the MLB will address this matter is unclear, but fans certainly hope it is sooner rather than later.

The discussion of baseball vs football brings to mind that classic from George Carlin:

"Baseball is different from any other sport, very different.

For instance, in most sports you score points or goals; in baseball you score runs.

In most sports the ball, or object, is put in play by the offensive team; in baseball the defensive team puts the ball in play, and only the defense is allowed to touch the ball. In fact, in baseball if an offensive player touches the ball intentionally, he's out; sometimes unintentionally, he's out.

Also: in football,basketball, soccer, volleyball, and all sports played with a ball, you score with the ball and in baseball the ball prevents you from scoring.

In most sports the team is run by a coach; in baseball the team is run by a manager. And only in baseball does the manager or coach wear the same clothing the players do.

If you'd ever seen John Madden in his Oakland Raiders uniform, you'd know the reason for this custom.

Now, I've mentioned football. Baseball & Football are the two most popular spectator sports in this country. And as such, it seems they ought to be able to tell us something about ourselves and our values.

I enjoy comparing baseball and football:

Baseball is a nineteenth-century pastoral game.
Football is a twentieth-century technological struggle.

Baseball is played on a diamond, in a park.The baseball park!
Football is played on a gridiron, in a stadium, sometimes called Soldier Field or War Memorial Stadium.

Baseball begins in the spring, the season of new life.
Football begins in the fall, when everything's dying.

In football you wear a helmet.
In baseball you wear a cap.

Football is concerned with downs - what down is it?
Baseball is concerned with ups - who's up?

In football you receive a penalty.
In baseball you make an error.

In football the specialist comes in to kick.
In baseball the specialist comes in to relieve somebody.

Football has hitting, clipping, spearing, piling on, personal fouls, late hitting and unnecessary roughness.
Baseball has the sacrifice.

Football is played in any kind of weather: rain, snow, sleet, hail, fog…
In baseball, if it rains, we don't go out to play. [The same is true in snow—in mid May, 1986, a 15 inch blizzard in Minneapolis forced postponement of a game. This decision was notable not because of the condition of the field being unplayable (it was the Metrodome, an indoor park) but that the teams could not get to the park.]

Baseball has the seventh inning stretch.
Football has the two minute warning.

Baseball has no time limit: we don't know when it's gonna end - might have extra innings.
Football is rigidly timed, and it will end even if we've got to go to sudden death.

In baseball, during the game, in the stands, there's kind of a picnic feeling; emotions may run high or low, but there's not too much unpleasantness.
In football, during the game in the stands, you can be sure that at least twenty-seven times you're capable of taking the life of a fellow human being.

And finally, the objectives of the two games are completely different:

In football the object is for the quarterback, also known as the field general, to be on target with his aerial assault, riddling the defense by hitting his receivers with deadly accuracy in spite of the blitz, even if he has to use shotgun. With short bullet passes and long bombs, he marches his troops into enemy territory, balancing this aerial assault with a sustained ground attack that punches holes in the forward wall of the enemy's defensive line.

In baseball the object is to go home! And to be safe! - I hope I'll be safe at home!"

Apr

13

 The Sound of Their Music, a bio of Rodgers and Hammerstein, by Frederick Nolan, has many layers of interest for the speculator and others, especially considering that Nolan seems to know nothing about the technicalities of music such as harmony or rhythm, and he seems to be uninterested in the personal lives of one of his heroes. Here are some of the interesting layers.

1. It describes the life and career of the greatest musical duo in history

2. It gives a birds eye picture of the evolution and creation of each musical

3. It gives a glimpse of every great popular composer of the 20th century, up to and Lloyd Webber as the duo collaborated with every one of them including Gershwin and Romberg and Sondheim

4. It gives the financial details of raising money in those days for each musical, e.g. 75,000 to put on Oklahoma

5. It provides a great snap shot of what life in the 20th century was like for the middle classes who loved music in the days when there were 150 American piano manufacturers versus 2 or 3 today.

6. It has great pictures of all the stars and directors of the day

7. It contains a great picture of the dynamics of a beautiful 2 person partnership (R and Hammmerstein) and a terrible one (R and Hart)

8. It contains nice details about the significant family events and deaths of each character.

9. It shows by indirection the techniques that built up a billion dollar business in the field masterminded by Rogers.

10. It shows how many musicians including the duo were able to overcome great neurosis and bounce back to do great work.

A great example of boom and bust was between 1924 and 1929 there were 26 new theaters built in NY, and these would house a total of 225 new shows a year. Similarly in 1929, the Hollywood studies produced about 250 talking musicals, but by 1934, hardly none at all and movie theaters would have to place a sign on their marquees: "there is no music in this show". 

I was also interested in some of the lessons for speculators and great anecdotes contained. Here are some of my favorites. When the cynical critics came to vet the duo's musicals in tryouts they often said as Mike Todd did about Oklahoma: "no leg, no jokes, no tits, no chance." They said the same thing about The Sound of Music. And Hammerstein in a typical quote (he was a saint) said: "the cynics hate to see a kid playing, a blushing bride, and a happy family."

Oscar's father and grandfather were impresarios in the business, and one of the rules that Hammerstein emphasized was "there is no limit to the number of people who would stay away from a bad show." Rogers said something similar in "the smartest people to judge a musical are the audience". And he was always willing to change a tune or cut if the audience didn't like it.

The musicals all needed road shows and tryouts to become good. They started out 4 1/2 hours long, and they changed enormously by the end based on what the audience and the critics liked. Hammerstein would have been a lawyer and Rogers, an underwear salesman if they had listened to their family and tried to get a steady job as they were urged. Both fathers were absentee fathers who spent little time with their kids as they were too involved in business. Many chance meetings let to the great shows. Hammerstein collaborated with Kern on showboat because they met at a Victor Herbert funeral. Kern was able to convince Ferber to let them use the book because he met her at a how with Woolcott and interrupted his conversation with a pretty lady saying "you have to introduce me to Ferber at the Circle" and Woolcott said "I think that could be arranged. The one you rudely interrupted is she".

After the success of Oklahoma, Hammerstein took out an ad in Variety saying "Here are my recent failures. Very warm for May, ball at the Savoy, three sisters, free for all the gang's all here, east wind, and gentlemen unafraid. I've done it before, and I can do it again". The latter thought is something that all speculators should perhaps plaster to their walls.

David Lillienfeld comments: 

It's interesting that it was during the mid 1920s that Park Avenue above 42nd Street took on its current characteristics as a major residential street. By 1928, 10% of all the millionaires in the US had a Park Avenue residence. Emery Roth designed many of those buildings (leading to perhaps the greatest irony in NYC real estate). This was also the time that the Vanderbilt mansions on 5th Avenue began to fall and multistory co-ops replaced them.

That there would a number of musicals appearing on Broadway makes sense given the wealth then accruing in NYC.

What I find curious is that when I think of a movie musical, I think of MGM. MGM practically minted money during the 1930s. Louis B. Mayer was rumored to have a $500K (some suggest it was as high as $1 million) annual salary during the Great Depression. So how is it that there were no musicals made?

Apr

13

 The energy of a closed system will increase when heat or work is transferred to it. 

The rises in Asia and Shell's cash infusion had o go somewhere, and Israel shows it best as always.

"Israeli Stocks Head for Biggest Jump in 2 Years; Dubai Rises"

By Shoshanna Solomon and Sarmad Khan (Bloomberg)

Israeli stocks are poised for the steepest increase since January 2013 after drugmaker Mylan NV offered to buy Perrigo Co. Shares in Dubai advanced.

The TA-25 Index climbed 2 percent at 11:56 a.m. in Tel Aviv, to a record high of 1,683.26. Global health-care supplier Perrigo, which has the biggest weighting on the index, surged 21 percent to an all-time high of 784.50 shekels. Dubai's DFM General Index rose 1 percent to 3,790.29.

Mylan NV offered to buy Perrigo for $28.9 billion, or $205 a share in cash and stock, according to a statement on Wednesday. The offer represents a premium of about 25 percent over Perrigo's closing price for its U.S.-traded shares on April 7, which rose 18 percent on April 8 and closed at $198.55 on April 10. The Tel-Aviv Stock Exchange was closed April 9 for the Jewish holiday of Passover.

"Today's rally is all about the Perrigo buyout offer," Saar Golan, a trader at Bank of Jerusalem Ltd. in Tel Aviv, said by e-mail. "Mylan's $205 bid is likely not the end of the story as rival bids may appear and Mylan may need to improve its bid."

Before Mylan announced its pursuit of Perrigo Wednesday, it had seemed to be a likely merger partner for Teva Pharmaceutical Industries Ltd. Mylan's offer is raising questions about whether Teva will seek a transaction with either company or look elsewhere. Shares in the Petach Tikva, Israel-based company added 3.9 percent to a record 264 shekels.

Apr

13

 Scott, what do you see as the the problem with target funds? Is it that they just hold too much in stocks?

I do see that AAATX, which is a 2010 target fund, does continue to hold about 50% in stocks. So they're putting someone who retired in 2010 and may be 65 or 70 years old into a 50% stocks portfolio. Indeed, that's a higher percentage than I would have expected. Is that the point that you're making, Scott? What do you think the percentages should be?

Scott Brooks writes: 

To Charles and anyone who wants to read this: Prepare for a long missive.

Target date funds have a multitude of problems…I'll hit on a few.

First, they give retirees a false sense of security. A sense that they're being taken care of by these big firms that "know what they're doing".

So you see retirees who have most of their retirement tied up in investments (as opposed to pensions) still living with an accumulation portfolio (i.e. still trying to get big returns) who think they can pull 5% - 10% per year off their portfolio because they've got a portion of their assets in a target fund.

Look at what happened to the target funds from 4Q07 - 1Q09. Most of their assets get hammered by 30% - 60%.

So you have a retiree who has spent the last 2 or 3 decades in an accumulation mode with an accumulation style portfolio and now they've got to make the shift to a distribution mentality and distribution portfolio…..and they don't want to do that…they think they can still keep investing like they always have in the past. They still want to see their portfolio grow like it did in the 90's or like it did from 1Q03 - 4Q07, or like it did from 1Q09 - present.

They forget the downturns as they become further and further removed from the downturns (00, 01, 02 are a distant and almost forgotten memory and 08 is almost forgotten as well).

But they "kinda know" that they should (maybe) get a bit more conservative, so they bite the bullet and put a chunk of their portfolio in a target date fund and leave the rest in their accumulation style portfolio.

Then when another downturn hits like 00, 01, 02 or 08, they'll see their portfolio meltdown 40%, 50% and in some cases more. They'll find that their target date fund (maybe) didn't lose as much, but it still went down 30% - 40% (maybe more).

Now what?

As much as a volatile market helped them in the accumulation phase of their lives (i.e. via dollar cost averaging), pulling money OUT of the portfolio to live on (kind of a reverse dollar cost averaging) hurts even more than DCA'ing helped them.

The drag/strain of a withdrawal stream on a portfolio is bad enough, but when we have downturns like we've experienced over the last 15 years, it can be devastating.

So basically, my first gripe is that Target Date funds give a false sense of security to retirees and pre-retiress (and believe me, I see it every single week) that they are not more conservative and the TDF portion of their portfolio is safe.

My other gripe is that Target Date funds have a problem with competition. When things are going well, (as they have for the last 6 years or so), people start to get antsy because of the lower returns of the Target Date funds. So eventually, after watching their friends get higher returns (sometimes substantially higher), people start to migrate out of the TDF's.

TDF's know this and they want to not only keep their current clients, but they want to attract new investors as well. So they have to "juice" the returns a bit by holding a bit more stock than they otherwise should. For example Charles made the comment about the 2010 TDF holding 50% stock and 50% bonds for clients that are ostensibly 65 - 70 years old.

Based upon "conventional wisdom" and "rules of thumb" (assuming you accept that claptrap), doesn't 50% stocks seem a bit high?

And if you're smart enough to see thru that line of BS (i.e. 100 - your age = % of stocks you should hold) you'll also notice that investing in bonds (especially right now) is not really a "risk decreasing move". Is anyone naive enough to think that interest rates are going to stay down forever? When they do start going up, we all know bonds probably aren't going to like that very much and I feel safe in summarizing that stocks won't like it either.

Yet people believe that 'ole line of horse manure sold to them by the "big mutual fund companies" that the TDF's are going to take care of them and that they've decreased the risk in their portfolio by making the switch to XYZ fund companies TDF group.

But what if interest rates never go up again? Are holding more and more bonds a safe way to go now? Well, the old phrase "you can't get there from here" comes to mind. By that I mean with interest rates so low, the bonds aren't yielding enough to make them worth the risk associated with the "butt kicking" that may some day come if interest rates go up.

But back to my earlier point about the TDF's having to "juice" their returns to help quell capital outflows while also attracting new money in. If interest rates stay low they've got to increase their stock holdings just to keep the peasants happy. So they decrease bond positions and increase stock position. So basically, even if interest rates stay low, the TDF managers just become part of the parade of people that are helping to build the next bubble (the next bubble being whatever the fund managers are investing in to get good returns that eventually will come crashing back to earth someday)

Look, I'm not telling anyone on this list anything they probably didn't know already. We all have a basic understanding of how markets and economies work.

But the average guy out there, Johnny and Sally Lunchbucket DOES NOT HAVE A CLUE!

They have little or no pension. They do have SS.

But what they've got is a nest egg in their 401k/403b/457/IRA/Roth/etc. And that nest is a LOT of money (at least to them).

Here's an example of what I see.

Couple aged 65 has:

$250,000 in an IRA

$100,000 in a TSA

$100,000 in an 401k

$150,000 in a brokerage account

$40,000 in the bank (I don't count bank "cash" money in my financial planning equations. This is "emergency fund" money that gives them "peace of mind" knowing they can get to it).

They've got $3,000/month of SS (between the two of them) coming in They've got $2,000/month of pension (between the two of them) coming in Therefore, they have a total of $5k/month coming in each month for them "to live".

When one of them dies (usually the husband in most cases), they are going to lose the lessor of the two SS and lose $500/month of pension income….but that's another problem to discuss on another day.

The problem they have is that (while both of them are alive) $5,000/month is not enough for them to enjoy the life they've worked 40 years for to have in retirement. They need an additional $1,000/month. So they need $6,000/month "to live"

They also want to have an additional $10,000/year "to have a life" (go on cruises and other trips, help the grandkids when needed, etc.).

So far, this seems pretty doable, right? Between the $1,000/month ($12,000/year) "to live", and the $10,000 they need "to have a life", they only need to "withdrawal/strain" their portfolio for $24,000/year (or 5.8%/year). They seem like they're in pretty good shape right?

Yeah, they're fine as long as 2008 doesn't come along again and knock their $500,000 nest egg down by 45% to $275,000 (Which is what will happen to them even if they own a TDF's). (And yes, I know their total nest egg is more $640,000, but bear with me for a moment and I'll account for the rest of the money in short order)

Now, when 2008 or 2000/2001/2002 happen again, they either have to drastically change their lifestyle or very much run the risk of running out of money. Maybe they just curtail their lifestyle for the 5+/- years that it takes for the market to recover. But at age, 65, how many "5 year curtailments of lifestyle do you want to take"? You don't have much time left and you certainly don't want to waste any time waiting for the money to come back.

So what SHOULD they have done?

Here's what I would do for them.

I'd take $240,000 and put it into a private pension annuity (yeah, I know we all hate annuities, but bear with me here). That is going generate for them a guaranteed monthly income of AT LEAST $1,000/month (keep in mind that is the guaranteed minimum….it could be higher). I would almost certainly use a fixed indexed annuity (don't fall for the variable annuity and it's "potentially" higher returns game here…remember, in retirement it ain't about the gain, it's about the losses).

I would then take $260,000 and put it into a mix of low and moderate risk private money managers who focus on risk management (i.e. decreasing beta by 50% - 80%) so that I can generate for them the $10k they need to "have a life".

Now, what have I done.

I've guaranteed that this couple is going NEVER run out of money because they have their pension, social security, and private pension annuity. So, at the very least, they have the peace of mind to know they'll, at least, be able "to live".

Since I'm using low/moderate risk money managers and properly allocating their investments over multiple asset classes, they have a very high probability that they'll continue to get their $10k/year of money "to have a life".

Also, if the private money managers only continue to perform at 80% of the level they have in the past, we'll also be able to offset the ravaging effect of inflation on their spending power over the ensuing years.

Now, if you've done your math, you've noticed that I still have $140k of money left over in their portfolio. What should I do with that.

Well, now we've got to take care of the other big problem that plagues seniors…..Long Term Care.

But who wants to pay for a LTC policy that could (and likely will) skyrocket in price over time.

So what I do is take $100k and I put it into a Life/LTC Combo policy that qualifies under IRC 7702 and 101c. This is a hybrid life insurance policy that allows you to use the death benefit for LTC (you can usually access up to 2% of the DB/month for to pay for LTC).

They both end up with a policy that has (give or take) approximately $250,000 of DB on each of them, that guarantees that the internal premiums can never go up (this is very important for LTC which is NOTORIOUS for massive premium increases), pays them a decent interest rate on their money in the plans (keep in mind that the interest they pay you is usually eaten up by the cost of the insurance but the benefit of this is that it allows you to pay for the premium with pre-tax dollars while still enjoying the benefits tax free), and the policies can be shared by each other (i.e. if the husband needs nursing care and uses up his entire $250,000, he can then dip into his wife's LTC plan and use up her $250,000).

I would then set them up with an attorney who would make sure that they have a good trust in place with proper POA's (health directive and POA for asset management) and also put together a Medicare Trust for them so that they only need to really worry about LTC for no more than 5 years after the trust is set up.

That leaves $40k of money that they have in the bank. That money stays right where it is. That's the amount of money THEY NEED to have the peace of mind that they've got an emergency fund handy that they can get to by driving down the street to their local bank. This is important the Lunchbuckets to have easy access to this emergency fund money…..JUST IN CASE.

Then, I would meet with the Lunchbuckets at least once per year (usually more like 2 - 4 times per year). My staff would call them at least monthly, they would get a monthly newsletter from me, and I would make sure that they attended at least 2 - 6 client events (dinners, client appreciation events, etc.) so that I CAN MANAGE THEIR EXPECTATIONS AND THEY CAN ALWAYS SEE THAT I AM PROACTIVELY DOING EXACTLY WHAT WE SAID WE WOULD DO AND THAT THEY ARE STILL ON COURSE TO ACHIEVE THEIR GOALS AND THAT THEY DON'T START TO GET ANTSY ABOUT WANTING HIGHER RETURNS OR GET TOO SCARED WHEN THE MARKET MOVES AGAINST US. I MAKE SURE THAT THEIR CLIENT BINDERS ARE UP TO DATE SO THEY CAN EASILY REFERENCE THEIR GOALS AND CLEARLY SEE THE PROGRESS WE ARE MAKING TOWARDS THEIR GOALS.

At this point, it's all about managing expectation and being there for them when they need me.

Now, after all this, let me remind you that we're not talking about sophisticated people here. We're still talking about Johnny and Sally Lunchbucket. But everything that I've laid out above (may) seem(s) like sophisticated planning…..AND IT IS….to the Lunchbuckets.

But the Lunchbuckets don't know about this stuff. All they know is what their Edward Jones broker (who has them in the same things he did when they were in the accumulation phase of their lives….and, quite honestly, sells the same crap to all his clients because he makes a higher commission by selling "certain" products) or their UBS broker, or their Wells Fargo broker or their "regional brokerage firm" broker, or their cousin who sells insurance and mutual funds (all of whom have the same conflict of interest issues that the Edward Jones broker has) has told them. And what they've been told by these "professionals who were smart enough to pass a series 7 exam" (which you don't have to be very smart to pass) is the is the same failed BS claptrap that they've been told for years….except it's been repackaged to fit the times…..i.e. repackaged as Target Date Funds (or some other equally slimy crap).

And the next time the market corrects, the Lunchbuckets are going to get HAMMERED…..and they're going to be told by their broker to "stay the course", "hold on, it will come back", "we gotta take the lows and the highs".

But the Lunchbuckets won't like that. They'll feel a gnawing sense of anger and an increasing pit in their stomach as they watch their portofolio melt down further and further and further. And they'll get angrier and more desperate as the market starts to recover and their portfolio doesn't recover as quickly because:

1. They sold stuff near the bottom in a panic or

2. Their broker got scared and put them in more conservative investments (you, now high sell low) or

3. Or they kept making withdrawals on the way down and had to sell more and more shares just to get the same amount of money and now they don't have enough shares to facilitate continued withdrawals and allow the portfolio to recover, or

4. Maybe they believed the Vanguard BS or their broker was lazy and they ended up with TDF's. TDF managers that are now in a panic because they didn't protect their investors at all and so now they all of a sudden want to get more conservative to show that they're at least doing something, even though it's "too little, too late" and they end up buying high and selling low.

I've been typing for some time now and I think I've gotten off on more than a few tangents and strayed from the original question about why I have a problem with TDF's.

What it comes down to for me, in a nutshell, is that TDF's are just a gimmick put forth the financial services industry to gather assets by telling investors a new twist on the same old line of BS that the financial services industry has been spewing from their lying mouths for years.

The Lunchbuckets used to get pensions managed by professional and prudent companies (usually insurance companies were the best at this) and they knew that between their pensions and SS, they were going to be able "to live' in retirement.

Now, the Lunchbuckets don't get enough (or any) pension and they have to figure out how to take care of themselves. Their pension has been replaced by a large barrel of cash in the form of 401k's/IRA's/403b's/457's etc. that the Lunchbuckets are woefully unable to handle themselves…..so they get preyed upon by the predators and scavengers who infect the financial services industry.

Now, some of these scavengers and predators are naive' and ignorant about the havoc they are reeking upon the lives of those that they call clients. They are just following the company line and doing what they are told by their "superiors and bettors that are higher up the food chain". Some of the scavengers and predators figure out the harm they are doing (or they are willfully ignorant), but are so addicted to the lifestyle and the money (where else can a schmo go and make ball player money?) that they rationalize what they are doing so they can stand to look themselves in the mirror or face their wives and children.

That is, in part, the problems I have with Target Date Funds…..target date funds are just a symptom of the many problems that plague the financial services industry.

anonymous writes: 

Nice work, Scott. Your clients should be grateful that you're doing this kind of thinking for them.

I guess I'd say there's nothing intrinsically wrong with the idea of "target date" funds, but Scott's saying that 1) these funds remain too heavily weighted in equities as the target date approaches and passes and 2) they often allocate reactively in a "CYA" kind of way.

I agree that annuities should play a role in most people's retirement finances, but I would need a pro like Scott to wade through the annuity world–they're complicated. I also came to the same conclusion as Scott regarding long term care insurance, which seems like a "heads we win / tails you lose" kind of deal for the insurers. Packing it into life insurance seems promising, though again, I'd want someone like Scott who is honest and immerses himself in this stuff to help me figure it out. 

Apr

13

 I was with a commercial real estate broker for several hours today looking at office space for my business. He said that Commercial Real Estate is really moving well and inventory is coming way down. It's a sellers market. Rents are going up.

He said that in 2014 in the St. Louis area they leased more commercial real estate than they had in the previous 3 years combined.

David Lillienfeld writes: 

In Silicon Valley, commercial real estate (CR) is almost non-existent, and the same is true for residential. Sunset Publishing maintains a beautiful garden at its headquarters in Menlo Park. After decades during which the garden was built, it will be plowed over for housing starting Jan 1 next year. Google and Facebook are both within 2 miles.

However, the situation in Tracy, on the East Bay, is a different story entirely. CR over there isn't nearly as in demand as in the Valley, and there's still reasonably-priced apartments (read: those earning under 100K can still afford them). (See this article from yesterday for a nice summary of the state of the valley economy.)

As an index of CR in the valley, though, consider: there is real estate speculation starting along the CA-92 and 17 corridors, and there are whispers of the valley extending its reach into Half Moon Bay and perhaps even Santa Cruz in the next one-to-two decades. HMB seems more likely, though, should it happen at all.

There are now two impediments to further growth in the central valley: open space (marsh lands are being looked at for construction) and infrastructure. In the AM, 101 rivals the LIE as a parking lot. East Palo Alto could be developed but it has almost no available water supply (not just water, but the infrastructure to distribute it).

So while CR is now strong out here (and residential too—as of yesterday, there are a total of 10 houses for sale on the peninsula. There are many for lease, though even then you're only talking about 50-55 or so), it's also strained—there's a limit to how many customers can get to it, there's an understanding that the valley business environment is frothy, and while there is household formation, it's anyone's guess as to how long it persists. Things change quickly when you cross to the East Bay. Strong in the valley (including the peninsula extension) and so-so in the East Bay. Everyone "knows" a downturn is coming, but no one it seems is much prepared for it. Go to the Stanford or Santana Row shopping centers, and you get the sense the area is floating on a cloud of money. (I think of it as the fleecing of Wall Street.) One sign of this state of affairs is the abundance of Teslas on I280, I680, and the 101. The Ferrari dealership in the west valley isn't hurting, but it's nothing like it was in San Diego near the QCOM and biotech ridge locales. Teslas are now seen as the new "chick magnets."

The big imponderable in California right now (and the other constraint on RE demand of any sort) is water. One story making the rounds had Facebook and Google considering moves of some of their admin functions to Reno, until they realized Reno was as short of water as California.

If there's another year or two of drought, I think much of the money now going into CR will be written off—there won't be the growth to sustain it. Not without a war between the San Joaquin Valley and the coast over water. With 10 percent of the state's water going to almond trees versus 12 percent for all human use, it seems likely that the almond trees will lose, but not before a battle

Apr

13

Good trading is a mixture of quick reaction times and having no 'intellectual baggage'.

Intellectual baggage holds one back from making good trading decisions.

Amongst much else, intellectual baggage contains memes similar to (and the opposite of):

1. stocks have to go down because rates are going up.

2. the Euro & Gold always move together

3. the EURO has to go down because they have a lot of debt & unemployment.

4. Oil has to decline because inventories are higher.

5. Bonds have to go lower because of a very strong run of pay rolls numbers.

6. The Russian Ruble can't possibly be the strongest emerging market currency against the USD in 2015 because oil has collapsed and the US have imposed sanctions against Russia.

7. The EURO can't possibly rally because the U.S. may be raising rates this year.

This short list was made from a cursory perusal of the front pages of a few sell-side 'research' publications.

I seriously do not know whether to laugh or cry.

Apr

13

I was discussing the stock market today with some perma bears who complained that this market does not reflect reality while giving a hundred reasons why it should go down hard. I commented that the market reflects reality, just not their personal reality. Profitable traders look at what is really happening, not at what should ideally be happening.

Apr

13

 Basic Relativity theory tells us that the further away from and the greater the velocity of travel that one gets from a fixed observer at one's point of origin then the greater the effect of 'Time Dilation'. The effects are not really noticeable until you reach approximately 40% of the speed of light.

The theoretical effects of time dilation can be 'calculated' (perhaps approximated is a better term) using something like this;

Dilated time = stationary time multiplied by the square root of (1 minus [velocity squared divided by the speed of light squared])

For the purposes of this post I shall not complicate matters by introducing a proximate gravitational mass.

Something quite different is happening in markets in my opinion. I believe that the further away from a reference point ( let's say the 'open' ) we are and the faster that the price is travelling, then, in contradiction to Relativity in the SpaceTime world– time SPEEDS UP, relative to the price action at the open.

Often, a large proportion of the magnitude of a move from (say) the open to the subsequent low (say) of the session occurs in the culminating few minutes of the time elapsed from the open to the time of the low. So, for example, the SPU may open at 2077.75, spend 4 hours working its way to a low at 2069.75 but 4 of the 8 point decline might occur in the final 3 (for eg.) minutes of the decline.

It is in that sense that it feels, to me, that time speeds up in these final few minutes relative to the minutes after the open. There is absolutely no reason why relativity should hold in this context so perhaps my perception of time is not at all unusual. (Author's note - all this talk of 'feelings' is making me queasy. Ha!)

Next time you are watching a market pull away from its opening price in an accelerating fashion then watch a minute by minute chart and if the price develops as I set out above ( with most of the move occurring in the last few minutes of the swing ) then I think you will also experience this idea of the 'blowoff' price action that concludes the move in the last few minutes happening more quickly than quiet price action around the open or whatever reference price you like.

Relativity joins a long list of concepts (exogenous to the mechanics of the markets themselves) that must be adapted in some way if one wants to apply some facet of it to distributions of prices of assets and liabilities in the financial and other markets.

Sushil Kedia writes: 

By the definition of Dilated Time cited here, its values can range from zero to stationery time, when respectively velocity is equal to that of light or the velocity is zero.

In other words there is no time dilation if any thing is traveling at the speed of light and the dilation of time is the same value as the stationery time if any object is stationery.

Time, it has been discussed variously on the list(s) before is an entity undefinable without involving self-referential terms. I have argued in the past that time is an entity that provides a measurement of the separatedness of events and objects.

Blackholes do not have any separatedness and therefore there is no time either in that non-space. The universe on the other hand is an unending expanse still growing and there is time as well as space in it.

The Theory of Relativity, to my "mind", is as much a powerful leap in the Cognitive Sciences as much as in Physics. The so called bends of the space-time-continuum and the endless related ideas of time dilation are cognitive constructs and also explain the cognitive limitations of "intelligent design", "intelligence" & even "intellect".

Having laid these few simplified working terms, I return back to the core of this post. Is the trading pit outside the realm of this universe and if indeed there is anything happening that is not part of the universe, as postulated by James? I strongly doubt, since the universe or anything else that a human mind can observe, including the trading pit, is what our individual cognitions are. The reality is only what each is perceiving it to be! The example of the star 4 light years apart I placed in a recent post illustrates this point.

For a moment, think of it another way, what are Lobogalas? If a sharp quick ephemeral (time frames are a matter of choice and time is most fungible construct apart from being the most illusive construct human mind knows) move happens as described by James, that seems to be outside and in fact the opposite of how things happen in the universe, then is it a regularity or an irregularity?

I would like to shoot that it is an irregularity, there is money to be made by fading it and those who count & test do make money from such moves in this manner. 

anonymous writes: 

I know nothing about the theory of relativity, but it seems to me that when the Greeks began to wonder about the forces of nature (physics), Greeks wanted to study exactly the natural forces.

(The Greeks who now they want out of the euro– the style now used by 'ISIS in erasing the traces of other civilizations).

These markets are anything but natural, are totally and deliberately manipulated. in this sense, trying the accused, a reference point, I would observe only the liquidity injections, foreign body (by central banks) and rates.

Financial markets would be simple… but you can't control a system designed on purpose to move the perception of risk. This has nothing to do with the natural forces. Without considering HFT that subtracts wealth like a leech on the pretext of providing liquidity to the system.

Apr

13

 Richie Benaud, who has died aged 84, became so celebrated as the most intelligent and articulate of television cricket commentators that his youthful triumphs, as one of Australia's greatest all-rounders and most inspirational captains, tended to be overlooked. In his seventies Benaud wryly observed that he had lost count of the number of times young cricket fans asked if he had ever played the game. He was, in fact, the first Test player in history to achieve the double of more than 2,000 runs and 200 wickets.

obituary

Craig Mee writes: 

Well spotted Stefan. Richie was always short sharp and to the point, loved and respected in England almost as much as in Oz, not an easy feat when it comes to sport. He was stoic and always positive. He was often quoted about cricket and life through its ups and downs, something we should all pay careful attention too, and on reflection all of us, no matter their position could say about trading and financial markets.

Apr

13

 I just saw this on twitter today: "Stanley Druckenmiller Lost Tree Club Speech".  I had never seen it before and found it fairly worthwhile to read.  Thoughts on finding situations to "bet big" on and also some interesting admissions on "biggest mistake" as well as biggest successes. I think that idea applies to bid qualitative ideas as well as quantitative or systematic ideas–viewing the strategy as what one is betting big on, vs. "the trade".

  
The strategy I have been developing that is new to me (within past 5 years) is using long term options to frame out these types of bets. Sometimes the leverage is extraordinarily cheap (in the way that I figure it).   

The mistake he discusses is interesting as he admits he had a compulsion that he felt was irrational, but could not resist it (lost 3B on tech stocks). Also some interesting thoughts on the economy and potential distortions created by government intervention. Very long intro that is easy to scan past if you dislike such things. Lastly I was amazed to find Dunavant Enterprises mentioned in the intro– it seems like the same "inner circles" alwasy resurface. 

Apr

10

 One of the most frustrating things in trading is when you research a (qualitative, not a systematic) trade, stay up late figuring out how you want to express the idea to maximize gain and minimize loss, and then the next day when you want to put on the trade that stock is up near 3%.   

Considering it has done nothing for months you figure, "I will wait till to buy on a decline a bit lower".  Then the next day you see it is up 8% and the options you had looked at were would be up 60% in a few days had you conceived of the idea just 1 day sooner. 

I think at such times (similar things have happened to me 3 times so far this year) one is very prone to going on tilt, such as finding some other market to chase, or otherwise do something out of frustration that is not logical and end up losing what you would have made had you been one day sooner.   

I am wondering if there is any way this sequence of events can be generalized beyond specific circumstances of one trader, to general market phenomenon, maybe even events that lead to predictable circumstances.

Jeff Watson writes: 

Whenever I go surfing, I miss a lot of good waves. I either am in a wrong position, miss it completely, or just blow it off thinking a better one will be behind. I never feel bad about missing a wave because there will always be another wave sooner or later. I look at trading exactly the same way I look at surfing.

John Floyd writes: 

Agreed, put another way as someone once said to me “there is a bus every 5 minutes”.  Also importantly in terms of the limits of time and energy don’t spend it worrying about missed moves, focus on what is ahead.  

I read a poignant quote recently in The Joyful Athlete: ”Second tier athletes tended to beat themselves up for mistakes, while the champions simply noted their errors and moved on, wasting no energy on self-recrimination.” 

Stefan Jovanovich writes: 

I have the same problem. Sometimes I wait on a trade too. I think it is greed, the desire to seize the least/highest perfect. So I remember: "Luke, trust your instincts!"

Anonymous writes: 

I strenuously disagree with the philosophy that "there is a bus every five minutes." (My late great father used to say, "there's always another street car.")
 
This is a rationally flawed analysis. Because it treats an opportunity cost as economically different from a realized cost.  The reality is that the P&L from an opportunity cost is real, and it compounds over time. And this is true so long as one is consistent regarding timeframe, methodology and performance benchmarking. The most pernicious thing about this street car delusion is that it can be hidden,  rationalized and forgotten.
 
By way of example, our fellow Spec Lister and Bitcoin Booster, Henrik Andersson declared on March 12: "Crashing commodity prices, currency war, crashing yields (with a big chunk of European debt trading at negative yield), surely this can't be because everything is so rosy in the world, this cant possibly be 'good' news. Couple this valuations close to ATH  and I have for the first time in 25 years sold everything (I started investing when I was 12). Everything." 

Since this declaration, the SPX, Dax and Nikkei have all risen between 3 and 6% — and the DAX is at an all time high.  If Henrik measures his performance on a daily or weekly basis, this is a bona fide opportunity loss of substantial note. But if Henrik measures his performance on a long term, multi-year basis, it is way too early to render a verdict and this opportunity cost may well morph into an opportunity gain.

John Floyd comments:

Point well taken and a good one. I was afraid my quick comment might garner the need for elaboration.   The point I was trying to make is if you “miss” a trade you should learn from the experience and move on, while trying not to repeat the same error in the future. Juxtaposed against expending energy lamenting the perceived lost opportunity, which also has a cost. Assuming this is done with some degree of improvement I think it is both rational and sound.  In this way the opportunity cost is treated as real and minimized over time. If there is improvement made then returns are compounded in a positive fashion as opposed to a pernicious one.  In anonymous’ example that might even mean Henrik recognizes what may or may not have been an incorrect thesis and “buys” everything the minute he read anonymous’ post.  

Sushil Kedia writes: 

My two cents on the table:

Opportunity costs as well as realized costs are both known and quantifiable only after the market has moved. At the instant of a decision as to whether to decide to take a trade or not, both are unknown.

Since a real P&L is a progression of a series of unknown infinitesimally sized but infinite number of moments, it is likely a flawed debate to undertake whether or not opportunity costs compound, since if those said opportunity costs actually turned out to be realized losses they too would compound.

Transliterating approximately what the Senator has said often in the past, the purpose of a trader is not to be in the market, but to come out of the market, one would like to tune one's mind to focusing on how much could one gain without losing beyond a point. For each this is a unique set of numbers despite the market being same for all. This uniqueness comes not only from different skills, but different restrictions on the types of trade one is allowed to take, the different marketing pitch each has to use for garnering risk capital (oh we keep transaction costs low), the different risk tolerances each must remain within etc. etc.

So each needs to focus on how one will travel from an infinite series of infinitesimally small pockets of time in deciding when to not decide. 

Paolo Pezzutti writes: 

With regards to missed opportunities, I have two observations.

Firstly, I think our mind is biased in focusing on the good trades that one could have made. We tend to forget the bad calls. It is true, however, that if your trading methodology is systematically not "efficient" then your performance will eventually be sub par.

Secondly, if you continue to miss opportunities, you may have an issue in pulling the trigger when it is the right time to do it. I have a long way to go to improve my trading and I think I have to work on both these areas. My trades are inefficient, because I can spot good entry points but my exits too often get only crumbles that the market mistress is willing to leave on the floor after a lavish dinner. Moreover, one tends to be afraid of taking the trade right when the risk/reward is more convenient, that is when fear is the prevalent sentiment in the market, the moment when you should "embrace you fears" as Larry Williams would say.

As a final comment, I have to commend the market mistress for her naughtiness and deceitfulness. The employment report on Good Friday released with markets closed saw prices of stocks plunge seriously (20 pts in 1 hour) to get 30 pts back on Monday.  Many opportunities during the Easter weekend in stocks, bonds, currencies, commodities because of ephemeral end deceptive moves. Who knows if they were orchestrated or simply "random". 

I went short gold on Thursday at the close (1715) at 1202.6. The first price  printed on Monday was 1212.7. I eventually took a loss later that day of about 14 points. After 2 days gold was down at 1994. Focused on my potential loss, I did not exploit the huge opportunities offered. Afraid of even bigger losses, I liquidated my position instead of trying to close the big gap printed at the open. Moreover, I did not buy stocks or bonds to trade the obvious lobagola move. Double damage.

It is a matter of mindset.  There are coincidences, situations; there is the ability of a trader to translate into action tests, statistics related to these conditions created by the market mistress. The more extreme the conditions, the more compressed is the coil, stronger and more powerful it will be the reaction in the opposite direction. Much to learn.

Duncan Coker writes: 

I have always had a hard time reconciling opportunity costs/gains with realized costs/gains, though I know in economics they are comparable. For example, a casual friend offered me a private investment opportunity which didn't smell quite right and I declined and I left the money in cash earning -1% real rates. Shortly thereafter the enterprise went bankrupt and all would have been lost. I suppose on an opportunity basis it was a huge success for me, 100% gainer, and yet my cash account is the same earning -1%. Every day trading is a missed opportunity to be fishing on a nearby river which is easier for me to grasp and adds to the overall cost of the trading endeavor. Being able to forget and move on is a useful thing in trading. A swim or run at the end of the day does it for me.

anonymous writes: 

I do believe one can go broke from taking profits. Maybe if one has very few positions at a time this could take a while to notice (the benefit to marketing a long term strategy of any sort– few observations) but everyone will fail.

Think of football, a defense might determine that if they can hold the other team to 17 points that they have won their part. What if the offense deploys their secondary after 14 points? May your successes be larger than your defeats.

We are playing an unbounded game, we have no idea the amplitude of future gains or losses, let alone their frequency. Taking profit when unwarranted may not give us a chance at tomorrow.

As for opportunity, we all balance the fear of missed opportunity with the fear of loss. The more successful traders I've known are slightly more fearful of leaving money on the table than losing money. Slightly.

But that depends on the difference between the value and utility of the opportunity. Duncan, you bring up the ultimate question about the purpose of life. Way to make this a deep conversation.

Apr

9

 If anyone needed reminding that incentives work, look no further than the recent 'What is a Trader' competition on this website.

There was a monetary prize attached for the victor/s and, perhaps even better, canes for other notable entries.

It is quite noteworthy that the ratio of competition entrants to regular contributors to the SpecList was very high. (Even allowing for the fact that the two samples are not exactly homogenous). Evidently, incentives matter!

Given that many of the hopefuls were likely traders from varying markets, backgrounds and experience levels–might not some of you consider sharing potentially quantifiable thoughts with the list from time to time as the mood arises.

There really is nothing like this list anywhere. Whilst this is mainly due to the Chair there are others who have very deep cutting edge front line in the trenches experience who learn new things from this list if not every day then certainly every other week.

Back to incentives… The REAL incentive is the cross fertilization of potentially quantifiable and testable thought from strong to weak, inexperienced to experienced, expert to expert in different fields.

Perhaps this defines what a trader is–someone who believes in incentive driven exchange of information that can be utilized in markets using his or her own comparative advantage.

Apr

9

I thought this was an interesting idea:

"Company mortality: Researchers find patterns in the life and death of firms"

"It's a simple enough question: how long does a typical business have to live? Economists have been thinking about that one for decades without a particularly clear answer, but new research by SFI scientists reveals a surprising insight: publicly-traded firms die off at the same rate regardless of their age or economic sector." and ' "It doesn't matter if you're selling bananas, airplanes, or whatever," Hamilton says — the mortality rate is the same. Though the number, of course, varies from firm to firm, the team estimated that the typical company lasts about ten years before it's bought out, merges, or gets liquidated.

"The next question is, why might that be?" Hamilton says. The new paper largely avoids engaging with any particular economic model, though the researchers have some hypotheses inspired by ecological systems, where plants and animals have their own internal dynamics but must also compete for scarce resources — just like businesses do.'

Apr

9

 When it comes to education and new media, there has been no development as overwhelmingly successful and useful (and actually successfully used, in the US and around the world) as the one-person-developed and relatively low-tech Khan Academy.

Nothing from the Gates Foundation, Teach for America, Common Core, Pres Obama, Arnie Duncan, the Dept of Education, Harvard and other schools of Education, that comes within 2% of Khan Academy.

There should be a lesson there about letting things bubble up from the talents, knowledge and intelligence of 320 million Americans, rather than imposing them from the top (eg, Common Core), but I doubt many will see it.

Apr

9

 It's May 6th 2010. Its lunch time and you're ready take a lunch break at your house from your high school up the block. You turn on your TV and turn to channel 724, CNBC. On the TV is a massive mob outside the Greek Parliament Building, which is surrounded by police in riot gear. There is this one gutsy guy who walks up to a police officer's riot shield and starts shouting. You open up your laptop and see that the little money left over from a string of losses earlier that year could be put to work by going short for a quick profit. The Dow is already down by at least 200, and then all hell breaks loose. The protesters and the police clash. That man taunting the police officer earlier is hit with a baton on the back of his legs and is seemingly flipped by the impact, and is swiftly hand-cuffed. The Dow, S&P 500 and NASDAQ all drop in unison. The ticker tape on the screen keeps showing lower and lower prices. You get this crazy idea to buy a far-out and cheap $115 put option on Apple, which is trading at around $140. You buy two contracts for .40 each, confident that Apple will tumble, hard; and it does. In an instant, those two contracts are worth well over $900, which makes up for the year's loss. As quick as the stock drops it rises, and by the time you go to close your positions the contracts are worth next to nothing.

A trader learns from mistakes like the one above, which is day-trading an option contract based on very little to no information other than a hunch. A trader learns to go by a system of rules with some elasticity. He knows his time scale for trading and has a plan-B for when things do not play out as they were supposed to. He is aware of other factors, such as changes in commodity prices or changes in foreign exchange rates which might affect his position. And last but not least, a trader knows when to take a break from trading.

Apr

8

The "What is a Trader?" entries were so good, we have some additional winners that deserve a cane. Numbers 14, 19, 26, 42, 47, 48. Kindly send your physical address to lap@mantr.com and we'll send you a cane for hobbling down to wall street during periods of panic.

Apr

8

 It is interesting to consider if, in addition to the statistics, one should consider the environments in which it makes relatively more or less sense to lay traps for certain types of prey.

For example, up until just a short time ago, it made eminent sense to lay traps for lumbering momentum strategies close to opens and closes as these firms were forced to use the (very well known) volume distribution to get set (you can accept it or you can reject it but these firms are too large by an order of magnitude). Nowadays many of these strategies have started using either bank provided or internal 'execution algorithms'… The seeds of destruction are planted. N.B. For the purposes of this post the efficacy or otherwise of these strategies is not under discussion.

Things keep changing. So here are are few thoughts:

1. Note the restrictions (notably integer time and linear volume accumulation restrictions of many bank/broker supplied execution Algos)

2. Note the distribution of quotes sent from HFT versus actual trades transacted and how this changes during the day.

3. Note the unusual behavior for the 2-3 weeks a year when London and NYC have a 4 hour time difference rather than the usual 5.

4. Note the several 'openings' in the FX markets each day.

5. Note the more 'persistent' price action in relevant markets ahead of governmental debt management and issuance.

6. Note the lack of a zero bound in some markets and very high Kurtosis for higher frequency data in some markets.

7. Note short term counter trend strategies buying sharp moves down almost every day in stuff……🆘

These may all be helpful in big game hunting.

All the different beasts roaming the market jungle all have a habitat. Now, they do try to change things but the camouflage is never perfect ( large players need to get volume done ).

Apr

8

I'm holding a snap contest with a $ 1,500 reward. I ran a piece called "What is a Trader" about terrible and typical things in our ken. I'll give a 1500 reward to the best augmentation to this by the end of next week. Award to be determined by open vote. Send your entries to me here on Dailyspeculations or to my twitter @VicNiederhoffer .

Apr

8

 A trader at the Grand Bazaar in Istanbul where gold trading has been going continuously for 550 years, amid shouts of 10 whole ones for chocolate tomorrow, a trader in sweats and a wool cap notices my screen, and says "Gold? That's what we love to deal." "Yes," I say, "and stocks and bonds, and oil and grain". "Ah, that's what we love," he says. "Tell us about market trading in the States. What's it like?". I start to tell him but… [where to begin?…]

At 4 am in the morning, a sleepy trader wakes up and finds that prices are climbing. He's short. He looks at the screen and notes they're up 5 points. Thank goodness, he says he saw the price of the stock market on his screen, and it wasn't the bonds he's short… The bond price was a mistake. But then he looks again, and the bonds have risen 6 points. He learns later that day that the minutes of the Open Market Committee were released secretly to 100 politicians and bank officials, on a "need to know" basis and that they were acting on it 10 hours before the release.

The stock market opens down 200 Dow Points, and you buy a line. It quickly goes down another 100 in the first 5 minutes. And you're down a few big. A news flashes across the screen that Janet Yellen just gave a talk to selected Democrats at a closed door meeting, and the market spikes up so you have a 2 tick profit of a grand or two. You quickly get out, thanking your lucky starts that you're not broke, and indeed you have a profit. The market continues to go up, and ends up 400 Dow on the day, and if you had just held your position you would have been able to retire and pay for the education of all your kids.

You stay at your screen for 48 hours straight, nursing a losing position that's being hammered by instability in Europe. The market is very thin, and you need a big move and big news to get out. Finally after waiting without sleep or food, you go to the refrigerator to get a coffee for 30 seconds, and in that time an announcement that the ECB is stepping in comes out and the market rises to where you would have had a profit, but by the time you get back there's only 2 contracts bid for, and by the time you find enough liquidity to get out, your loss is gigantic.

You're sick in the hospital bed, all wired up with tubes and lines but they're on rollers. A mentor comes from California to visit you to see and comfort the family. You have a big position, and have to trade it. But your ashamed to be looking at at the prices, while he's here to see if you're alive. So you go to the bathroom trailing your lines behind you, and your friend says to your wife, "I guess the kidneys are in desperate shape".

 You have a big position in gold, and it's gone against you 100 bucks. You pick up your terminal and you find that Goldman had issued a bearish report on the metal the previous night. Their next report: "As predicted, gold has plummeted to 600. Our prediction was right on target. But we said sell at 800 and it only reached 795 overnight so we missed 5 bucks of the move."

A lot of people have asked me why so many hundreds of thousands trade short term in America. Almost all of them lose. Almost all of them base their trades on mumbo jumbo things that are completely random. The only constant is the vig they pay to the house, which is often 25% of their average gain or loss on the trade. The chances they'll end up a winner is less than the parts in a warehouse spontaneously assembling themselves into a beautiful girl.

I asked an eminent psychologist who has written many books on the market about it. And he said there is a feeling here that no pastime is good unless it causes pain. Most of the traders feel guilt about their childhood, and what horses asses they were and what evil thoughts they had. They wish to atone through trading where the pain of a loss is infinitely greater than the rare occasions that they make a comparable profit. I don't know enough about psychology to know if he's right, but as I suffer through the trading year, and take our small profits on every big move in my favor, but lose it all in the few big moves against, and the little woman says, "when are you going to learn to cut your positions by 90%", I think he may be on to something.

A trader from South Africa comes to your office, and says he's been following your blog for years, and you're the one person in the world that can appreciate his methods. He says he has an IQ of 190 and was on the Olympic handball team. He has the ability to predict the exact range of the day in every market. But his marketing firm won't let him trade unless they execute the trades for him and he wants you to back him. You tell him that being able to predict the range is useless for making profits as far as you're concerned. He leaves the office, curses you out and says he'll be throwing mud on your well deserved and soon to be utilized grave.

A weather forecaster is introduced to you at a party by a friend. He informs you that he's been able to forecast correctly a month in advance the last 7 major droughts in the Midwest. He wants you to subscribe. You ask him why he doesn't just make a killing on these things himself. He informs you he would but he was caught big in one of his forays and lost his stake.

An expansive trader who knows stocks and bonds but knows nothing about the grains decides to take a position in soybeans. He buys a few hundred contracts at the market before the open, and it opens limit up and closes limit down. He finds that he didn't get out before the delivery notice, and his broker informs him that he's now storing 10 big train loads of soybeans in a warehouse at a charge of 10,000 a day + interest.

A trader opens a position in a short put spread selling 20,000 of premium. It goes in his favor for a few days, and it's 15% away from his higher strike price and potential loss. He checks with his broker on the margin and finds that he has 1,000 of premium left but the required margin is 1.5 million. He calls up to find if it's a mistake. "No, that's correct, during the last 3 days before expiration, we assume 10 scenarios, and take the worst which in this case was an immediate 30% decline in price. Furthermore, we're charging you 5,000 a day in Exposure Fees, to compensate for our extra risk. And yes, we just doubled our charges, because we got hit for a 300 big loss on Swiss franc positions, so don't complain."

The lone trader does his analysis and doesn't worry about being taken because he is just one guy trying to make a few trades. And then his setup happens and he takes his position…and the market does exactly the thing that will cause him the biggest loss. How can this be? he thinks. He is just one clown trying to clip a few ticks or points, here and there, not worthy of being a target. But he starts to suspect that maybe he is just one of a thousand clowns, or ten thousand, who are all doing exactly the same analysis at precisely the same time and taking the same positions, which are exploited by a better algo in a co-located box somewhere with huge backing. This "thousandth clown theory" starts to gnaw at him, makes him doubt.

Orson Terrill adds: 

An investment bank with operations in Houston hires an MBA from one of the most prominent business schools in California, he's also the son of the CEO of one of the largest banks in Latin America, and surely there will be huge deal flow for them. They put him on with great access and freedom. Instead of putting on a bad trade of several hundred thousand, he's able to executes several hundred million, accidentally, and loses several million in the first day. He ends up being a high paid restaurant manager, for his financial acumen and pedigree, and he sets the place on fire.

Apr

8

 The forced parallels of the current events in Greece with the events before WW I, WW II and the Cold War in Europe fail to fit the facts. The Russians are now using half their effective combat power to support the "volunteer separatists", the Germans spend less than 1% of their GDP on defense, and neither France nor Britain nor Spain nor Italy nor the Netherlands nor Germany has any imperial interests or even pretensions.

A comparison with the events of 1880 to 1890 in Argentina would be more useful. No one with any sense has believed that the Greeks were going to be able to pay the debts they had, yet Greek sovereign debts traded at tiny spreads to German ones for most of the period of this "crisis" (sic). During the 1880s the spread between Argentina's long-term sovereign bonds and the U.K. consols remained equally calm even as "underwriting banks demanded higher fees and Argentina's government accepted leaving more money on the table by underpricing its IPOs as its fiscal position deteriorated."

By 1890 the annual interest on Argentina's debt was 40 percent of that year's fiscal revenue.

anonymous writes:

What do you think about the idea that even closer in time one might draw similarities between Argentina in 2001 before the peg to the US$ at 1.0 broke and Greece today?…

1. In an effort to import policy discipline an ill-suited, rigid fixed exchange rate is adopted. Argentina in 1991 starts peg at 1.0 and Greece in 2001 enters the Euro.

2. Domestic economic policies that are inconsistent with the currency regime are pursued.

3. End game develops as official support wanes, domestic unrest waxes, and fewer pieces on the board heighten the disparity. Further to elaborate on the US dollar comments and some posts earlier…

As mentioned based on current volatility of around 10% markets have a reasonable chance priced of seeing 1.0 in the Euro within the next 18 months.

The Euro was at about 1.40 in May, 2014 and the recent low was 1.0458 March 16, 2015. The all-time low was about .8300 in October, 2001.

In terms of direction I would ask the question of what the drivers of direction have been in the past and what the drivers of direction are likely to be in the future.

Where is the change and variant perception that may cause an acceleration in current medium term direction or a reversal?

Further, given the "blip down" US economic data relative to expectations over the past month or two and the "short term" blip up in European economic data relative to expectations who else is asking this question and perhaps acting upon it? Has the EuroUsd 1.05-1.10 range created some complacency and perhaps allowed some steam to build up?

Apr

7

 Steve Stigler, in discussing regularities relating to the height IQ correlation proposed a rule of his father "the correlation between the intelligence of economics and their height is 0.99 with the exclusion of Milton Friedman and John Galbraith (6'8'')".

Andrew Goodwin writes: 

The idea I heard pitched once in Harvard Anthro classes was that it was the body size to cranial capacity ratio that had greater correlation with intelligence. Dolphins are supposed to rank highest in this ratio among the mammals. Dolphins probably have greater intellect than the humans looking at such simple and deterministic measures.

Apr

7

 Today is the anniversary of the Blitzkrieg. The tactic of using an armored division as an independent assault unit was first put into practice not by the British, Germans or French but by the Italians.

It makes me wonder - again - why so wonderful a writer as Rick Atkinson chose to do the long unrewarding slog of following the American Army's follies in North Africa. Some topics are better left buried - like the Seminole War.

If you spend much time there, you come away with a sense of how thoroughly incompetent the official American Army has been whenever it could not leave the bulk of the fighting to someone else. Thank God for the citizen army.

The reward, if any, is to realize how masterful Jackson and Eisenhower were as Presidents. They both knew that Americans' vaunted capacity to fight and win wars depended on having (1) effective allies - France in the Revolution and again in WW I, the Soviet Union in WW II and (2) outnumbered opponents. Yet, each man was able to convince the rest of the world and Americans themselves that the United States had exceptional military skill. Without that triumph of marketing the country's most profitable victories - against Mexico and the Soviet Union - would not have been possible.

Apr

7

 The book Fundamentals of Modern Statistical Methods by Rand Wilcox describes many situations where slight departures from normality create large distortions in the usual methods of statistical analysis. It recommends more robust procedures such as using the median, the trimmed median, bootstrap simulation, absolute deviations, running correlations, likelihoods, and something I hadn't seen before, M-estimators, to overcome what seem like trivial departures from normality like mixed normal distributions rather than single such.

The book is self contained and doesn't require a high level of previous mathematical or statistical background. It contains summaries of each chapter in five easy steps. It's a good primer and spark for improved methods of looking at data.

Apr

7

A floor trader from the Merc was replaced by a computer algorithm. His life after the pits was documented in this fictional series of short videos. Every stereotype of traders and ex-traders is touched in this comedy.

Apr

7

What Is A Trader?
 I ask the man.
He looks at me.
A trader is not a bystander, nor a mindless member.
 Neither is he a selfless servant. No,
A trader is an ecosystem,
 Evolving,
 Refusing to be categorized or labeled,
 Branded or defined.
Not one role,
 Not one task,
 Not a tool or production line,
 Not one idea or small man. No,
A trader is an ecosystem,
 Independent,
 Challenging all else
 To survive and thrive, evolve and change, or
 Sink and die. Extinct.
A trader knows existing today is not tomorrow.
 Buttons pushed, research tested, markets predicted.
A trader lives for certainty in self and tomorrow’s unknown.
 Adapting to survive, evolving to advance, competing to learn.
A trader creates a pulse that connects and propels
 An ecosystem he designed to challenge our own.
So the trader returns back to the question,
 What am I and who are we?
Consistent, curious, and connected,
 Accurate, authentic, and adaptable,
 I strive to be.
 I am an ecosystem within this unknown we.
Know Thyself,
 He says to me.

Apr

2

 It is difficult for me to fathom why a now struggling toy company would pick a Greenwich, CT based 64 year old, classic corporate guy (who ran Pepsi for a few years) to be its CEO. Maybe he has grandchildren? Or great-grandchildren?

anonymous writes: 

They must think their problems are organizational.

But it got me thinking about how a modern toy company needs to focus on what kids want now, which made me think that AAPL should produce something like the iKidPhone, which would be a less-expensive, limited cell phone for little kids, with game and learning apps, and the ability for the adults to let the kids have just a specific set of numbers for friends and family that they can call. Might work. I know, I know, "it's called the iPhone 4". But AAPL might be able to create a specific product that would sell nicely and maybe cannibalize some of that hand-me-down business.

Apr

2

 All are welcome at the Junto tonight

Date: Thursday, April 2, 2015

Time: 7:30 p.m. - 10:00 p.m.

Free admission, no RSVP required

Location: 20 West 44th St., ground floor New York City

Jason Riley will speak on the topic of "PLEASE STOP HELPING US: How Liberals Make It Harder for Blacks to Succeed"

Here is a Barron's Review of his book:

Reviewed by Gene Epstein

In this courageous and clearheaded polemic, Jason Riley recalls the racial profiling he suffered as a young black man attending college. Living off campus, he was stopped so often by police while driving to his classes in the morning, that he "started taking a different route to campus, even though it added 10 to 15 minutes to the trip."

Moving to New York after college, Riley kept encountering indignities, like being avoided by cab drivers or being asked to prepay for a meal after ordering in a restaurant. But while he recalls these experiences as frustrating — "I was getting hassled for the past behavior of other blacks" — he recounts them without anger.

Riley also recalls that he himself practiced racial profiling as an undergraduate working the night shift at a gas station with a mini-mart. Since "the people I caught stealing were almost always black," he writes, "when people who looked like me entered the store my antenna went up." He points out that, given "the reality of high black crime rates," most ordinary people, black or white, practice racial profiling because they are "acting on probability." He admits to crossing to the other side of the street at night when young black men approach, not because he is "judging them as individuals," but because he does not want to "take the risk."

As part of the author's plea that liberals "stop helping us," he argues that it is no help for liberals to blame racial profiling on racism, or to deny that society must be tough on crime. Since "90% of black murder victims are killed by other blacks," liberals' general indifference to effective crime prevention comes down to caring "more about black criminals than their black victims."

A member of the editorial board at The Wall Street Journal (published by Dow Jones, which also publishes Barron's), Riley would surely call himself a conservative. But he pays homage to liberalism's achievements on behalf of blacks. "The civil rights struggles of the mid-20th century," he declares, "were liberalism at its best." He hails the Civil Rights Act of 1964 and the Voting Rights Act of 1965, and includes in his honor roll "Rosa Parks, Martin Luther King Jr., the Freedom Riders, the NAACP, and others who helped to destroy significant barriers to black progress and make America more just."

But Riley believes that liberalism has long since become a part of the problem rather than part of the solution — and especially the liberalism of today's black leaders. "The civil rights movement of King has become an industry that does little more than monetize white guilt," he observes. By contrast, "King and his contemporaries demanded black self-improvement despite the abundant and overt racism of his day. King's successors . . . nevertheless insist that blacks cannot be held responsible for their plight so long as someone somewhere in white America is still using the n-word."

Liberals portray young black students as victims of school systems run according to "European American" values, a judgment that exempts the students from responsibility for poor performance. One reason this view is dubious, the author points out, is that black students from African countries generally perform better in school than their American counterparts, even though English is not their first language.

Another reason: Black American students show much-improved performance in charter schools — public schools run by independent organizations according to the same European-American values. The success of charter schools, he notes, is "one reason why they are so popular with black people." These are black people — as distinct from black civil rights leaders — who refuse to succumb to liberalism's destructive delusions about the proper schooling of their children.

"*Please Stop Helping Us*" is written in a clear but understated style that gains power from understatement. Not once, for example, does the author use emphatic words like "hypocrite" or "hypocrisy." But he does expose liberal hypocrisy in some of its blatant forms.

Speaking of the achievements of the school-choice movement via charter schools and vouchers, he points out that, while liberals "urge poor people to sit tight until . . . bad schools are fixed, they themselves typically show no such patience." Among liberal champions of public schools who nonetheless rejected these schools for their own children, he includes in the hypocrisy hall of shame Bill Clinton, Barack Obama, and Ted Kennedy.

The author quotes the bracing tough-talk of entertainer Bill Cosby, which he much prefers to the liberal rhetoric of President Obama. "We, as black folks, have to do a better job," Cosby declared in a speech for which he was vilified by the black intelligentsia. "No longer is a person embarrassed because [she is] pregnant without a husband. No longer is a boy considered an embarrassment if he tries to run away from being the father."

Or as Riley puts it, "Having a black man in the Oval Office is less important than having one in the home."

Apr

2

 Franklynn Phan writes:

Dear Mr. Niederhoffer,

Thank you again for the "What Is A Trader" challenge. I thoroughly enjoyed reading the varied submissions.

Recently, I was listening to a radio show from the CBC that reminded me of "The Education Of A Speculator". The broadcast (Wire Tap - Forgotten History) describes a Brighton Beach/Coney Island environ as vivid as the one that you describe. I have taken the liberty of attaching a link, not only because I think that you might enjoy it, but also as a thank you for the many eclectic show tune classic that you post (the most recent one being a fav).

(It starts at 3:26)

Best regards

Victor Niederhoffer replies:

Thanks for those resonant memories. Now I'll tell you one.

Joseph Heller was born in Coney Island and always went to steeplechase where the clown blew up the skirts. You got a 50 ticket card for 25 cents there. As you went through the rides the 50 holes were punched. Joseph couldn't afford the 25 cents but it was no problem. They'd wait for the old men to come out, and then say, "mister can I have your ticket." The old men would give it to him, usually with 40 holes left and the kids could enjoy the rest of steeple chase for free. About 50 years later in '64 right before steeple chase was closing, as a blast, to recap the old, Heller brought Puzo and Mailer to steeplechase. They bought the tickets, but when Puzo when through the roller, he fell, being somewhat rotund (by the way Puzo never met a mafioso but did the whole thing on library research). Okay, the three of them sat on a bench and cursed their agents, and talked about the declining sale of hard back, and the problems with their royalties et al for the rest of the day. As they got up to leave at 4 pm, some kids approached them: " Mr., Can I have your ticket". They looked at their tickets 49 left on each of them.

Mar

31

 The demise of Capt. Cook, Hawaii, Feb 14 1779

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1. The book Captain Cook by Vanessa Collingridge tells the story of the rise and cannibalization of the greatest explorer in English history, and the discovery of Australia, and the attempt by a nobleman illustrator to take away his renown by showing that a Portuguese actually discovered Australia, and is a great travelogue of an intrepid modern day explorer geographer in Vanessa Collingridge, a cousin, and contains much material of salience for Aubrey lovers, e.g. Joseph Banks the naturalist rode with Cook and had a Maturinesque relation with Cook similar to Maturin's with Aubrey. But for me the highlite of the book was the story of 10 disparate random things, terrible coincidences that led to Cook's death at the hand of the Maori's in Hawaii. First, Cook had to create hostility with random killings by his rebellious officers on the previous visit, then he had to be turned back by icebergs when he left trying to find a northern route bak home, then he had to choose to go bak to the Maoris, then a Maori chief had to steal the tiller and carpenter's tools, then they had to have a miscommunication as they decided to blockade the harbor but Cook went out alone to catch the culprit, then the chief was ready to come aboard as a hostage, but at the last minute the wife intervened to beg him to stay, then one of his officers on the other side of the island had to kill a native, then the marines and Cook failed to watch their back not believing that a deity like Cook could be in danger. All had to happen for the fatal clubbing behind his back to kill Cook. It's like what happens with a bad trade that is not properly thought out that leads to disaster. Brett Steenbarger is rite that a few minutes of delay and thought before pulling the plug can save the Kingdom.

2. The round numbers are becoming particularly attractive all over.

3. The more I study chemistry, the more convinced I am that all the quantum and whole number states and jumps between wavelengths as in climbing up a ladder and angles between the atoms of the molecules have direct and useful implications in our field.

4. LoBagola is living in many markets with moves up and down the ladder occurring with inordinate frequency.

5. The Japanese baseball is a perfect model for how all traders should be prepared in our field, and it would be useful for all to see a Tokyo Giants game. An added bonus is that there are beautiful songs for each player.

6. The books about Rothschild show that he played the same role in financing the railroads at the start of the Industrial Revolution in Europe that the venture capital firms in Silicon Valley play today.

7 The best sushi restaurant in the world is in Awaji Island (outdoor scene restaurant the food ),the shellfish capital of the world. The beauty of eating non-frozen sushi just off the boats, and having abalone in abundance rite out of the shells is unrivaled.The price of a comparable meal in NY at Masa or Nobu would be 10 times as high, and 1/2 as good.

8. I know of many kids of Commodity Traders who are as independent as their fathers and often turn that independence into rebellion

9. Crude oil goes up and down with Mideast hostilities but like all commodity markets ultimately moves as Sushil points out to telescope future supply at lower prices and moves to balance today what future prices will transpire when the supply at current prices is reduced. In other words, the cobweb theorem still holds and trumps Russian and Yemeni and Saudi moves.

10. The elderly agrarian at the Fed seems intent on bulling up the economy when it will help our agrarian counterparts in the legislative branch.

Mar

31

1) "The leechbook is one of the earliest examples of what might loosely be called a medical textbook. It seems Anglo-Saxon physicians may actually have practised something pretty close to the modern scientific method, with its emphasis on observation and experimentation. Bald's Leechbook could hold some important lessons for our modern day battle with anti-microbial resistance." http://www.bbc.com/news/uk-england-nottinghamshire-32117815

2) and an interesting blog published by the Society of General Microbiology on resistant microbes and microbes in general http://microbepost.org/

Mar

31

Fascinating story on the BBC World Service :

"For decades, Mark Landis donated art to museums and galleries across the US. He was feted as a wealthy collector but the pictures were fakes that he had created himself."

"I know everybody's heard about forgers that do all these complicated things with chemicals and what-have-you," he says. "I don't have that kind of patience. I buy my supplies at Walmart or Woolworth - discount stores - and then I do it in an hour or two at most."If I can't get something done by the time a movie's over on TV, I'll give up on it." The way Landis presented himself - and his donations - was also very convincing.

"He said everything an art museum would want to hear," says Leininger. He had a "back story about how he had this art collection and supposedly family wealth, promising money for endowments".Leininger sought advice from a former FBI agent who specialised in art crime. But because no money had changed hands for the forgeries, Landis had not broken the law. The burden of due diligence fell on the institutions who accepted his donations and if they displayed his fakes in their collection, that was their problem.

Pitt Maner III adds:

Reminiscent of another artist..

 "Eventually Boggs was acquitted. His lawyers persuaded the jury that even “a moron in a hurry” would never mistake his drawings for pounds sterling. In truth, the threat posed by his art had nothing to do with counterfeiting. If the Bank of England had reason to be anxious, it was because people knowingly accepted Boggs bills in lieu of banknotes."

http://www.forbes.com/sites/jonathonkeats/2013/01/18/j-s-g-boggs-counterfeit-money-is-worth-more-than-the-real-thing-are-you-buying-it-book-excerpt-2/

Mar

30

Here's one of the most useful things i tell my students: once an old man told me to pull out a sheet of paper and order the five things in life that are most important to me. Most people choose: money, family, job, security, sex. for me (Keeley) the list i made at age 25 yrs was: knowledge, experiences, health, travel. and helping others. I've reordered those throughout the years, but the list remains the same.

Mar

30

Speed Traders Make Peanuts in Profits From Economic Data Plays - Bloomberg News Item

Vic Niederhoffer:

Excellent academic paper with many fascinating facts, e.g. the human reaction time is 200 ms. vic

Paolo Pezzutti adds:

It is called:

"Do High Frequency Traders Need to be Regulated? Evidence from Algorithmic Trading on Macro News" by Tarun Chordia, T. Clifton Green, and Badrinath Kottimukkalur

The link:

http://www.bus.emory.edu/cgreen/docs/Chordia,Green,Kottimukkalur_WP2015.pdf [38 page pdf]

Burgess Humbert comments:

Taking the paper at face value, and Ceteris Paribus, the elimination of excess profit down to a 'utility' rate of return is a natural phenomenon in a field whose technological advance has resembled an arms race of late.

Unfortunately - ( and this does not denigrate the thrust of the paper or its authors ) - a call to ex colleagues in the field just now led to them falling off their chairs laughing at the idea that the marginal returns are ( or are beginning to ) decline.

As to the other part of the paper about the need for regulations etc. Let me answer this way -

Execution via High Frequency execution has both improved and decimated 'liquidity'. ( Here , I refer exclusively to spot FX, commodity futures, long end interest rate futures and stock index futures )

It has improved liquidity for transacting small parcels that are small enough to be executed within the first two levels of the bid/offer depth order book. I find the improvement stunning - particularly FX.

In terms of dealing in size - well, just a year ago, one could call a counterparty and get a stunning bid and or offer in say 75 mio GBP/ USD Spot FX. No more…. a combination of regulatory change and HFT execution has worsened fills by about 0.00015 in this amount. ( please let's not even start with discussion about using market maker provided execution 'algorithms'…. )

A real life example to put some meat on the table ; The last time I sold 50 mio GBP USD the rate going in was 1.4987/89… the following 'fill profile' is typical of a market order of this size nowadays-

3@87

17@86

30@84

Worse case fill at 86 when dealing with senior professionals just a year ago.

There are ways to improve on this, but I wanted to demonstrate how HFT has both improved and decimated liquidity at the same time.

Andrew Goodwin is skeptical:

What is the cost to every resting limit order in every correlated asset? Think of all assets including options, stocks, futures and derivatives or combos. Isn't is a fool's errand to look at profit from S&P 500 futures to generate the conclusion that HFT does not make much money on news breaks?

Burgess Humbert agrees:

Indeed. Let's call it 30 billion a year with a Sharpe of something approaching infinity.

stef says:

The real problems with HFT are the rules and how they protect the manipulators

See "Direct vs SIP Data Feed" http://www.nanex.net/aqck2/4599.html

Burgess Humbert adds:

There are indeed some very nasty yet very legal order types. The description of some of the orders extends to 20 pages ( yes twenty pages ).

But, there are ways to minimise and work with it some of the time.

I encourage all to regularly read;

www.nanex.net

One particularly amusing story on that site ( that caused a change in Federal Reserve data release policy !!!!) is called something like '… Einstein and the great Fed robbery …'

Look it up- it will change your world.

Surely a candidate to be made into a film one day.

Mar

30

Positioning for relatively low probability outcomes ( in terms of both magnitude & runs of consecutive similarly signed trading periods ) has been the optimal thing to do for the last several months in CL, Currencies, Bonds and DAX. ( ex- post profitability from momentum strategies likely in the order of that list also ). Contemporary returns from the HF world up until last Friday support all of this.

This post does not seek to challenge or discuss the wisdom of these moves or the disturbing future ramifications.

In dealing with the market's regular shifts between rewarding either;

* positioning for low probability scenarios

Or

* positioning for high probability outcomes

It is difficult to assess how the market has done because the practitioners keep changing, survivors bias comes into play (in addition to all the other factors that are common in these types of studies)

One approach that has been fruitful has been to run theoretical portfolios of naïve trend following strategies and portfolios of naïve reversionary approaches. The aim is not to trade them but rather to have an objective measure of what strategies the market is rewarding with outsized gains and looking, quantitatively, at conditions that indicate a change in regime.

To those of this list who care - I believe a substantial change of fortune is at hand based on the above.

For the avoidance of doubt - Further out than the next 36 hours I have very little idea as to the direction of any of the major markets so I most clearly am NOT calling the end of any major 'Trend' ( whatever that is - Sorry, couldn't help myself). What I am saying is that the mistress is likely to be much more discriminating in sharing her pleasures than she has been in the last several months per unit of risk taken.

Mar

30

P.S. One of the gravest errors in the area of testing and counting is the assumption that if something is statistically significant in one period it will be predictive in the next (in markets or life). 

My market views:

Europe UP as long as Ukraine and Greece do not worsen.

USA with strong $ has lost competitiveness vs rest of the world, revenues do not justify present stock prices.

The tax burden is increasing in America. It is likely that markets remain flat (fall on worsening data).

Before Europe solves the problem of Greece … and EU proceeds with the QE, before skies are blue again [much time will pass]

The world central banks all involved to bring rates into negative territory, didn't they learn anything from the competitive devaluations of 1930's.

Summers advised Janet to NOT raise rates (and so the $) …maybe bring about negative rates?

All these Trillions printed in anticipation of future earnings… in a global economy that will not restart… and not one billion flows to the underlying… the real economy. Consumers are to be listed in the WWF web site as endangered species.

There seems to be an inflation of red pills:
Blue pill, the strange vision ends, tomorrow you wake up in your bed and believe whatever you want.
Red pill, you stay in Wonderland (rates negative and QE when needed), and they show you how deep is the white rabbit hole.

What are they waiting for? A miracle? Or the restart of the Chinese economy in April…

From 2009 to end 2014:
1514 total days, 27.53% of them "red 10 day" [positive 10 day momentum]

In 2008 it was only 11.81% (I am using S&P500 index, not futures).

Mar

30

"The forty-eight hours after the march into the Rhineland were the most nerve-racking in my life. If the French had then marched into the Rhineland, we would have had to withdraw with our tails between our legs, for the military resources at our disposal would have been wholly inadequate for even a moderate resistance."

This "quote" of Hitler's is now being used to justify arming the Ukrainian Army. It will undoubtedly succeed because "we all know" that, had the Allies stood up to Hitler, nothing bad would ever have happened.

What will be conveniently ignored are these trivial facts:

(1) The only two European victors in WW II - Britain and the Soviet Union -both supported the German military reoccupation of the Rhineland over France's objections.

(2) The actual testimony at the Nuremberg trials of the source of the quote, Paul Schmidt, who was the German Foreign Ministry's translator.

"Considerable fear had been expressed, particularly in military circles, concerning the risks of this undertaking. Similar fears were felt by many in the Foreign Office. It was common knowledge in the Foreign Office, however, that Neurath was the only person in government circles, consulted by Hitler, who felt confident that the Rhineland could be remilitarized without armed opposition from Britain and France. Neurath's position throughout this period was one which would induce Hitler to have more faith in Neurath than in the general run of 'old school' diplomats whom Hitler tended to hold in disrespect."

Source: http://avalon.law.yale.edu/imt/03-28-46.asp

Mar

29

Many thanks for indulging my post.

Allow me to stretch some thoughts on Reality & its Perception.

Say, a star is said to be 4 light years away from us. If it is assumed for a moment that, it would be possible to travel at the speed of light or slightly less than the speed of light at some point in the coming future, then too it will take one to reach that star a little more than 4 years. To know the reality of the star for sure, one would thus be separated from its reality by the distance and the limitation on the velocity of cognition. One will therefore know only much later after the star ceases to be in existence when it so happens. Without the assumption of the travel at the velocity of light, all minds — scientific or otherwise — are limited by a fact that for an entire 4 years all could be only perceiving a star to exist that has actually ceased.

Same way, for any other observation of reality, there are perceptive limitations. Limitations brought about by the limited availability of tools of observations and the necessary and unavoidable lag on the one hand and limitations brought about by impositions of our unique minds (that are self organizing pattern seeking systems) on the other hand.

As economic agents, we are not required to and are often unable to work on the challenges of improving up on the available tools of observations. But as economic agents we are required to and all the time observe with the limited tools. We have a freedom to overcome our minds or succumb to them. Traders are those who overcome the mind. The rest are merchants, sales-traders, sales persons, research analysts, strategists. Each of the other agents in the financial markets is allowed to and encouraged to exist in their respective ivory towers of imagination, self-justified values and beliefs. Traders are neither allowed to exist in ivory towers nor do they choose to live there. Traders respect markets more than any other agent and the maximum weightage they attach to any inputs are the inputs provided by the behaviour / activities of the markets. In this simpler sense, traders are the ones who observe markets closest to the purest state of observation, while all others evaluate markets from their perceptive screens.

This connects the dots well with the idea that traders thrive and not just survive the intense frequency of feedback that markets produce. Those others farther down the perceptive efficiency chain (the food chain), ignore a lot of signals of the markets that are eeking red lights at them, since those others choose to not handle the intense feedback mechanism. This is true, according to my "mind", of any participants on any frequency / time horizon in the markets.

Traders, in fewer words, act spontaneously along with the market. All others act after imposing their beliefs. Some continue to live in Abelsonian denial.

Mar

28

A patient walks into a doctor’s office for a diagnosis of whatever ails him. A time-consuming, costly battery of tests follows that comes up with a targeted diagnosis many hundreds of dollars and days later. However, in Latin America the doctor examines the patient, asks a few questions, and 15 minutes later has a short list of differential diagnoses. This is the two or three candidates for the cause. Then, one-by-one, corrections are made until the right one is found. It’s almost always the first or the second educated guess. This is Latin medicine, on-the-spot diagnosis and treatment that prevents costly, time consuming lab tests. I’ve been through it a hundred times for my zoology of past and healed problems. One doctor in Mexicali told me that he could practice in the USA, but prefers Mexico because of this protocol.

Mar

28

One very significant and predictive element of surf forecasting is the period of the swells.

NOAA Wavewatch [latest pacific waves forecast]

The period is the time between the peaks of the waves and can determine the eventual size of the breakers, the power, and the quality. Higher periods mean faster and better waves. A smaller wave with a long period is often better then a big wave with a short period which is choppy.

I wonder if market price periods might have some predictive value. Survivorship analysis is one way to look at it. Time between events, max and minima time periods seem productive looking forward. An idea is along the lines of the longer time between max/min the more the amplitude as in waves in water. Would shorter periods mean more "chop" with less favorable trading conditions. Would longer periods predict larger amplitudes or more vol and good trading?

Ed Stewart comments:

I think there is something to it. The tricky part is sometimes one can identify wave periodocity that they won't let you profit from - they let you in on the bad trades every time but not often enough on the good trades. Yet is can be very enticing if one does not consider that factor beforehand.

For example. A friend told me his firm "shut off" their computers due to going outside their risk parameters, and what do you know the periodicity during that period was highly profitable with the type of very fast reversals and squeezes from extremes many short term traders thrive on. Huge volume still but a low level of resting orders. Made me consider that when composition of the participants change the character of price formation changes substantially.

Stefan Martinek says:

High/low pressure areas drive weather patterns. Pressure can be quantified in markets as well. We can fix a time unit and measure the price pressure, or we can fix a price unit and measure the time pressure. Price and time are non-linear. To manage just one dimension seems enough.

A few years back we sailed to Corsica [island in the Mediterranean] when Mistral [strong northwesterly wind] arrived. All was very predictable: Short chopping waves, everyone threw up 10-20 times except captain, and it went for two days. I never sailed between Europe and the US, but some claim that it is the most predictable journey due to Passat winds.

Mar

28

Here it is; Two old men coming out…now the media will be forever on our side. Vic captured their minds—I’m still here—and they are still talking about him as the legend he is.

My highlight of the baseball game was seeing people eating pizza (and other food) with chopsticks. Lots of traders here and some very successful one; they like to test

lw

Vic Niedehoffer adds:

Larry and I are on the same wavelength. At a great sushi dinner, an attractive  tv reporter accompanied us. She mentioned that she had interviewed a certain world traveler that is old hearted about commodities at his home in Asia. Before she finished the sentence Larry and I both spontaneously and independently said  " did he hit on you?".

Aside from standing on Larry' s shoulders and seeing the Giants warm up, I visited the Tokyo and Kyoto fish markets, and had the best sushi of my life at Awagi Island rite across from the Pearl bridge, the biggest suspension bridge in the world. The Island is the shell fish capital of the world, and I had 4 sauteed abalones, which I haven't had as good as since 50 years ago at Sams on Bush street. They now cost 50 bucks a 3 inch circular abalone versus a buck or two in my day. The restaurant is a fish market during the day and converts into a sushi restaurant with all the local fish of the day in the evening. I had some Kobe beef hamburger afterwards as a test, but it's so tender that there is not much firmness in it. vic

 Gary Rogan complains:

It's interesting to note that you stressed directly the opposite back in 2007. You emphasized both on Dailyspec back then and live at the Junto, that your favorite seafood sit-down's in San Francisco menu merely appreciated not even three-fold over as many as three decades past. Your point was to knock down commodities' long term potential vs stocks. I could never understand why you meant that to immediately be Bullish for stocks vis-a-vis commodities. Did the fact that Stocks were at yet again historic high vis-a-vis commodities that languished for decades was comparatively Bullish for stocks?? I was shellshocked. Now we hear an opposite song: $50 vs $1-2! The deflationary omen?

Gary Rogan comments:

Abalone doesn't seem like a good predictor of anything general, especially their prices in San Francisco. All commercial fishing of them is banned.  As for comparing their prices in Japan today vs. California 3 decades ago and deciding what it means for commodity prices, this has got to be a job for the famous trader who is based in Asia who is the only person smart enough to accomplish this feat.

Mar

27

Larry is treated as a God in Japan. He started the whole industry of technical trading in Japan and about 1000 of his students were in attendance. He believes in conveying specific tested trades to his audience, and he has many students that he has been teaching for 20 years. One of his students handed me his card, and he was the Richard Branson of Japan owning 15 businesses including one involving the cruise ship outside our hotel . Larry concentrated on specific trades, and I concentrated on principles. We were a great tag team. But we both felt that we didn't get the universal respect we are entitled to. We decided at a great sushi dinner the nite before to rectify the situation. The only way to get universal respect in America, guaranteed fawning from the media is to come out of the closet. So we announced that we were coming out of the closet at our Sunday afternoon presentation, and we were greeted with appropriate plaudits, and Tokyo tv which followed us around and video'd the whole program was suitably appreciative. The highlite of the tirp for Larry and me aside from seeing all his fans was our trip to the Tokyo Giants suggested by Larry. I got there at 3 pm to see the 4 hour warmup. The best part was the 80 year old manager leading his team in calisthenics, all the time berating the laggards for not doing it expeditiously enuf. I used that scenario in my talk about the importance of preparation and wa. vic

Mar

27

The trading contest entries were fantastically good,and I compliment all of the entrants on great ideas and spirit. The Prize was 2250. The winnner is # 59 . The second and third place are 18 and 37. The prize will will be split 1500 to the winner and 400 each to the second and third place. Some of the entries were so good that they deserve to be rewarded . I am just back from Japan but will review all the entries and send canes to a number of the great entries that were not winners. The canes can be used as you know for hobbling down with your overplus to wall street during period of panic. Winners kindly send your address to  Lap@mantr.com and a check will be sent. Thanks for your heroic and valuable efforts. Sincerely, Victor

ps. The contest went so well that another contest will shortly be held. vic

Mar

27

I have seen this card trick many times ("Pick a card, any card"). This is not the best video, but is one that I found with a quick search: flash card [You Tube 0:39]. Please watch it to make sense of my rant…

What if: Traders are glued to watching quotes. HFT can flash quotes — "is it too fast?" Let me go slow. Then, it is something humans can actually see, dances around and pauses on the "right number", dances again. Sometime later, the market moves and everyone jumps in etc based on whatever indicator (FOMC, Economic numbers, Technicals, etc.). They need a stop. Let's pick a price "no one else will know".But HFTs know — 99% pick the same number based on the way they flashed prices and run them.

Is it possible? Because somehow the more I am glued to the screen, the more likely my stops are filled!

Mar

27

When planning a research agenda, I believe that it is fruitful to start with a modicum of thought about the ways in which markets try to misdirect our focus.

In extremis everything available to the modern trader that is supplied to him by the providers of the market infrastructure ( exchanges, banks, government et. al.) provides a picture or 'information/data' that in some way attempts to generate 'business' for the provider ( commissions, taxes, subservient behaviour etc. )

Whilst the above borders on tin hat conspiracy ( after all, we need SOMETHING to analyse! ) it makes one think about what factors affect prices that are not readily available.

Some are:

# True bid/ask volume and depth. Nowadays, this information as shown on DMA platforms arguably does not represent the intentions of the buyers and sellers in the market given all the different order types & not to mention HFT. So, one should research into whether magnitudes and changes in it have anything to do with future price changes in and of themselves.

# The price formation process. One has seen live trading evidence that there are very high levels of mathematics- applied to reasonably high frequency data ( not so high frequency that latency or hardware is the true 'edge') - that there exist relationships between numbers that are very predictable for short holding periods ( interestingly this type of predictive analysis descends into randomness with holding periods longer than about 36 hours - it may be of interest that the best trading firm since we left behind the primordial slime trades within this time frame) So, at the meta-level is there a price formation process that ( whilst not necessarily available to all, might in some way reveal itself )

# Changes in regime. Whilst not wanting to enter into a discussion here about things like hidden Markov switching et. al. It is very interesting to consider how, when & why the markets shift regime. This may be from Trending to non trending, from relatively low to relatively high levels of Volatility.

# Markets' varying responses to the same stimuli. An example shall suffice -yesterday morning, one was fortunate to sell GBP USD at a very good level based on one of my approaches. The market declined sharply subsequently. The same trade idea applied later in the day would have been the exact wrong thing to do. Now, I know why in terms of my trading approach but the bigger question is still there - it's all just data isn't it. Of all the four points listed in this post, this last is most reasonably addressed by an understanding of non linearity- but that for another day.

Just as I concluded the above it strikes me that perhaps 'comparative advantage' can be made to work in trading - I am certain that I have a 'closed form' answer to research that others have spent two decades on and I am sure others might look at some of my strategies' short comings and have improvements that would be very helpful to assisting one become a Rothschild.

Good day ahead all.

Ed Stewart replies:

Great post.

My working hypothesis is that markets "advertise" to draw in the maximum amount of resources to the system. Price action and "fast action" seems to entice the basic urges the way i fishing lure does for the fish. Much of the "stuff" out there, is to draw in new participants and their $$, like blinking lights at the casino. And it is not a "conspiracy" but rather spontaneous order of the market do to competing profit incentives.

Of course the above is not my idea, i learned it (expressed much more eloquently and accurately) from Victor's books. It is only "mine" in the sense that the more I trade, the more i see the applications, and the more certain I am that it is true. I would say it took me about 5 years to get the point, so I am a slow learner.

Mike Caro the poker author had an article recently that said something like "you should be happy when your opponent draws out on you". ( http://www.poker1.com/archives/12809 ) Of course, because it keeps them playing and taking shots. Same is true with trading, i think.

What the market does is advertise the "drawing out" situations and then entice people to make those plays, which are not percentage plays. Anyone who looks at a chart naturally picks out those "drawing out" situations and says, "I would have bought here and sold here" etc.

Even investors, traders, or hedgers who do not officially use charts or market-based signals can still be influenced by them, because they have psychological impact or pull that does not require conscious articulation.

Jim Sogi adds:

Big orders used to mean something in the depth, but deception is the rule of the day now. Some of the traders or market participants at CME get info on who is making the orders. That might mean something in a deceptive environment. When also seems to be important. How long seems to be a regulatory and legal grey area now as well.

Gary Phillips writes:

Deception is nothing new, and the market's micro-structure is nothing new. back in the pit, it was always my belief that the market would trade to size. floor traders would inevitably be lured into stepping in front of large orders, only to race one another as their lean got hit/taken and disappeared. the exchanges have since struck a faustian bargain to provide the same benefits to hfts, (including front-running, etc.) in exchange for the provision of market liquidity; something that was once the provenance of the floor trader. the new micro-structure, doesn't appear to have changed things much. back in the day, when we wanted to "pull liquidity" we simply put our hands down, and like the hfts, we would do the same things, at the same time.

Hernan Avella adds:

Gary observes: "and the market's micro-structure is nothing new"

When talking about the stock market, this is certainly not true. Here's a good reference Fox, Glosten,Rauterberg: The New Stock Market . When taking about futures markets, the differences are also profound. Electronic trading is a continuous auction that features an order book, because of this you add another dimension to the game: the priority in the book. You also have different types of orders that affect liquidity and risk transfer. The meta-principles of deception and whatnot might be the same in life, pits or servers, however, an observation relevant to practice has to take into account the enabling mechanisms . Hernan.
 

Paolo Pezzutti argues:

Overnight when trading is lighter the book may provide some " true" indications (although this should be tested…). Algos are less active, hft is not there and the slow trading pace sometimes looks more driven by arbitrageurs more than anything else. This might give an edge in an environment that has different characteristics and competitors than during regular hours.

Mar

26

Economic forecasters fail to foresee recessions and are politically biased. Those who get the big calls right do a particularly poor job on routine ones. But the picture isn't entirely bleak. See my review of "Inside the Crystal Ball" by Maury Harris.

Mar

26

I have come to like these posts which ask us to examine in depth the nature of trading. Today I think and write of very successful traders (speculators, if you like) who do not seem to ever be excited about their profession. This brief comment (from a few years back) by Sir Vic started me in this direction:

"Jim Lorie was one of the most successful speculators I ever knew. He passed away with a vast estate and he did it mainly on a teacher's salary, which was very modest in those days. His method was always to ask his friends for a good stock, buy and hold it, letting go only when it was bought out."

Sounds boring; really boring.

For some reason Jim Lorie reminds me of one of the most successful commodity traders of his day, back-in-the-day. I won't speak his name since his privacy was important to him and he may still be with us. He had a small office on "the street" and visited a nearby deli, where he would have lunch and take the rest of the day off - the rest of every day off. This is where I made his acquaintance. I think he liked me because I did not know everything and did not act like I did.

He shared his trades with me. Very rarely did he have a loser; his winners were usually big winners. He traded in size for himself and he had a small, but very wealthy, client base. He was never excited about a trade. Mainly, he thought about his garden and fly fishing. He had one simple approach:

"Let the technicals confirm the fundamentals."

A book about folks like this would be a snoozer. The general impression about the successful speculator is that he is on the edge of stress every day in an exciting world of near misses.

Nope.

Mar

26

dig if you will the picture
doubt and patience amiss
the smell of fear now vanquished
can you my bears
can you picture this

how can I be too long
when rates refuse to rise
maybe it's because of the dollar 2 strong
maybe I'm in for a surprise
maybe I'm just like the herd
they're always foolishly enticed
trying to change the free bird
maybe it's already been priced
but this is what happens
when doves fly

Mar

26

Everything was ready [for Eurozone economic recovery] but now Greece's blackmail threatens to blow up the party.

The situation with Greece seems about to escalate, at first I thought it was a way to buy time until after the May election, but the level of confrontation continues to rise day after day, both from European countries and from outside ( even from warren buffet and his dog, when warren will be food for worms .. Greece will still be there ), now there are hints of the exit of Greece from the euro. The substance is that they do not trust Tsipras, whose blackmail if followed by victory would be a negative signal, a bad example. EU will try to worsen the situation in Greece until new elections in Greece (…?) and replacement of Tsipras with politicians more willing to impoverish the Greek people at any cost . It seems another Lehman and it seems that Europe is willing to risk this poker hand.

So Greece will be "saved" despite everyone knowing the country can never repay their debts. The Russian or Chinese threat is something far worse than $ 300 billion of Greek debt. Which says a lot … about the debt of nations!

 Andrea Ravano replies:

I don't think the World's Nations are supposed to repay their debt, but to roll it on; the European  liquidity crisis which arose after the Lehman collapse is a clear example of lack of re-financing of existing debt. I think we must examine the problem of debt in these terms, not in terms of repayment.

Mar

26

Kyle Bass recently opened a new strategy against drug companies: short their stock and then attack their patents, using a law from three years ago that basically opens the door to such things. Even if the challenge results in no action by the PTO [Patent and Trademark Office], it will take a while for that to come to closure. In the meantime, there’s some discounting of the presumed NPV of the portfolio as those wily masters of earnings estimates on the Street (who are never ever wrong) conclude that the company’s earnings will be adversely impacted in this way or that. Stock drops, shorts cover, and PTO denies the claim. If the patent is for a cytokine, the challenge may be upheld based on recent SCOTUS rulings, but that’s about it.

Some patents may seem absurd (and some are!), such as Schering's (now Merck’s) patent on interferon alpha (used for Hep C) dosing—how many times a week, and so. That patent was challenged, and the challenge was denied. That doesn’t stop the perceived value of the company from dropping, though.

For big pharma, this may be more of a pain than a major matter. Sure, they will go to Congress to get the law repealed or at least reformed. And the structure of matter patents key to industry are probably intact so long as they are not straight copies of a naturally occurring molecule (I think that’s been the new SCOTUS standard). After all, if they were at risk, the chemical industry would be at risk, too. And the capitalization of the majors is such that a drop, while unwelcome, can be weathered.

However, for the start-ups, this may be a bigger problem. Not only is there usually tight spending already so that paying attorneys’ fees has a potentially major impact on the budget (could it mean needing to raise more capital, likely with significant dilution??), never mind management’s attention more productively spent on product development.

Then there’s the stock price. Many start-ups look forward to being acquired as an exit strategy for investors in the company. However, they prefer to do so when the company is in Phase 3, when the valuation has considerably risen. (Including product failures and the like, peak valuation of start-ups is midway through Phase 3). However, if the stock drops because of shorts piling on the company, the market cap will drop, potentially enough to attract the attention of a major pharma looking at the company’s assets as priced at a bargain. If this is early enough in development, the market cap isn’t going to be that great to begin with. Consider, InterMune’s valuation about a decade ago was 100 mil. Pirfenidone, the stuff it’s marketing now (whether it’s worth using is a different matter), was in Phase 1 / 2. Early development. Go ahead 9 years, and Roche bought the company for 8.5 bil. (Roche is a conservative company; someday, I want to get the BD fellow responsible for the deal off to a quiet corner of a bar and ply him/her with enough cognac to understand the thinking behind the purchase—but that’s just my view of it).

So while the biotech frenzy continues (there may be a bubble, except there are real products generating real earnings (and lots in the pipeline from acquisitions) that’s supporting much of the valuations. And while you can say that Celgene is a bit stretched, but Gilead sure isn’t. Take a look at its PE, its revenues, its products and therapeutic areas and then its pipeline. Not stretched at all. So, is there a bubble? If you look at Valeant, you might be pardoned for thinking so. At some point, Valeant is going to be big enough that the M&A isn’t going to support the company’s valuation anymore. Kind of like what happened to PDL before the Facet spin-off. At that point, Valeant has to start functioning like a pharma (and not an PE enterprise) and generating some increases in earnings to support its market cap. Either that or watch the air come out of its balloon (guess where I stand on that assessment).

So back to the patents. I think Congress will do something at some point, just not the current Congress, which could barely pass a bill mandating that Reagan National should remain open. In the meantime, there will be some raids by the shorts until everyone else starts to discount rumors of invalid patents. At that point, it’s Game Over. Until then, though, while the big pharmas aren’t going to be bothered much, there may be some significant damage on the start-up front. And before you pooh-pooh that sector of health care, it’s worth remembering that the amount of productive research in big pharma labs is pretty poor these day. Innovation is taking place in the start-up world (not for big pharma, which may get some bargains, but for the investors in those start-ups, who may decide not to invest as much in the area, or in any given company, citing this “play” as a major risk and lowering RoI as a result. in VC [Venture Capital] terms, that RoI has to be high enough to cover the costs of the all-too-prevalent product failures).

Mar

26

Bernie Cards are MLB's most profitable team

"The St. Louis Cardinals are baseball’s biggest anomaly," Forbes wrote. "Despite playing in one of the smallest markets, the Cardinals are MLB’s sixth-most valuable team, worth $1.4 billion. During the 19 seasons Bill DeWitt has owned them, the Cardinals have posted a winning record 16 times and have been in four World Series, winning the title in 2011 and 2006.

Since moving into their new stadium in 2006 the team has never finished below sixth in attendance and has placed second the past two seasons. The Cardinals also pull in baseball’s highest local television ratings. And with Ballpark Village, the Cardinals have made the area near Busch Stadium a destination place for people looking for dining and entertainment."

Mar

26

At dinner here in Tokyo with Vic a young 'cub reporter' seems to have fallen for the notion in America that inequality is rampant; wealth is in the hands for the few. Vic demolishes the notion. To take it a step beyond I looked at some charts ..a 43% increase in millionaires since 2008, more wealthy people than any other country. America is still the land of opportunity and allows for upward mobility.

S. Martinek says:

The reporter's complaints remind me of this famous reply by Margaret Thatcher: "On Socialism" [You Tube, 2:34].

Vic Niederhoffer  adds:

I would add however that the cub was no cub but the main producer and a very competent one of a major program on Nippon Tv about the future. She is planning an interview with Pikety, and Larry and I gave her a little food for thought. More important she accompanied Larry and me to a Tokyo Giants game, and we saw a 75 year old coach lead the team in 10 minutes of calisthenics 10 minutes before the game, berating all the laggards all the while. I commented that if a coach did that in the States he would doubtless be strangled. But the lesson of group harmony and orderliness before a performance should not be lost on all trading rooms.

Mar

26

Here is an excerpt from my session in Japan. [You Tube, 0:58].

Mar

26

 One comes back from a trip to Japan with yet another mumbo concept to inspire fear. This one is that 26 days have gone by without the market showing 2 rises in a row. Indeed the last time the S&P 500 went up 2 days in a row was 2 17 when it moved 2076 on 2 12 to 2086 on 2 13 to 2088 on 2 17. This supposedly is bearish showing that the market can't put a sustained rise together. The song "Let's Misbehave" comes to mind. But does it ever occur to anyone to test it? That's what we're here for. "Er, have you tested that" is the motto of some parts of the spec list. Indeed there have been 6 occasions since 2007 when the market went 25 or more days without two consecutive rises. And indeed 5 of 6 of them were up an average of 2%, three days later.

Much more important, the stock bond ratio at 2053 to 164. or 12.45 is at a big, 28 day minimum and what are the alternatives to stocks, for investors, centrals, and pension. Same holds true for Japan and I predicted a new high there 3 to 5 years from now.

One notes the advanced computer technology in all of Japan and one was particularly pleased to buy two tickets on the bullet train to Kobe. And there were 50 sets of 3 seats on the car. The computer left only one vacancy and it was next to us two Gaijin . It was good to see that the computer is programmed to espouse Japanese values. And good to be back.

Just for fun a music video: Let's misbehave .

Anatoly Veltman replies:

The video trumps the test, by far. I thoroughly enjoyed the flick; but the test idea - not nearly as much. The moment I saw 2086 to 2088, I immediately thought to myself: this can't be serious. I've always questioned the idea of day's + or -, which at the same time didn't differentiate between a substantial and a randomly minuscule. So test results and expectations would differ if some day's delta was -2.00 as opposed to +2.00 with the subject value of 2,086.00? Something tells me the idea should be refined before a test. Great to have u back.

Mar

18

As there have been many excellent contributions to the "What is a Trader" contest recently, we will extend the deadline for votes for the best until Friday, the 20th. We will pay interest and augment the prize to $2,250. Good luck.

Mar

17

  Dollar at the round 100 and a 0.00 gain today according to Finviz

Luck-of-the-Irish?

Hello all,

I'm Paul Marino, have written a very few times on DailySpec over the years and am a tremendous admirer of many of you and your insights for years.

Hope all is well with you and happy St. Pat's.

I'm half Italian/Irish if the last name and theme don't seem to match. :-)

Best of trading to you all.

Paul

Mar

16

Kindly vote for the best entry to "what is a trader" contest. The entries are numbered. Just tell us the number of entry you think is best. We'll announce winners at end of week. I would also say that the entries are well worth reading as they constitute the best writing on what trading is about that I have ever seen. Vic

Mar

16

 Growing up in the Jewish enclave of Pimlico in 1960s Baltimore, I would often hear stories of Hank Greenberg and Al Rosen. Greenberg was from the 1930s, and Rosen, the 1950s. (In 1965, Sandy Koufax entered into that list. When he retired a year later, you would have thought there was one giant shiva at someone's house; mothers who didn't know the difference between an infield and the infield fly rule, or who thought a Texas leaguer was a ball player in Texas—my great grandmother, when told that the Astros played in Houston, observed, "Boychik, don't they know it's hot in Houston, especially in the summer? Those men must be exhausted running around the field all day. Why didn't they do what Hank Greenberg did and play in Detroit? Detroit's nice and cool." How she knew anything about Hank Greenberg I never figured out, as it was the only sports fact of any sort that she knew. I didn't have the heart to tell her how hot Detroit got during the summer—began talking of Koufax with tones of reverence.

Al Rosen was one of the anchors of the very successful Cleveland teams of the late 1940s and early 1950s. Ask many about those teams, and the first person from those teams they might mention is likely Bob Feller, the hard throwing HoF pitcher. Rosen would probably be the second one. He was a power hitting third baseman, leading the league in HR and RBIs twice each, MVP one year, and almost a triple crown in 1953. It's a real shame that an injury cut short his playing career. I wonder what his stats woudl have looked like absent 4 years in the navy during WW2 and the injury.

More about Al Rosen from SABR:

Q. Who, during his AL MVP year, missed the triple-crown finishing second in batting average by .0016?

Hint: Had he not missed the bag at first, he would have had a hit in his final at bat that may have given him the batting title and triple crown.

Hint: However, the Senators players were rumored to have intentionally made outs to prevent the eventual batting title winner from getting a final at bat.

Hint: Bill James called his MVP season the greatest ever by a third baseman.

Hint: During his short career, he hit more homers than anyone else that played for only one AL team.

Hint: During the 1950's, only he and Mickey Mantle won the AL MVP by a unanimous vote.

Hint: In fact, he was the only unanimous AL MVP since Hank Greenberg - an irony not lost on either man.

Hint: He and Greenberg not only had the same award, but they also encountered the same type of prejudice during their careers.

Twint: An excellent boxer, he said he had a trick for dealing with anti-Semitic players and fans: "You flatten them!"

Twint: One might say of his mother "A Rose is a Rose is a Rose".

Twint: Hall of Famer Ralph Kiner said, "He was the leader of the team and the best all-around player I ever played with."

A. AL ROSEN, SABR Bio (1953 Won HR [43] and RBI [145] titles, but finished 2nd to the Senators Mickey Vernon (.3372 to .3356): He admitted he missed the bag and thus provided his own excuse for losing the title; It was rumored that Vernon didn't bat in his final inning due to fellow players intentionally making outs in order to award him the crown; MVP 1953 Vote; 1950-1956 HR 192, Yogi 191, Gus Zernial hit 193 but for two different teams; Greenberg unanimous AL MVP 1935; Like Greenberg, Rosen was Jewish; Jew or Not Jew? quote; Mother Rose Rosen) FCR - Bill Deane, Cooperstown, NY

Mar

16

 Nodding assent is important so the speaker and group you are in know that you are in agreement and are with them. Japanese want to have group consensus and they want to know everyone is on the same page which nodding indicates. If you don't nod and acknowledge verbally every sentence some one speaks they might feel you don't agree or are looking down on them. So nod and say "yes", "I see", "is that so" after every sentence, even if you don't agree or don't understand. They will be very happy. You can then disagree with everything they say in argument or questioning and its fine. Nodding is also part of the greeting, and social etiquette of bowing and establishing social rank. A nod is a very low bow. Most of them will bow lower to you as you are the respected sensei of trading but a nod will complete the greeting. They don't really want to shake hands, so don't stick out your hand in greeting.

Things are much much more different in Japan now than 10 or 20 and 30 years ago. Many young people speak English. Hotel staff, rental car counters, trains have some English to accommodate tourists. The trains announce in English. People are much more cosmopolitan than before. They don't stare at foreigners and allow handicapped people out and about. This is changed from before.

Japan is clean. There is no rubbish at all in the street. The bathrooms are spotless. The toilets have little water jets.

Out of 100,000 people I saw during a recent trip there, I saw 2 fat people. The rest were thin or skinny. On return to the US, I counted loosely 75% of people were overweight by at least 10 pounds, 50% by over 20 pounds, and a 25% 30 pounds or grossly obese. It was very shocking and will have economic and health repercussions as time goes by for the US.

Mar

16

 A very belligerent moderator of the Junto invited the nutritional equivalent of a chartist to debate John Mackey, and tried to debunk scientific findings. Somehow she believed that a double blind study of say 100 selected subjects (they are all from a pool) might be more indicative than the millions in these meta studies.

A good study in this area is "Does low meat consumption increase life expectancy in humans?".


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