January - 2015
Sunday
Monday
Tuesday
Wednesday
Thursday
Friday
Saturday
1
2
 S&P -6.75
 USB +1.03
3
4
5
 S&P -30.40
 USB +0.48
6
 S&P -21.50
 USB +1.06
7
 S&P +25.20
 USB +0.01
8
 S&P +35.40
 USB -1.09
9
 S&P -19.70
 USB +0.20
10
11
12
 S&P -12.90
 USB +0.29
13
 S&P -6.30
 USB +0.06
14
 S&P -8.60
 USB +0.25
15
 S&P -18.40
 USB +0.22
16
 S&P +23.80
 USB -0.18
17
18
19
20
 S&P +3.90
 USB +0.10
21
 S&P +9.80
 USB -0.24
22
 S&P +29.80
 USB -0.19
23
 S&P -12.50
 USB +1.11
24
25
26
 S&P +9.70
 USB -0.08
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31

Jan

26

The CME and the CFTC are doing a great job at destroying the market ecology by exterminating the 'spoofers' out of the futures markets. This clever species helps maintain the equilibrium of order flow by gaming liquidity asymmetries and thus keeping the population of naive momentum front-running strategies in check. It reminds me of the extinction and later reintroduction of the wolves in Yellowstone.

Ed Stewart writes: 

I can't see how spoofers are bad for anyone but the momentum front runners, as you suggest. There must be a "god given" right to jump in front of slower moving participants that we are not aware of. I'd love to know how the spoofing practice developed. My guess is it started as a counter-strategy to neutralize front-running before it became a source of profit?

Vinh Tu writes: 

And "they" destroyed limit orders when they busted the trades during the flash crash. I guess front-running is the only virtuous and god-favoured strategy?

Hernan Avella writes: 

Vinh, I think the case with the limit orders is simply adaptation forced by the hft boys techniques. They have raised everybody's game. What do ppl gain by advertising their intention in the order book?. What it's remarkable, is how long it took for other participants to start randomizing, splitting and using hidden orders in a more widespread fashion.

But to your point, yes, speed is expensive and 'they' try to recover those costs.

anonymous writes: 

Famous energy trader John Arnold says:

"Front-running is profitable against traditional orders entered by humans. But with spoofers in the mix, the picture looks quite different: When the front-running HFT algorithm jumps ahead of a spoof order, the front-runner gets fooled and loses money. The HFT's front-running algorithm can't easily distinguish between legitimate orders and spoofs. Suddenly the front-runner faces real market risk and makes the rational choice to do less front-running. In short, spoofing poses the risk of making front-running unprofitable. Because spoofing is only profitable if front-running exists, allowing both would ensure that neither is widespread."

The basic ideas are very similar to Hernan's market ecology post.

Jan

26

Here are my results. Stay safe everyone!

Jan

26

 The use of today's minimum wage to estimate the cost is a bit hokey, but 480 hours of labour for one shirt is interesting: about 10-15% of one person's productive output for the year (and ignoring unrefined goods input and capital costs, taxes not really existing back then).

"The $3500 Shirt - A History Lesson in Economics"

One of the great advantages of being a historian is that you don't get your knickers in as much of a twist over how bad things are today. If you think this year is bad, try 1347, when the Black Death covered most of Europe, one-third of the world had died, and (to add insult to injury) there was also (in Europe) the little matter of the Hundred Years' War and the Babylonian Captivity of the Church (where the pope had moved to Avignon, France, and basically the Church was being transformed into a subsidiary of the French regime). Things are looking up already, aren't they?

So, 7 hours for sewing, 72 for weaving, 400 for spinning, or 479 hours total to make one shirt. At minimum wage - $7.25 an hour - that shirt would cost $3,472.75.

Stefan Jovanovich writes: 

Ms. Fisher's narrative is horribly Eurocentric. A third of Europe died from the plague– if one accepts the usual figure which has the problem of being almost entirely an educated guess; but there was no comparable mass epidemic in Asia and the Americas. For the Chinese of the Song dynasty it was all good news. Of course things are better today, but people have the odd habit of measuring their lives against what their sense of envy tells them about what other people of their time have. So, the Song developed paper currency and QE and things got worse.

Jan

26

 It's unlikely that many have heard of the Ten Thousand Commandments. It's the title of an annual report which measures Congressional legislative progress and then contrasts its record with that of the "rules and regs" initiated by a host of federal agencies in the same period.

The most recent report reveals that Congress managed to enact 72 pieces of legislation. Federal agencies, chief among them the Departments of the Treasury, Commerce, Interior, Health and Human Services, Transportation, and the Environmental Protection Agency pumped through 3,659 new rules. The annual "rules and regs" price tag? $1,863 trillion - to put that amount in perspective, the Feds annual "take" from individual taxpayers was $1.234 trillion.

In addition to the enacted rules and regs, there are an additional 2,500 "proposed" regs awaiting a final go-ahead. There are also over 24,000 "public notices" regarding many of our daily concerns. Among these are issues of health care, education, energy production, finance, land and resource management, etc.

It's imperative to understand that agency rules and regs are legally binding decisions which are written and implemented by groups of nameless, faceless, and unelected individuals — many of whom, like members of Congress, have agendas of their own, but unlike members of Congress, are unanswerable to the American public.

Jan

26

What are the alternatives to stocks in a deflationary environment?

1. playbook of scenario of Japan since 1990 : )

2. Year book 2012 by Prof. Dimson/ Marsh/ Staunton (or fondly called the optimist trio) has a thorough investigation of historical deflationary events

Or here is a one line summary from Year book 2012:

During marked deflation (in the chart, rates of deflation more extreme than –3.5%), equities gave a real return of 11.2%, dramatically underperforming the real return on bonds of 20.2%

from a sample of 19 countries and 112 year = 2128

Jan

26

"Saudi King's Death Brings Visits by Obama, Cameron, Erdogan"

The one thing that the ministers told Carlos was that the Saudi Ambassador must not be harmed as the country was the Lynchpin of everything. The visit by Obama and the avoidance of the French by the US provides evidence 25 years later of the wisdom of Carlos.

Jan

26

 It's during bizzards moreso than other storms that people suffer severe injuries. Orthopedic surgeons are usually quite busy after historic storms. Whether this one will meet the forecast remains to be seen.

When I was on call at Shock-Trauma during the 1983 blizzard, we a sustained of blizzard condition—whiteout and wind. Some fellow in Frederick County (I was in Baltimore City) decided it would be a great time to take his snowmobile out for a romp through the storm. He missed seeing the tree that his snowmobile took on and lost—and he suffered multiple system injuries—lacerated liver (it was half off the vena cava, and the surgeons were amazed he survived the helicopter trip), broken pelvis, broken femur, collapsed lung, brain hemorrhage, skull fracture, broken cheek and eye socket, 4 or 5 broken ribs, a broken knee cap, a broken wrist, a bunch of broken toes. and bilateral dislocated shoulders, not to mention extensive bruising. he received something like 25 or 30 units of blood. It was pretty bad. He walked out of the hospital 6 weeks later.

Blizzards are dangerous. They're not just big storms.

Jan

26

 AMERICAN SNIPER and THE HURT LOCKER aside, it's relatively rare for a film today to exude l'air de macho accomplished. John Wayne bought the farm a while back. Van Damme and company are on hiatus. Liam is being re-TAKEN and re-re-TAKEN.

But BLACK SEA comes close to being a tough-minded, suspense-driven masculine welcome basket to movie goers hungry for actors, not CG effects. For tough-minded scripting, withut PC rubbish leavening the text for the delicate micro-aggression-oriented.

"Black Sea" is that movie. Directed by Kevin Macdonald, the story starts in the dismissal of Robinson, a vet submarine captain, played by a terrific, corpus-hardened Jude Law, who walks with the bowlegs and slight caveman predisposition of a long-time swabbie. Sailors on land look always slightly untrusting of the ground beneath them, and manifest a wide stance in case the terra become not-so-firma under them. He's being excessed by a maritime salvage company that is dry-eyed about its seamen, and not given to watches and lifted-pinky farewell parties.

Some 70 years ago, a German U-boat laden with $40 million or so in gold was lost somewhere in the Black Sea. Recovering it is a scheme Law and his close mates come up with to generate money after they've been cashiered without much of a envelope. Don't let the door hit you on the way out.

Outfitting the old sub they are given by a go-between, Daniels (Scoot McNairy) to accomplish the recovery of the gold bars means hiring a roughneck crew: half Russians, half Brits. Much of the dialogue is in untranslated Russian, but when there are subtitles from the swarthy, often taciturn Russkies, they are mouthing wisecracking or typically no-bull grit the audience laughs with, though the British naveys have no idea about. The movie might well gain if they were to subtitle the British dialogues, since they are fast, guttural and often below the obvious comprehensible threshold.

The opening credits feature a montage of Stalin, WWII at sea with Germans and Russians in grainy perspective, and on land, with a wash of blood drenching the screens top to bottom. These B/W and aged-brown photos and footage set the scene for the coming hours of risky scrimmage against Russian fleets, inter-ethnic and internecine pile-ons, ever-present perils of being leagues deep in a Sargasso of oceanic dangers and unpredictable fails. And a stunning betrayal even the savviest could not swallow.

Robinson/Law runs the Russian diesel sub, grizzled and believable. There is a young guy, 18, Tobin (Bobby Schofield) who's a last-minute hire, aboard for lack of one of the experienced submariners, and he both grows with the part, learning the baffling wheels and pressure gauges mostly from the Russian orders, grunts and directional hand-language—as well as from the fatherly interest taken by Law in him. It is a humanizing affection that–each time it is exhibited in the midst of crises of increasing severity—makes you aware of the subtlety of Law's work—often, such men have scant room for affectionate care of anyone, let alone newbies they are stuck with in battle conditions.

The Russians, superstitious and tough, call the young man dragooned into being their 12th, derisively, The Virgin. Men of the sea don't think it propitious to travel with a virgin. (In our experience amain, sailors and such high-risk adventurers do not take kindly to women traveling with them in any capacity, either—even disguised as so-so effeminate men, with breasts squooshed.) We see Robinson's gauzy flashbacks to his once-happy family, gone consequent to his career choice.

In such circumstances, there is usually a split unequal in the divisions of the eventual haul, should they manage to find the sunken sub and extract the gold. But Law's skipper knows the men are all working equally hard, all under equal risk, and he rules the gold is to be divided equally among all the men, leading to no small squalls of rage, envy, grumbling and dissatisfaction.

The cinematography is fine, managing to convey the claustrophobic and ancientness of the craft, but capturing the man to man to man interactions in life and death encounters. Viewers are gripped with each hair-trigger decision and crisis.

The story, taut as it is, is something of a relief, coming at a time of Angelina Jolie's harrowing but true UNBROKEN, Hawking's crippled presence in THE THEORY OF EVERYTHING, and Turing cerebral, aristocratic IMITATION GAME. It's about the recovery of millions of dollars' worth of undiscovered gold, not existential catastrophe and civilizational doom.

It's a man's movie, a relieving movie, like a trou Normand—it clears the too-brutal menu of realia from the average filmgoer's palate. It is a tense, manly engagement, revealing how men on their uppers handle cooperation, fear, competition for top dog, and … prime in such cases, greed.

Jan

26

It is interesting to see that the US is about the only market down this year to date, down about 1% with all Asian and European markts up about 5% with a s.d. of 3%. Naturally there was unaminous agreement that the US market would be best this year.

Jan

25

 Yesterday while looking at the beautiful harbour of Sydney waiting for the Manly ferry, I witnessed some interesting herd behaviour. The wharf was packed with tourists and day trippers awaiting departure when an inaudible announcement was made over the loud speakers. Well, within seconds some people got up off their seats and started to queue for entry at the ferry gates and 90% of the rest of the people followed, only to have to stand for another 20 minutes before the gates opened and the ferry left. Point being, amazing that the people who had a good position (seated) were blindly led into the abyss by a select few on a what if. Always control your own information channels. As with life, as with markets.

Jan

24

Why do markets naturally gravitate to a state where things that are good are considered bad and vice versa. The idea that deflation is bad is a horse from that garage. When deflation and prices goes down that means that the stock of wealth is increased in real terms. That's good. How have we been cowed into thinking that when our real wealth goes down, that's bad, and we should encourage our central banks and governments to create inflation.

Etali writes:

The Chair of course knows the answer to his own question. Deflation is good for savers and bad for debtors. There are more debtors than savers. Inflation helps debtors by devaluating their claims. Governments, for example, the Swiss and the Luxembourgers, are the biggest issuers of IOUs. Why, the Dutch mathematician asked, "do government clerks and bailiffs become rich, yet leave their offices in great debt and financial chaos?".

Gordon Haave writes: 

1. The banks have an interest in inflation. They get zero percent loans and invest in things that pay interest.

2. Everyone is obsessed with GDP numbers and deflation can make GDP look "worse". There has been little to no research into GDP and how it's calculated in the last 50 years and people take it for gospel that GDP going up is good, GDP going down is bad. They are having trouble however explaining why GDP has been up but the average person's financial picture hasn't really improved in 20 years. They also can't explain they GDP in southern europe is flat to down, but the average person is vastly worse off.

The answer lies in the two things going together. Deflation is the cure to the world's economic problems. In order to prevent the cure the government and central banks have enacted policies that make the GDP number look ok, or stable, but it isn't doing anything for the average person.

Incidentally, this is also the cause for the "wealth disparity" issue.

anonymous writes: 

Finance-based (collateral) deflation and technological progress based deflation are not the same thing, exactly. The fact that we can buy a computer cheaper this year does not cause banks to fail or a contraction in the money supply/ability to pay interest.

 

Jan

24

 1. The key bellweather these days is the Dax.

2. The reason The Knicks won 3 in a row was that they got rid of Smith. He was the rotten egg that ruined the barrel. After losing 16 in a row they won 3 in a row. The market went down 5 in a row then up 4 in a row. The market learns from sports team.

3. Every situation in baseball and basketball including whether a fielder should have made a put out is captured on video and quantified these days. The book Mathletics by Wayne Winston uses regression analysis to find the value of each player and each play in the major American games. A better technique would be montecarlo simulation. Often Winston makes the part whole fallacy of fitting many variables to an outcome and then reporting an improvement from a naïve strategy. The pythagorean theorem gives good results in baseball, and basketball, and it could do the same in market. Use the ration amount gained in rises /divided by amount lost on losses to predict the % of wins. But there is the part whole fallacy in it. Naturally given the distribution of gains and losses, if you know how many points gained and losses there were, it's going to give you a great estimate by simulation of the games won, that will do much better than the squares of James et al.

4. I've given up on dealing with the big low priced broker as they now add a risk fee to the regular commissions, but it seems like a great stock to buy, as they leave no contingency unopened in order to make a profit at the expense of their clientele. Good bye to any thought of option trading also as I recently had a position with $1,000 of premium with a few days to expiration where the required margin was close to 1 big. The thought too smart by half comes to mind.

5. The main reason that stocks go up more than bonds and the explanation for the dimsonian 70,000 fold a century multiple you make is the power of compounding on a base of the return of capital. It has nothing to do with dividends. However, the differential between earnings price ratio and 10 year rates continues to rise, and that is extraordinarily bullish for stocks for much the same reason as above.

6. Reading Roman history, one sees the wisdom of Nock's idea that the only thing worth studying in history is the Roman and Greek history because everything happened there that will happen again. The prelude to the Crusades is particularly relevant today.

7. The Nasdaq refused to go down with every other equity down on Friday.

8. Gold is now playing footsie with the round of 1300 the same way it did with 1200 last year. But of course everyone was bearish last year so it went up a fast 100 bucks in 2015 proving the old adage that the things that go down the most in 1 year go up the most the next year. However, I stopped trading gold except in small quantities because one can only predict a day or so, and you can't get in or out of a position with poise when your numbers tell you to do so.

9. The Asian markets amazingly go down even more on each meaningless survey than the US or European markets. Of what significance is it that the growth rate in China forecast is lower by 0.1 % from time to time from 7.6% to 7.5 %.

10. One should never forget that once the Fed changes a qualitative rate, the average run in the same direction is 10 or 12 further changes, i.e. a run of 10 in the same direction.

11. I can never read a text on chemistry or physics without getting a million ideas as to how their foundations and findings and experiments provide vast insights into our field.

12. How much does supply have to go down in the oil industry for oil to start moving up again.

Anatoly Veltman writes: 

On 10. The upcoming FED rate hikes: yes, historically, it has been observed that once official hikes or cuts got rolling, they wouldn't stop for that many counts to come. And of course, it is VERY advisable to position yourself in advance for another re-run of the scenario. Curiously, that's exactly where the profit will be made: on an anticipatory position. Because once the first hike occurs, I'm not at all sure that history will play an infallible guide this time around. Why? Because what we've had in the current cycle with ZIRP was unprecedented, and thus this time may be different: after a hike or two and a market upheaval, the FED may reverse back to manipulation
 

Jan

24

 I have just read Mathletics by Wayne Winston and Mathletics by John Barrow. Both are great books, with many techniques and applications to markets. The Winston book uses regression analysis to find the value of different plays and players in baseball, football, basketball, and gambling. It also uses game theory and simulation. It tries to teach you how to replicate the results with excel. The Barrow book uses probability theory and physics to show you how to improve and analyze any sport including diving, kayaking, high jumping, running soccer. It's ingenuity is overwhelming. Considering the level of analysis and ingenuity and attention to detail in these books, our own field looks very tired and ossified. Highly recommended both.

Jan

24

 Something today reminded me of a mentor (English teacher, older guy retired a few years later) that I had in high school. One of the key things he told me was, "Never get serious with a girl whose mother you would not want to have relations with, if given the chance". I think more than a few times that thought flashed before my eyes and it saved me from serious error, partly because it was memorable. I'm trying to think of any similar rules of thumb that might help us to avoid those trades or strategies that can severely set back profits, create anguish, and otherwise make things worse than they should be. Any ideas?

Leo Jia writes: 

Hi Ed,

"Never get serious with a girl whose mother you would not want to have relations with, if given the chance"– I thought that was only my words!

There can be many similar things for trading. Here are some for critique.

1. If you don't like someone's way of life, don't trade like him.

2. If you don't like the dominant players of a market, don't trade that market.

3. If you don't like the rule makers of a market, don't trade that market.

4. (I learned this one from Scott Brooks) If there is already a professional at the table, go somewhere else.

5. If you don't like a country's tax code, don't trade in that country.

6. If a market hasn't shown a lot of opportunities in the past, don't trade that market.

Jan

24

This is a very good business lesson from Frank Zappa.

Jan

24

 I always thought dogs were angels too, and trained hard many years in veterinary school to heal them.

However, certain dogs in certain countries, depending on the people that influence them, in one month turn from angels to snarling demons. I learned a lot in the past seven months fighting about eight dog packs of 5-10 animals each by being surrounded by them all snapping within four feet – front, back, and either side.

The best thing to do is to back into a corner. Otherwise the fastest alpha will sprint around and try to hamstring you by biting in the rear. It's impossible to watch 360 degrees, so if one is encircled without any plan or mental rehearsal, blood is sure to flow. Yours.

It's exactly the same technique I watched on a National Geographic film of packs of 6-10 wolves each taking down caribou, deer, elk or even bison in Alaska. Unless the prey can outrun the predators (not me any more), or back into a corner so there is no real side or rear attack, or grab a weapon, then one is at the mercy of the canines.

This never happened to me, though I was bitten biweekly by the Peru Amazon street dogs in various haunts where I walk. The two primary fighting techniques were to pick out the alpha (usually the biggest male), and charge it ignoring the attempted nips from the rest. Once you kick the alpha in the teeth and he whines, the rest retreat. In the common case of the fastest dog running around end to get behind you, I always turn and immediately chase it trying to kick it. You need to get to it fast because as you turn to face it the rest of the pack rushes your heels. That dog is the fastest, usually the bravest, and once it zips off the rest will follow its lead away from your body.

Once I got these strategies down, I actually looked forward to the afternoon or night workouts of fighting off the packs after a long stint at the 'office', and it was restful before going to bed.

Sad to say for a veterinarian, I resorted to psychological warfare to turn the tide to keep from going psychologically rabid myself. I knew the dog alpha of each of the eight packs in a blink at a block's distance; it was usually the biggest male, but nearly as often the stupidest which is to say most fearless, like pit bulls and bulldogs. My psych warfare was to stalk them during their sleep, especially during a night rainstorm, and kick them directly in the cranium. If you kick in the eye, ear, nose or teeth it can cause permanent damage, but I only wanted to establish myself as their dominant. My foot made hard contact about twenty times over the months with the various sleeping alphas, as hard as football punts, but their heads are so hard that it was like kicking a 8" diameter rock. I alternated feet over the weeks waiting for the soreness to go away. I have no toenails left on either of my big toes from this.

Then the psychological part comes into play – a hard head kicked sleeping dog awakes instantly and instinctively turns and bites at the foot. There's a split second to kick a second time with the same, or better, the opposite foot, and about one second after your first kick the animal registers pain, the eyes dull, and it withers off yelping in pain with a tucked tail. Now is the time to follow it through the rain for blocks, not letting it lie down, rest or sleep for about thirty minutes. It's easier than you think because every alpha returns to the same spot after a few minutes, so I just lay in wait, as they have done with me, and keep them awake and moving. It's a combination of pain and sleep deprivation, and after a few nights of this, without fail, the alpha will no longer lead the pack in attack. Instead, when it sees me coming, it lowers the head in a cowering gesture and sulks off, followed by the rest.

That's the time to be on the alert for attacks from street people, who live like them, and empathize in bands. I know this from hundreds of encounters with the same packs in the past few months in the Amazon where the dogs have turned nasty with a sudden rise in consciousness of the people who now treat the dogs like second, instead of equal, citizens.

These are the techniques to beat fallen canine angels. And they worked on people too.

Pitt T. Maner III suggests: 

These high frequency deterrents called zappers work fairly well and could be easily shipped to Peru.  At least it would make an interesting study.

Marion Dreyfus writes: 

When I rented a house on a hilltop at End of The World, Zimbabwe, baboons made increasingly aggressive encroachments toward me and the house. I remember saying to the park ranger, who came and shot the baboons dead: "Once they are no longer afraid of people, they will rip your face off. We must kill them to keep that from happening."

Andy writes: 

A recent study on Montana and Wyoming data indicates that killing wolves leads to increased depredation of farm livestock.

One theory proposed is that shooting the alpha breaks the discipline of the pack and leads to more independent wolf breeding pairs. These rogue lone attackers are more likely to predate livestock than an alpha led pack.

The researchers did not find a drop in the depredation until >25% of them were destroyed, which corresponds to their population's rate of increase.

The idea for a rancher is to avoid killing the alpha unless he can and will take out more than 25% of the population of the wolves.
 

Jan

23

 Tonight I went for my usual 5k walk. I plugged in my ear phones and hit my Pandora app and had to decide between my stations. I was in the mood for some rock, so I choose the appropriate station, turned the volume to the right level and set off my journey.

About 3/4 of the way through my walk, I was heard a special treat. The studio demo version of the Lynyrd Skynyrd's "Free Bird".

Now, I'm sure most, if not all, of you are familiar with that Free Bird. It is, IMHO, one of the 3 greatest rock songs of all time (the other two being Layla and Stairway to Heaven).

But I had never heard the studio demo version before.

What is unique about this particular song is how different, yet similar, it is to the album version or the live version (I prefer the live version…."play it pretty for Atlanta").

Free Bird starts out as a ballad, but then, kicks into high gear with the famous 1970s style guitar jam.

When the studio demo version kicks into high gear, it starts out with the screaming lead guitar for a few moments…then the lead guitar stops, and all you hear for the next few minutes are the rhythm guitars.

Anyone who knows Free Bird know that lead guitar jams long and hard for at least 5 minutes straight. It is an unmistakeable 5 minutes of classic rock guitar licks that anyone with even a passing appreciation of classic rock will know and recognize.

But on the demo version, the "jam" portion is mainly rhythm guitars for almost the entire time.

What was very interesting to me is that even though there were only rhythm guitars playing for most of the song, in my head, I could not help but hear the lead guitar…even though they were not there.

I tried very hard to concentrate on the rhythm guitars and appreciate what I was hearing. Heck, I sorta played in garage band in my teens and I played the rhythm portion of Free Bird many times "back in the day".

But no matter how hard I tried, my mind forced me to hear the absent lead guitar.

Listening to this demo version of Free Bird got me thinking about the markets and my investing strategies.

How many things happen around me that I just assume are there….but really aren't…..whether in my life as a father or as an investment adviser?

When I vet money managers to place my clients money with, how much I am superimposing (is that the right word?) what I think I should be hearing/seeing over what is really going on?

When are there subtle (or not so subtle) changes that I miss because the meme playing in my head tricks me into hearing/seeing what I expect to be there?

I'm going to refocus myself to see if I'm really hearing what I think I'm hearing….or whether there are some missing lead guitar illusions that are clouding my judgement.

I pose this question to the group: How might one go about doing that?

In the meantime……..here's the YouTube link to the demo version of the Free Bird. Try and listen to it without hearing the absent lead guitars(also, bonus points if you spot the difference in lyrics):

And to give some context to those that don't know the song, here's the album version of the same song.

And I'd be remiss if I didn't include my favorite version of the song (play it pretty for Atlanta).

And just because it's so tasty, I'll throw in a little semi-obscure Skynyrd hit: Curtis Lowe

Leo Jia writes: 

Reality or illusion? I like to study the topic, and learn how to tell the difference or whether there is a difference. One believes something to be real when the 5 senses send signals to the mind and the mind says thus it is real. That is what reality means to most people. What if one's 5 senses were altered? The mind then has no way to tell. Think about virtual reality. Though the current technology is not fully there to truly alter the 5 senses, it demonstrates how the mind determines reality. Actually, the concept of virtual reality itself tells that there is not a real line between reality and illusion. It is all mixed together. Do we live in the world or does the world exist within oneself? I am more inclined to the latter.

Scott Brooks writes: 

Great points, Leo.

I like illusions as well. My youngest son is into magic and illusions and does a pretty fun show for kids birthday parties. Even though I know how the illusion works, it is still fascinating and fun.

But I'd like to take it a step deeper. I know when I'm being tricked when watching my son or a Penn and Teller show. But what about when I have no idea that I'm being deceived….or even deeper, when I'm the one doing the deceiving, and I'm both the deceiver and the mark (i.e. self deception).

I'd like to know how I can clear my head of those times. But…..how do I know what I don't know that I don't know?

Rocky's Ghost writes: 

Excellent post, Scott! Thanks for sharing.

Rocky believes that, when speculating (as distinct from investing), more important than seeing one's own ghosts, is seeing everyone else's ghosts. For example, in his early days, Rocky would occasionally find bona fide arbitrages in the options markets. However, the ability to monetize the arbitrages relied on OTHER PEOPLE also seeing the arbitrage and closing it. If you are the only sane man, you will likely go bankrupt long before others realize that you are the only sane man. Or, put another way, when the lunatics are running the asylum, it pays to trade as a lunatic — while remaining mindful that they are indeed lunatics. Now where did Rocky leave his bottle of Clozapine?

Jan

23

All the testing I have done on stops indicates they work exactly as you would expect. They reduce risk and they also reduce expected return. Sometime they reduce the return to breakeven or negative in which case its better off just not to trade. In other cases they eliminate bankruptcy risk and allow for some return, but not the expected return you get without stops. It seems to fit right in with EMT, CAPM and practical ideas on markets regarding risk and return. If you are selling disaster risk, you expect to be paid for it.

Ralph Vince writes: 

Or, expressed in terms of their effect:

Total Return = (A^2 - V)^(Q/2) - 1

Where A = Average return per trade (expressed as a multiple, i.e. 1.0 + return)

V = Variance in the A's

Q = total number of A's

When stops reduce V more than they increase A^2, it pays to use them.. I suggest conducting tests on this, it is far more revealing (in terms of the distribution of the A's) then meets the (rolling) eye(s) when looking at the simple equation.

Jan

23

It can be interesting to open up a quote list and view the prices with a mindset that you haven't looked at the market in months or years. Oil here, bonds there, etc. And then process your initial reaction.

Jan

23

The loss of a nail caused the loss of a war. It all starts with the horrific having two positions on opposite sides at same time. Worse yet is the use of mental stops with the idea that the broker can't read your mind.

Andrew Goodwin writes: 

Voice brokers know the locations of the stops and the times when they will make margin calls or force liquidations. The broker does not need to read your particular mind to know the levels that once hit will create more trading activity. Mental stops fail because a broker can extrapolate the actionable levels from the inside view of the collective levered positions and stops given by other clients.
 

Jan

22

 Thank you for passing along the Constructal Law of Design paper by Adrian Bejan.

Bejan's basic premise is that everything in nature is a flow. There are the obvious flows of things like water (rivers, blood) or air (lungs, air distributions systems), etc. In addition, he discusses flows of stress, for example, in the arrangement of the limbs on a tree, or the flow of animate mass, e.g., when a herd of animals runs or school of fish swims. His premise is that living systems are continuously changing and adapting their configuration to maximize the "currents that flow through" them. Even the building of the Egyptian pyramids, he argues, represents the flow of stones from a broad area to a single point (the pyramid). Here "living" systems (both animate and inanimate, such as rivers or pyramids being built) are constantly evolving and changing their configuration. When a system stops reconfiguring its flows, it dies: a dried-out river bead, dead animal, or completed pyramid receives no further maintenance, i.e., there is no more reconfiguration when something is dead.

Here is a Q & A on the concept of Constructal Design by a Forbes reporter and Bejan that has things described in less technical terms than his paper.

In terms of applying these concepts to trading, it seems to me that the obvious entity that flows is money.

One concern that I have, however, in adapting Bejan's ideas to a trading model is that, in the flows that he is describing, there is always a driving force from high to low: gravity pulls water down a landscape, a pressure differential drives air in and out of the lungs, a disturbance or threat forces animals to run in the opposite direction. As a result, all of the flows that he is describing are one-way, or unidirectional. This central to his entire theory, as the opposite behavior is prohibited from the Second Law of Thermodynamics: heat does not move from cold objects to hot on its own, rivers do not flow uphill, air does not come out of the lungs when the diaphragm expands to reduce the pressure in the lungs to draw air in, dropping the broken pieces of a coffee cup on the floor will never result in re-assembled cup, etc.

Thus it would seem that a critical element in adapting Bejan's ideas for trading will revolve around describing a driving force for the flow of money. This is really your expertise far more than mine, but let me start the dialog by suggesting that the driving force for money is the perceived potential for money growth (PPMG). 'Perceived Potential' here implies that there is an opportunity to make a profit from an investment, but that the outcome is not necessarily guaranteed (think of Enron and Bernie Madoff). Reconfiguration, also a key tenant to Bejan's ideas, happens with the flow of money from one instrument to the next. If we now draw the analog of a river basin, and that high PPMG is analogous to a low point in the flow of water over a landscape, then it can be seen that money will flow from regions of low potential (elevated areas, mountainsides) to regions of high potential (low areas, valleys). The lower the elevation, the more rapidly money will flow into it.

What complicates the analysis is that PPMG is a dynamic quantity. A company can be very profitable at one point in time (Kodak, General Motors, Blackberry), and thus have considerable growth potential, but over time, its growth potential can change. This is analogous to the river basin landscape changing constantly in elevation, and having the flow adjust accordingly. This does happen in nature as well, of course, both slowly (Colorado River/Grand Canyon) or quickly (earthquake/volcano). Such a time-varying landscape would be important to include in a trading model.

I think that the above would be a bare minimum to implement the ideas that Bejan is putting forth. I did do a quick search to see if people were using these ideas for trading (in particular) or finance/economics, but I did not find much. This is not a surprise: Bejan's ideas are new and different and thus will take some time to permeate to other areas. This, in itself, is an opportunity to seize the advantage. The risk, is, of course, that the ideas may not have significant utility in trading to upset the state-of-the-art now in place, and thus will not pay off after time spent trying to integrate them. This is the risk of adopting any new technology/idea, I suppose.

Anyway, there you have it: my rather disjointed ideas on the matter. I would be interested to see if Bejan's ideas could prove to be of utility for trading.

Jon Longtin, Ph.D., P.E. Professor Department of Mechanical Engineering 159 Light Engineering Bldg. State University of New York at Stony Brook Stony Brook, NY 11794-2300

Jan

22

A topsy turvy day. Everything the opposite of what it seems. Bonds start way down as never before and then rise 2 1/2 points and goes down. Gold starts down 10 and goes up 5. SPU starts up 15, goes down 10 and now up 10. What an opportunity to do the wrong thing.

Jan

22

"How Do You Quantify Panic":

In a paper recently published in the journal Interface, researchers from the Massachusetts Institute of Technology, the Draper Laboratory, and the disease-forecasting company Ascel Bio say they've found a way to predict overreaction to outbreaks.

Jan

22

Lumber is worth a close study and possible long position here…

Jan

22

 QEe (QE euro) seems to be moving forward. So why did gold, which has had some strength over the past month, not budge at the news the way currencies did?

anonymous writes: 

The theory I am working on in my head and was hoping to have time to write about tonight is as follows:

QE depends upon a central bank "cartel" all agreeing to do it in unison and or in staggered phases. The cartel allows them to get away with this absurd policy without immediately wrecking the currency as compared to other currencies they don't seem to be devaluing.

Switzerland broke the cartel.

This means that the future of QE is in fact in jeopardy and will be more limited than otherwise.

anonymous writes: 

Isn't that the path off all cartels of > 1 players (Debeers),

Look at OPEC post 1974.

Like the prisoner's dilemma, the "cartel participant," game would call for a certain, upside price where the first member jumps ship, with a phony justification for their greed trumping the purpose of the cartel.

anonymous replies: 

Yes of course. Only in this case instead of restricting the supply, the deal was to expand the supply.

In the old days when Kuwait broke from the cartel and cheated it brought oil down more than just by the amount of Kuwait's extra production because once one member of the cartel cheats everyone else is going to.

It's the same thing here. Once SNB broke, others will be tempted to as well.

This isn't talked about in the press because of the insane and incorrect notion that your currency going up is somehow a bad thing, so the mainstream all think that the Swiss are somehow hurting themselves.

Alston Mabry writes: 

But the alt version is that they weren't playing along because their EUR purchases were putting upward pressure on EUR, counter to ECB's strategy.

anonymous replies: 

What ECB, US, and Japan would have wanted is for the SNB to devalue along with them. SNB wasn't going to do that.

Now, all of QE depends on the big lie that you are not really printing money and not really devaluing the currency.

Any time someone says "you're printing money" the response is met with "you just don't understand" followed by a description of the complicated process of QE and how it's not really printing money.

But the fallback position for the QE'ers is "look, there's no inflation (no consumer inflation.. it's in assets) and "the currency isn't being devalued".

The SNB's peg kept the ECB being able to claim they weren't destroying the currency. The SNB undoing of the peg reveals that the emperor has no clothes and they are, in fact, going to destroy the currency.

Alston Mabry responds: 

It may be true that claims were made about the EUR on the basis of the CHF cross. But I find compelling the narrative that Mario called up Thomas Jordan and said "look, unless you're willing to print tens of B of extra SFrs a month, you're not gonna be able to keep up." And Jordan, knowing that technically the SNB could do it but politically internally couldn't, said "you're right" and they dropped the cap. 

Jan

22

The RSP (equal-weighted) S&P index ETF is well-known. Less known is the RYE (equal-weighted energy sector ETF). It has only existed since about 2006.

Equal-weighted ETF's give a larger weighting to smaller-capitalization stocks and, to the extent that individual stocks approach zero, they engage in the Rocky pastime of "scaling down to oblivion". That is, If cap weighted indices "ride the trend," equal-weighted indices sell the winners and add to the losers on each rebalancing.

Might anyone have some insights about whether such a practice is inherently superior or inferior over time? And especially for a (distressed) sector index?

Kora Reddy writes: 

But the academic literature suggest otherwise: "equal-weighting is a contrarian strategy that exploits the "reversal" in stock prices" (see this pic).

Except in Australia, equi-weighted outperformed the cap-weighted in major countries.

Gordon Haave writes:

I wrote about this 6-7 years ago when the first Wisdom Tree stuff came out and they were talking about how equal weighted was superior to cap weighted and showed the back-tested numbers. All they were really saying is that "over time small caps beat large caps" which isn't exactly news.

To call a equal weighted index and "index" is itself misleading. A cap weighted index is "the market" or some approximation thereof. Theoretically every single market player could go passive and be in it. You can't do that with an equal weighted index (or at least not without distorting prices).

As to your idea of how they have to double down on the loses that is somewhat limited by the fact that once the name falls out of the index it is dropped.

Larry Williams comments: 

Along that line Our work shows it is better to invest equal dollar amounts vs equal share amounts

Gibbons Burke adds: 

I know a fund which used to invest 90% of client stake in SPX via SPY.  A couple of years ago they switched to 10% equal dollar investment in each of the nine sector select spdr ETFs, with the intent of rebalancing to equal dollar allocation annually. They found, in testing, the strategy provided an average of 200 bps of boost each year over the cap-weighted all-SPY investment.

anonymous writes: 

Regarding a depressed sector, is there any truth to the adage: "Buy the stock that has gone down the least, and also the one that has gone down the most". The strong stock will come back smartly and the oversold weak stock will come up from being smashed on a higher percentage then the middle of the pack.

So if this is true you could design your own basket of strong stock leaders in the depressed sector mixed with oversold beaten down stocks that pass a screening survival test.

Erich Eppelbaum adds: 

Theoretically speaking, re-balancing a portfolio by using the winnings to buy more of the losers is at the heart of the only portfolio selection methodology that I know of that mathematically guarantees to asymptotically outperform the best stock included in the portfolio (See Thomas Cover's Universal Portfolio seminal 1991 paper): pdf link.

I don't know if in real life the portfolios resulting from this methodology are inferior or superior over time to those created by rebalancing based on allocating more to the winners (such as a market cap weighted portfolio); I would assume that any result would depend heavily on the rebalancing costs and slippage (the liquidity of big vs small stocks matter, especially when trying to push size), and I would assume that the slippage incurred in a market cap weighted portfolio would be less than that incurred in a equal weight portfolio (less small company shares to buy/sell).

In reference to a previous post, another thing to consider is that perhaps there are many effects at play other than the small-cap "more-risk-more-reward" effect. For example, a sell-the-winners-buy-the-losers methodology could be profiting partly by say the volatility harvesting effect described by Claude Shannon.

This brings up another question: The volatility harvesting effect becomes greater as the volatility of the portfolio's underlying stocks increases. In the stock market, volatility usually increases when the market falls. Could this mean that an equal weighted/rebalanced portfolio would outperform a market cap weighted portfolio during bad times? and would the opposite be true during good times? Would be interesting to test… 

Jan

21

Economists missed the Swiss franc uncapping, the oil price collapse and the interest rate drop. They may burn you on GDP, too.

Jan

21

 I just read the book Contrary Opinion by R. Earl Hadady. Aside from his point on bullish consensus, I found the following very interesting (I call it theorem of winning and losing). We all know that the majority lose trading futures. So, say 80% traders lose, and let T denote the total number of traders, NW the average number of contracts held by winning traders, and NL the average number of contracts held by losing traders, then the following equation holds:

0.2 * T * NW = 0.8 * T * NL

From the above we get: NW = 4 * NL

Which mean the average number of contracts by winning traders is 4 times the average number of contracts by losing traders.

If 90% traders lose, then we have

NW = 9 * NL

So, the theorem says the deep pocket traders have a natural advantage to win. It begs the question of how traders with not so deep pocket can survive and win. What are the good strategies? I wonder if this also implies that one may increase the chance of winning by not diversifying funds.

Stefan Martinek writes:

"It begs the question of how traders with not so deep pocket can survive and win. What are the good strategies?"

Trading can create such an addiction that sometimes addicts do not realize that the world is full of opportunities outside of trading. Good business strategies match our pockets, or our pockets + pockets of family/friends (initially). Trading with a small account frequently makes no economic sense if we consider opportunity costs. It's better to go kitesurfing.

Jan

21

 The trouble with movies is that they have to pretend that a bunch of people hitting focus marks according to a shooting script somehow represent "reality". The trouble with war movies is that their portrayal of "reality" is almost always made by people who have never gotten shot at. There are some exceptions: They Were Expendable (which was a box office semi-dud) had Robert Montgomery, and he was even able to prevent John Ford from injecting his usual bravado. James Stewart was able to convey something of what it is like to fly bombers in combat and he helped his friend Gregory Peck put that across in Twelve O'Clock High; but these are the only ones that come to mind for this former Hollywoodista. I doubt American Sniper is much different; but I am not curious enough to find out. (My taste in films is now antique; I find the underscoring in most "modern" films and TV so maddening and deafening that I limit myself to the ones where there is a reason for the music - i.e. Fred and Ginger are doing something to it.) What I can say, without having seen the movie, is that they probably made it about the wrong guy. As Chris Kyle himself was generous enough to say in his C-SPAN interview, Carlos Hathcock is the model; everyone is else is just trying to learn his lessons.

Pitt T. Maner III writes: 

Michael Moore received a bit of feedback for one of his recent comments related to the film: "Marine Sniper Dakota Meyer: Michael Moore's the Real Coward". Maybe he should stick to Selma…

Craig Mee writes: 

"Hitchcock once said that he survived in his work because of an ability to "get in the bubble," to put himself into a state of "utter, complete, absolute concentration," first with his equipment, then his environment, in which every breeze and every leaf meant something, and finally on his quarry."

Jan

20

 The situation with Interactive Brokers is somewhat analogous to Uber vs. the medallion holders, although not necessarily in the speed of execution. For close to a hundred years or whatever (since 1937 in NYC) some poor shmucks had to buy a medallion to be able to do business. Some saved for years to buy one, others watched the appreciation of their prized property with great satisfaction. Then wham, Uber comes along and the system falls apart. Should there be medallions? Not in a free society. But if they exist, should their value be allowed to be drastically reduced because the collective government action suddenly allowed to a politically connected company what was considered a crime before? Not clear.

Jan

20

 Cold and flu season seems to be taking an unusually severe toll in California this year. Though it's still early in flu season, there are state-wide shortages of cough syrup, and state health officials are beginning to wonder what the consequences may be for the public's health.

While the notion of flu season is likely already incorporated into many of the models that we usually discuss, and while for the day-to-day modeling it might not much matter, I wonder if any of the other models of price movements have incorporated any indices of health status such as might be represented by flu cases? At some point, those case levels may impact us economically, leading to some increased gravitational pull bringing prices "closer to the earth."

Even if people who are infected go to work, their productivity will be less than usual. Or is the impact sufficiently muted as to be inconsequential?

Jan

20

"World’s Largest Traders Use Offshore Supertankers to Store Oil"

This article is a beautiful example of how futures markets coordinate production/consumption/storage of commodities over time– creating the price structure and consequential incentives for entrepreneurial action.

Jan

20

This is an interesting article on the evolution of planes From a constructal view and the need for efficient flow:

"Commercial airplanes satisfy an insatiable need of the human and machine species to move as many people as possible a specified distance while using as little fuel as possible."

Jan

20

 I make an unapologetic forecast that by Friday, the EU thumb-sucking backscratchers in the markets will realize that Draghi must resign.

The emperor has no clothes.

Hello USD/EUR parity.

Stefan Martinek writes:

My unapologetic forecast is that USD/EUR will go below parity and somewhere around 0.6-0.8 German voters will decide to leave the party. Euro is too strong for weak members, and too weak for strong ones — it does not fit anybody. Political will will change and the path of least resistance will change as well. Nothing dramatic will happen at that point. The world will function as usual, Schengen area will stay in place, winter resorts in Alps will be nice and functioning. Most forecast are usually wrong …

Jan

18

 "Three Card Monte Scam Artists Return to Midtown"

The Swiss National Bank (SNB) in a way played a good game of 3 Card Monty the past few years with market participants. The winning card was where the rate was going to be. On September 6, 2011 the SNB set a peg for the EuroSwiss rate at 1.2 when prevailing market rates where approximately 1.1, a depreciation of the Swiss Franc of about 9%. Between September 6, 2011 and January 15, 2015 the EuroSwiss rate traded between 1.20 and 1.2650, a roughly 5% range. On January 15, 2015 the SNB removed the 1.2 floor and at the extreme the EuroSwiss market rate went close to .8500, a move of about 30%. Who played the game? Who controlled the cards? Who were the shills? I could not help but recall my own adventures in 3 Card Monty and loss of a $50 bill as a student playing Holden Caulfield in Times Square circa 1983.

What trading lessons might there be in the move by the SNB and subsequent moves in markets? How can these lessons be embodied to provide a future playbook of offensive and defensive plans? Following some delirium from trading the markets the past few days some clarity came to mind on some runs the past day or two. First, some empathy to all have may lost in the market this past week. One close friend of many years described the feeling just 30 minutes after the SNB decision by saying " I feel like I just got my leg blown off, I can barely think straight".

10 rules, lessons, and examples I have found effective and illustrative.

1. Find and trade markets where your edge is the greatest.
2. Avoid markets were the probability of rule changes and lack of transparency is present.
3. Think of and imagine market scenarios others fail to.
4. Fundamental macroeconomic forces will ultimately prevail.
5. Trading time frames and profit objectives though must coincide with what the market is giving you at any one time.
6. Quantify risk with a multidimensional perspective, not just by one or two measures such as VAR or a price stop.
7. Learn from history. Jay Gould and his attempts to corner the gold markets in the late 1860's. The Russian default of 1917 and 1998. The European Rate Mechanism break up. The Tequila crisis of 1994. The Asian financial crisis.
8. Be deadly serious, as Gichin Funakoshi said "You must be deadly serious in training". If you have a position make it a meaningful size and monitor it carefully. I recall many comments from fellow traders the past few years saying something like "I am long EuroSwiss just to have some on but not really watching it."
9. Define and use a trading methodology that incorporates a process and framework that works for you. Inclusive in this should be a daily routine that includes diet, exercise, family time, etc.
10. Seek out catalysts for CHANGE in markets. Where are the forces, in a Newtonian like law of motion, building up the greatest to cause a CHANGE and movement in markets?

What further elaborations and examples might there be?

Stefan Martinek writes: 

I was thinking about it recently. Great list. I would only add: (a) Be prepared that liquidity in any market can disappear regardless of historical data or experience; (b) Mind counterparty risk.

Anatoly Veltman writes: 

Excellent lessons from John. The dilemma here is of common variety, though. Similar to an individual smaller stock: you're either an insider, or a mark. In case of the SNB last few years: you were either in bed with the devil, or you were exposed to a chance of a -100000% annualized loss on any given random day
 

Jan

18

"Police: Juvenile posed as doctor at St. Mary's hospital":

A security guard told police the boy is known around the hospital as a doctor. The guard said he had seen the "doctor" around for about a month, according to the report.

Jan

18

 Along with MFM Osborne, Holbrook Working was one of the two original seers, innovators, beacons, and founders of the field of speculation, dwarfing the lesser lights after them in all ways.

Working was the author of the study Jeff forwarded to us (which has the title "Wheat Studies of the Food Research Institute, Stanford University, 1932"), and when I looked at the first 3 pages, I mentioned to my colleagues, "only Holbrook Working could do good work like that". Sure enough page 55 states "This study has been prepared by Holbrook Working, with the assistance of Adelaide M. Hobe and P. Stanley King".

Jan

18

Good morning. I've been wondering what the calendar means at the top
of the page… I'm sure there's a post I missed. Can you point me in
the right direction. Thanks.

Reply:

The numbers in each box are the daily changes in S&P futures and Tbond futures

The color coding is as follows:

Green: Bonds up and Stocks up

Red: Bonds down and Stocks down

Blue: Bonds up and Stocks down

Yellow: Bonds down and Stocks up

Jan

16

One wonders what the effect on sp of intel earnings report is statistically. vic

Kora Reddy replies:

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Jan

16

My recollection of the marketing pitches for retail focused FX platforms was that they had some parallels to the bucket shops described by LeFevre, particularly one of them who advertised that one of your account features could be "no margin calls." If a position went against you by a particular threshold, the broker would automatically close it out, so you would have no "surprises."

anonymous writes: 

FXCM stock (a listed US company) is indicated down 75% this morning. They issued a statement that the CHF move "generated negative equity balances owed to FXCM of approximately $225 million."

As of 9/30/14, their stated equity book value was $262.7 million (source: Bloomberg) — so if their book value is real — then this particular problem can be contained.

Interactive Brokers stock is indicated down 10% this morning. They have made no public statements so far. But as we've seen time and again, broker-dealers rely on customer confidence and should a large number of customers start withdrawing collateral, this could spiral. Hence silence isn't golden.

Ed Stewart writes: 

A few things about IBKR.

First, is is a much more highly capitalized than financial statements at first suggest, as only 15% of the company trades on the exchange, the rest is owned by managers and (mostly, if i recall 75%) by CEO Peterffy. As of the last quarterly report, excess regulatory capital stood at 3.25B. S&P credit rating A- Stable, zero long term debt.

Anyone who has traded there is aware that relative to other brokers they are very conservative on margining issues, etc. Also, they don't have the business model of bucketing all of the trades on their FX platform like most retail platforms do. The IB FX ecn mostly allows IB customers to trade with other IB customers and other banks, though they are also a market maker there. In other words it is a much, much stronger business than the crappy retail FX companies.

The other issue that is hitting the company recently (hurt their results last quarter and almost certainly this quarter) Is that they keep their equity in a basket of 16 currencies that they call the GLOBAL, so they are getting hit by the strong dollar.

I could be wrong I think a currency peg blowing up is the kind of thing their risk department and peterffy would identify as a risk and substantially mitigate, especially if they had retail traders trading in masse against the peg the way the other forex platforms had. This is based on my reading most of Peterffy's writing and conference calls over the last few years, I could be dead wrong.

If there is a bad quarter out of this but the damage is not too bad I think it might end up a solid buying opportunity. It was my largest stock holding in tax deferred accounts till yesterday when I dumped most of it.

Garrett Baldwin adds: 

Global Brokers NZ has failed and Alpari U.K. is insolvent.

anonymous writes: 

What am I missing? Why should a retail broker go under because a currency moved? Were they trading against their customers as opposed to just executing orders?

Anatoly Veltman writes: 

If they don't call for margin, they end up owning position. How could they do anything with a position thru the entire initial bidless 20% gap? They obviously did rush to liquidate on the small bounce; and that's how the new low was made (look up intraday chart)
 

Jan

16

 Here's a very interesting scholarly paper from some wheat counters ~83 years ago. It's a very good read, and appropriate for the time, but government interactions in the grain markets, wars, and international trade have rendered much of this obsolete. Still, it's a good picture of the level of scholarship that was applied to the wheat markets 83 years ago. Much has changed from then to now, but one thing never changes. The best and brightest of any generation will always drill down, and try to find a way to beat a single market.

Jan

15

Thoughts, from anonymous

January 15, 2015 | 1 Comment

1. The Swiss franc is up about 17% this morning. This is unprecedented in recent history. That is a BLACK SWAN. A BLACK SWAN is an event that you have not read to be predicted on Zero Hedge or anywhere else. This cannot happen without reverberations — and could be destabilizing — and volatility inducing in unexpected places.

2. This could be the ultimate no-confidence vote in the Euro currency.

3. It makes Bitcoin's move of 23% yesterday look quaint.

anonymous writes:

The most obvious conclusions to draw:

1) Further downward pressure on the Euro currency
2) Further downward pressure on global yield curves
3) Further loss of confidence in central banks

More derivative thoughts to consider:

a. Impact of forced liquidation of short CHF trades and potential subsequent reduction in risk and positions b. Impact on CHF funding trades in places like Hungary and Poland c. Impact on Swiss economy given where the currency and rates settle d. Impact on SNB flows e. Impact on ECB meeting next week in terms of QE

Jan

15

The Fundamental Dilemma of all market manipulation, whether legal (as in this case) or illegal: when you stop pushing up the value of an asset, it falls back, giving you mark to market losses on your inventory. Today the SNB is taking tremendous losses on the Euro assets it has accumulated in its Euro buying binge. I would not want to be a private shareholder of the SNB (or a swiss taxpayer) on a day like this.

Jan

15

Speaking of round numbers, the euro/swiss must want to end up close to parity of 1. It will make it so much easier to do all the conversion at Davos.

Jan

15

I notice that the Dow is down already and I note that gas is 1.86 this morning overnight from 1.92 here in Southern Ohio. Many empty rentals around my area. Many people, due to oil production in my area, have been been priced out of renting. I have several empty units but have found over the years people don't move over the holidays nor the cold winter months unless evicted or just moving into the area.

A complete background check will sort through any of those issues.

Gary Rogan writes:

There is enormous destruction going on of all kinds of daring, innovative oil drillers, the best of the best, which will produce damage that may last many years, as well as many traditional oil, infrastructure, transportation, etc, etc, companies but all people care about is the price of gas. Isn't that selfish?

Pitt T. Maner III writes: 

It will be interesting to see the impacts to natural gas supplies as the number of drill rigs in operation decreases.

"In fact, the current natural gas rig count remains 80% below its all-time high of 1,606 reached in late summer 2008. In the year-ago period, there were 372 active natural gas rigs." 

This paper gives an idea of the relationship between drilling new wells and production.

Jan

15

Talking to a friend: "If a year ago somebody had said just put everything in zeroes and utilities and then forget about it until January 2015, what would we have thought of that suggestion?"

And then I wondered: What is it now that would sound just as stupid?

Jan

14

 As the days lengthen and the crocuses bloom, as the buzz of spring approaches, one's thoughts turn to the icon of the warmer times of the year: baseball.

Over the weekend, I was talking to a neighbor about the coming season, and he commented about the changing styles of ballparks and their effect on the game and how it's played. Consider: Yankee Stadium is often referred to as the House that Ruth Built. I had always understood that to be a reference to the size of the ballpark. When it opened in 1923, Yankee Stadium was 60-70 percent bigger in seating than other ballparks–accommodating the fan interest in the King of Swat. But one could argue that the moniker The House that Ruth Built was as much about the dimensions of the field as about the size of the stands. Yankee Stadium had incredibly shallow depths along the foul lines–under 300 feet. While no one would question Ruth's ability to belt out home runs, the quantity of those hit at home was likely aided by the short distance to the foul pole. Perhaps that's the reason Ruth's (and Gehrig's) power is shown so well in extra base hits. Those aren't helped so much by a shortened outfield.

 Compare Jacobs Field (now Progressive Field) in Cleveland, or Oriole Park at Camden Yards, with 320-330 along the foul lines. (The short lines were not strictly a Yankee Stadium characeteristic. Ebbets Field and Fenway Park, for instance, both had similarly short foul lines.) Big difference. (It wasn't until 1958, tough, that dimensions like those of Yankee Stadium would be considered unacceptable under the MLB rules for new ball parks.)

As we were talking, I thought about the different eras in the construction of baseball parks. There was first the innovator era, when the owners built the parks and often named the parks for themselves. Wrigley Field, for instance, named for the owner of the Cubs who play there. Not that Wrigley built the park, he just named it after himself during the late 1920s. Comiskey Park was built and named for the White Sox owner, Ebbetts Field in Brooklyn, Griffith Stadium (Washington Senators), Shibe Park (renamed Connie Mack Stadium) (Philadelphia As), and so on. (Not all were so named, though; Forbes Field in Pittsburgh, for instance, was named for the soldier in the French and Indian War who named the city.) It was in this cohort of ballpark that the "classical" design took hold. It would hold sway until after World War 2, when the next era of ballparks would arrive, typified by Memorial Stadium ("The Old Grey Lady on 33rd Street"or "The World's Largest Outdoor Insane Assylum," take your pick) in Baltimore. (At one time, at 34th and Charles Streets, by the Entrance to Johns Hopkins's Homewood campus, there was a bust of Johns Hopkins on an island in the street.

 When Memorial Stadium opened, so the story goes, there was such confusion about where the stadium was–many drivers thinking the bust was for some athlete, insisted on turning onto 34th Street, with lots of accidents, as the traffic signals were not set for lots of left turning traffic (many drivers jumping the light)–that the bust was moved to the side of the road. At least that was the story on the Homewood campus, particularly the university's historian during the centennial commemoration of its founding. 

This new cohort of ballparks was designed for mixed use–not as a ballpark for which some other sport might be tolerated. That meant some compromises. They still abided by the general feel of the first round–the "owners' round"–of parks. Bricks and such, but they also started strut some steel; materials were used to have the ballparks "fit in" with the surrounding community, though how something as big could "fit in" isn't so straightforward. One other interesting feature to this round: Unlike the prior round, in which the teams financed the construction of the park, now municipalities were doing so. Perhaps that was the beginning of the myth that ballparks pay for themselves.

At least for the baseball season, with 81 games played, I can see how there might at least be an argument for economic benefit, but for football?? In any case, this round of ballparks lasted into the 1960s. It may not harken the same loyalty that the owners' round would–but when the baby boomers went to the park, it was as often as not one of the newer parks, and so the newer parks were embedded with pleasant memories in their brains, unless of course they were Senators' fans, in which case I can't talk about any association of pleasantry since my recollection of the Senators in that era was of a team more consistent with A-AA ball than the big show. And some days, sandlot might be applicable (except when Frank Howard was hitting well; they didn't look so bad then–even the defense seemingly performed on those days).

 The Astrodome ushered in the "modern" era of ballparks. It was domed–that was new. It had a space age look (befitting its location in Houston)–that was new. It was big–that was new (well, it was in Texas). No longer would the fans enjoy the proximity to the field of the earlier eras. Houston being a major petrochemical center, it's not surprising that the Astrodome also ushered in Astroturf, a plastic pseudograss that bears as much similarity to its living counterpart as an aluminum Christmas tree does to the living (or at least formerly living) one (or if you prefer, ox to bull, or McDonald's shake to those available at many of the remaining diners still operating in the US). I'll leave aside the issue of whether real baseball can be played on pseudograss–a field lacking the sweet scent of mowed green blades, all in support of that most pristine shape in sports, the baseball diamond–or has to be played on the real thing to qualify as "real" baseball. There are also variations on this theme–for instance, no dome, or a retrievable cover.

 Perhaps the peak of the third age can be found in the Hubert H. Humphrey Metrodome, know affectionately in the Twin Cities, prior to its demise, as the West Bank Marshmallow. It may remain as the only site in which an MLB game was snowed out by a 15 inch blizzard on May 15, 1986–without a snowflake ever touching the field. The Metrodome was a hitter's paradise. Four baggers would go flying out faster than an F-18 off a carrier. Maybe that's why Kirby Puckett liked playing for the Twins so much. Regardless, while there are many who probably liked the Metrodome, it always struck me as sterile. Indeed, that's my complaint about the third age: the ballparks lacked character, identity. There was one thing I liked about the Metrodome, though: it was right by downtown. That was not a universal characteristic. It wasn't a feature of ballparks until the fourth era, the one we are still in.

In the fourth era, ballparks went back to the early 1900s to take their style cues. Sure, modern engineering enhanced the experience, with unobstructed views. And there were the skyboxes, rights to which flowed to the team's bottom line. But with the style going back to the classic one of the early 20th century, one might term it retro. Fans like the effect. Ballparks built over the past two decades have been designed in the retro style. Bricks, old style grillwork, often located near downtowns, and so on. Character was not absent in these places. The trend started with the building of Oriole Park at Camden Yards. Oriole Park was part of a grander scheme to revitalize Baltimore's downtown. First, there was Harborplace, then the Aquarium (site of Willy Don's battle with the sea lions in 1981). And then, nothing. There were a few apartment houses built, a convention center, but not much else. Downtown Baltimore still felt incomplete.

With the departure of the Colts in 1984, scurrying like a thief in the night at the end of March that year, with snow flurries in the air and a Governor whose campaign theme of honest government seemed to think that it prohibited him from intervening, Baltimore's city elders realized the risks of the Orioles leaving Baltimore (I'm not sure the name would have moved as easily as "Colts" did) were there, and needed to be addressed. Back in the late 1970s, the Os' owner, Edward Bennett Williams, complained that it took too long to get from Memorial Stadium back to DC and that Baltimore alone was too small of a market to support a baseball team. Enter the Mayor, who had the police tail Williams back to DC for the next three games that he attended. When Williams next complained about the troubles of leaving 33rd Street, he was met by the Mayor noting how quickly Williams made it back to his DC office (not noted was the speed that Williams's limousine took to achieve those times, nor the anger among the State police that Williams–a defense attorney–that they were under strict orders not to issue a speeding ticket to that car). Williams never complained about it again. So the city elders caucused as they were wont to do, and they decided that Memorial Stadium, beloved as she was, likely was near the end of her useful life. Barely 30, and washed up. Thus began the planning for a new ballpark in downtown Baltimore, around which further downtown development would happen. There was mass transit emerging in the city (though why Baltimore needed a subway is beyond me), and I-95 right next door to facilitate ingress and egress. That was the plan, at any rate. It took a few years to get all the plans in place, but when Camden Yards was finished, it was magnificent. So much so that it kicked off the retro trend

 One of the nicest ballparks built with the retro theme is AT&T Park, the replacement for Candlestick Part in San Francisco. AT&T was built in part because not only was Candlestick not economically competitive in terms of skyboxes and the like but it was arguably the worst located park in the MLB. The winds off of San Francisco Bay would howl in the summer, so much that Fisherman's Wharf and the Presidio seemed warm even during the summer. Had the park been built a mere 75 or so yards to the west, the winds would have been less of an issue. Ditto for orientation. The fog that enveloped Candlestick during night games was legendary–not only for the associated temperature drops, but also the challenges it presented to the player, particularly in the outfield. One of the Alou brothers once noted that at Candlestick, you could see the pitcher throw the ball, you could see the batter hit the ball, but from then until the ball came down, the fielder had to rely on instinct–you just couldn't see the ball all the way through the air. This was the place, after all, where Stu Miller (he died a little over a week ago) was called for a balk during the 1961 All Star game played at the spanking new Candlestick Park. Miller always contended he hadn't balked. No matter, that's how it was scored Of course, many of the pre-retro parks are beloved by the fans. Dodger Stadium at Chavez Ravine is a great example. Woe to the visiting team fan at Dodger Stadium. Watching Koufax pitch at home was a delight, but the fans like the ambiance of the ball park itself.

There are 37 more days before Orioles pitchers and catchers report.

Play ball!

Jan

14

Some recent moves.

Jan 12     10 minute abs values 182   alg change 13   ratio 14

Jan 13     10 minute abs values 165   alg change 6     ratio 27

While the move yesterday of down 6 seems quite minor, the range from high to low was 50 points, and the sum of the absolute values of the 10 minute changes was 165. There was considerable opportunity to make or lose a fortune. I would propose that the ratio of absolute values to algebraic change might be a good indicator or how much money the reversalists made relative t o the trend followers, and it might be that there are some interesting predictive regularities in the ratio for the next days algebraic change, and the profitability of reversing or some such.

Jan

14

 You may read a guidebook, or just as well judge a people in a new land by their dogs. In rainforest Iquitos, five years ago, all the dogs were friendly, and so were all of the 700,000 citizens I encountered during multiple visits from 1999 through five years ago, 2010. As the new decade swung in computers arrived, and provided a model for thought that was non-existent 'PC'. Affluence followed the ability to think starting about four years ago, in 2011, and now the dogs, people and their wallets are fat.

I was never once barked at nor accosted in the pre-computer era, but tomorrow I return to the US as if from a war. My legs are riddled with dog bites from virtually daily attacks for seven months, and the human assaults have been bi-weekly. Why not go to the police, you ask? Before 2010, there were effectively no police in Iquitos except for a handful of pretty señoritas in white uniforms who stood like marble statues in the plazas. Now there are thousands of police on motorcycles, in the first cars to arrive in the city, and walking the beats. The police step in when someone asks, and the case is decided on the street according to which arguer bribes the highest. Law enforcement is an auction, and because I am wealthier than most it has saved many hard times and my passport once. However, a dozen other times the police have stood chuckling while snapping dogs ringed me, without stepping in because the sport is greater pleasure.

The children offer to kill them, and the going rate is $2 for a small dog or $4 for a large one. I have only put a bounty on two dogs: a rotten Rottweiler and a nasty large golden lab that attack me daily. The canines' method is to ring and wait for an opening, or to lay in wait and bite from behind. If one stands up to one or a band of two or four legged attackers, they wilt. However, this has left my one set of clothes (on a rainforest island of small, strong people like the dwarves in the Hobbit and nothing fits my American frame) in tatters after multiple repairs, and the socks have lost their toes, and the shoes are a laugh.

The faculty to think and an ability to buy nice things came too fast for the Peruvians. Nearly overnight, they became as cartoonish as a Bugs Bunny film, as indulgent as Golding's Lord of the Flies, and their seemingly rabid bands of dogs are the leading indicator.

However, there are still dogs that follow me like the Pied Piper for kibble I let drop from a hole in my knapsack, two señoritas have named their newborns after me, and I didn't even sleep with them, and kids dangle 5' rattlesnakes from 12' cane poles they have used to kill the serpents to keep my path safe.

Jan

14

 I was shocked to read that the default choice for premium pension savers in Sweden (not sure what a premium saver is) who are under 55 is a 1.5X levered global equity fund. My thought is that for an individual actor such a move might make sense, but I question if the market is giving enough to allow massive numbers of people to profit from such a technique at the same time - without in some way shaking most out with a disastrous IRR. It might be a sign that people are over-reliant on market returns to provide for their future relative to increasing savings rate and similar conservative measures. The same is true of the very popular "all weather" strategies that appear to get most of their juice by leveraging fixed income– which was shown in Roy's paper to the the source of over half of CTA profits as well. How can the market allow for great multitudes of people in "leveraged" products to simultaneously get above average returns over the long run do to a simple factor, leverage.

Based on the following article it appears that the managers are looking for tactical timing techniques to help them escape "popping bubbles".

Jan

14

 The rise and fall of the mortgage servicing tycoon might contain lessons. In every interview or article I read about him, I felt in not-so-subtle ways he was poking at the flexions– celebrating his triumph in the highly flexion-centric industry in a way certain to create animosity. For example, his public gloating about his firms 90% tax savings vs. the competition.

"The New Subprime Bet: How Bill Erbey Built A $2.8 Billion Fortune By Getting Inside Homeowners' Heads"

he moved his principal office from Atlanta to St. Croix, in the U.S. Virgin Islands, which happen to be an economic development zone. As a result Ocwen now saves 90% on its corporate income tax. It's also the reason Erbey is now worth $2.8 billion and may be the most innovative man in the mortgage business.

In the meantime, as he avoids the sun in St. Croix, Erbey relishes the attention his financial empire has gotten on Wall Street and on Main Street thanks to his "socially responsible" mortgage innovations. But he makes no pretense: "I am in the business of making money, but I try to do it in a way that I can go home and say that people benefited from what I did today." Even better when his new home saves his shareholders millions in U.S. taxes and happens to be a stone's throw from a Caribbean beach.

People laughed at us for the first 15 or 20 years. Today it's something that has been adopted by the industry.

I wonder what observations might have been made to predict the unraveling. On the other side I received quite a few emails and read quite a few articles suggesting his stocks (ASPS, OCN, both down 30% today, ASPS down from 150+ to 17 in last year) were great values mid-2014, and that the pending legal issues and lawsuits would all blow over.

Jan

14

One thing that changes over time, and has changed a lot since 2009, is the translation of a given % move into S&P points. So many equity holders think in terms of % moves, but in futures land the value of that move in points is now +20, and the margin requirements have changed, too. One is reminded of that on a day like yesterday, where we traversed almost 50 points.

Jan

13

 Boomers are retiring.

A. their productivity is going down.

B. They are consuming more than they are producing.

Therefore, C. they are ultimately inflationary.

The store of wealth of the boomers, however, does slow down the Velocity of money. Hence the money created now, is not causing inflation due to the "higher savings" rate or in many cases "lower leverage rate" of both private and companies.

But to perhaps ask for a further explanation: People do "consume" despite deflation, but they stop storing value in assets that are deflating, i.e. houses and real estate in general. Instead they store value in cash and short term liquid holdings…. hence slowing the velocity of money and further causing a deflationary spiral.

While stopping building houses nobody really needed would free up resources to more productive uses, it also was the most common way to leverage, again both privately and for financial companies, and hence a massive slowdown of money turns from hand to hand.

What am I missing?

Jan

12

 I'm waiting for our specs to give me examples from any field of things as exciting as the S&P last week and these racket things from table tennis or this.

Boris writes: 

Lake Placid - Olympics final, Team USA vs. Soviet Union.

Laurel Kenner writes: 

How about the gladiator contests of ancient Rome? Fed would be the patron with the thumb. Up/down.

Alston Mabry writes: 

One of the exciting things about tennis (and similar racquet games) is a function of the game's structure: No matter what the score is in a tennis match, the player on the verge of losing can come back and win the match. Contrast this with a game like American football, where there is a clock, but also where a team far behind in the score can take big risks (long passes, onside kicks, trick plays) to try to get back in the game.

The natural question for a trader: Does the market have a game structure, say, during the course of a single trading day/week/month, that constrains the possible outcomes or the nature of risk-taking? For example, once the relationship of equities vs bonds (or USD vs the €Mark or crude vs whatever) gets to a certain point, does the game require that a rebalancing occur?

anonymous writes: 

America's Cup, 2013 with the U.S. having to win last 8 in a row to win 9-8.

Jan

12

 The recent events at Petrobras have taken the investment community by storm, and there is much discussion about when the right time is to get in. Bulls figure that given the reserves and the potential that the current price is cheap and will work out well in the long term despite the current scandals. I am usually an "asset based" contrarian, but in this case I am not so sure. Let me give you my perspective:

I've worked at both Devon and Kerr-Mcgee and had many friends at Chesapeake.

To preface this post, I have never been a fan of "management guru" books and find them to mostly be trash with little insight. That being said, an excellent book could be written about the resurgence of Oklahoma City and the contrasting fortunes of Kerr-McGee, Devon, and the one-time high-flying Chesapeake Energy over the years and the differing management styles at each company. Perhaps I should write it. However with the protagonist of this post now working for one of the antagonists the final chapter cannot yet be written.

If you don't want to read a few thousand words and just want the punchline it is this: Management and management culture matters, and Devon's former CFO Jeff Agosta is one of the main reasons for Devon's success whereas Kerr-McGee has disappeared and Chesapeake goes through recurring crises. Interestingly enough, Jeff is no longer at Devon and now works for former Chesapeake founder Aubrey McClendon's new company, American Energy Partners. I will write more on that later on in this post.

The story for me begins in the mid to late 1990's when I was working for my father's money management firm. Chesapeake (CHK) was a high flying driller based on horizontal drilling in the Austin Chalk.

Wall Street was heavily promoting CHK and it was one of the biggest "momentum plays" on the street. My father didn't believe it. Frankly, anyone with experience in the austin chalk knew that the decline curves were massive. This time it was supposed to be different because of CHK's horizontal drilling. Horizontal drilling, however, wasn't going to change the nature of the austin chalk as a play, it was just going to make the initial production bigger. The problem however was that these were new wells and there wasn't much history.

At the time getting well data was a pain. We had to subscribe to a Petroleum Institute service for around 10,000 dollars per year that sent us CD's with county well data from Louisiana which was months out of date. Sure enough, the decline curves were massive. We talked to wall street analysts, and of course they didn't care. CHK was everyone's favorite.

A few years later CHK almost went out of business as sure enough the decline curves were massive. That was the first time I heard the name Aubrey McClendon.

The next time was the summer of 2003. I was sitting at my desk at the Zurich office of Kerr-McGee Luxembourg, (thank you IRS for creating such inefficiencies). I had very little to do. I was in Zurich for 2 months for a paid internship that was put together at the last minute because the employee whose job I was doing had a stroke and Kerr-McGee needed someone to take his place while he recovered.

The head of the office was an American hired in 1999 (a rare outside the ranks hire). The rest of the staff was Swiss and/or German. The European marketing team from the Chemicals unit (later spun off as Tronox) also shared these offices. European Chemicals marketing was run by a Kerr-Mcgee old timer who was one of the few still around from the Karen Silkwood days.

The first sign that Kerr-McGee had issues was that I didn't really have anything to do all day. By and large I was done with my job by 10am. In addition to my day job I was given a project to research the possibility of issuing euro-denominated bonds in Europe. The project didn't take long. Other than that I had a lot of spare time. Someone in IT at the main office in Oklahoma City seemed to have the sole job of tracking my web surfing and blocking every site that wasn't work or finance related.

The Swiss like to take long lunches and usually have a few beers at lunch as well. A directive had come down from HQ that nobody was allowed to drink at lunch but my boss told us to do what I wanted as long as he didn't see it. So, sometimes we would take 90 minute lunches by the seaside and have a couple of beers, but that still left the entire afternoon with little to do. I had brought a lot of textbooks with me to Zurich to study finance and economics but I burned through those pretty quickly.

If I could do it all over again I would have spent the time learning German, although it was also when I first started to really study body language as I could not communicate verbally. It is really the subject of another post but from my time in Panama, Switzerland, Italy, Albania, Poland, etc. I have become somewhat of an expert in reading body language. Body language doesn't lie. People do. I now like to sit in restaurants and watch body language. It is fun to spot which woman doesn't like her date and just wants to get out of there as quickly as possible even vs. which guy is going to get lucky that night. I'm also good now at knowing when I am being lied to - although I have had a few spectacular failures in that regard.

Back to Zurich: So I started spending my spare time looking for a permanent job. Simply searching "energy companies in Oklahoma City" got by my IT censors and I quickly gathered up the names of all the big energies companies and their officers. By googling around the domain names you can always come up with the structure of corporate email addresses (i.e. firstname.lastname or whatever) because some employee somewhere has always used his or her work address to post on a random message board.

So I sent out some emails to some Oklahoma City energy company executives. The emails read as follows:

Hello, my name is Gordon Haave. I am currently working for Kerr-McGee in Zurich in the corporate Treasury department. Previously I have served as Vice-President of a $300 million money management firm and as the CFO of a $20 million residential construction firm. I am returning to Oklahoma City in August and am looking for a full time job if you have any available."

Short and simple appeals work with some people and not with others. I got replies from both Jeff Agosta (then SVP of Finance and Treasurer of Devon) and Aubrey Mclendon (CEO of Chesapeake) Aubrey was very nice as everyone always says he is. We had a brief back and forth and after inquiring around the company he told me that there was nothing available but to stay in touch.

Jeff responded basically with a "yes we are looking for someone, come and see me when you get back to Oklahoma". That's how I ended up working for Devon.

However, I was still working at Kerr-Mcgee. Every day was frustrating as there was little to do, and everything I did have to do basically had zero value added. Let me explain:

My primary job was ensuring the accurate cash forecast of Kerr-McGee's North Sea oil and gas operations, and to ensure that cash balances were kept at a minimum so that they could be invested in time deposits. In the morning I had to make sure time deposits were properly received that were due that day, and in the afternoon all cash had to be swept up into new time deposits. These were often overnight or just 2-3 day investments.

The process was based off of the weekly cash forecast which was stored on the Kerr-McGee mainframe and accessed by everyone via Citrix. The weekly forecast started on Monday at the operating units. The operators would have to forecast DOWN TO THE PENNY every single expenditure or receipt they knew about. At the end of the day Monday the information would go to one higher level up, where it would be compiled. It would then move on to one level higher up on Wednesday to a treasury analyst for that unit. On Thursday morning I had all of the information for every unit and would complete the overall spreadsheet which presumably someone reviewed on Friday. It was a pain-staking process that took the time of at least 10 people over the course of the week to do. And to what end?

Of course a Treasury department needs to be able to forecast cash, but down to the penny? There were times where somewhere along the way the info would be recalled because someone let out an anticipated $500 expenditure. What difference did it make if $500 was invested one day or two days?

Ideally if you have the exact cash balance down to the penny you can invest better. For example, if you have $1 million dollars extra and you know you can invest it for and extra 4-5 days instead of just overnight you will earn more interest. But how much? Enough to have 10 people working on the thing? Enough to harass operating units into worrying about that instead of worrying about their operations? Of course not.

I once said something to my boss about it and his response was "you are lucky, when I first started here they were doing this by carbon paper and fedexed around. We only changed to spreadsheet because they couldn't buy the carbon paper anymore".

I was in a good position to learn many other things about the corporate culture. As the young American guy there by myself the chemicals sales force guys would take me out at night on their expense accounts when they passed through town and they expressed how hampered they were by the corporate culture.

Also, at the time, Kerr-McGee was spending literally millions of dollars per year on outside consultants whose job it was to change the corporate culture. One of these consultants spent a week or so in Zurich and I went out to eat and have a few drinks with him a few times. I'll spare you the details of the horror stories but his conclusion was pretty straight-forward: "It's utterly hopeless."

I don't want to name names but I remarked to him once that a certain person in our division seemed to be the real brains of the operation, yet he was not the head of it and I was wondering why. The answer: "Because X joined the company two weeks later than Y 20 years ago".

So let's review what I learned about Kerr-Mcgee:

A. A massive number of employees doing useless jobs.

B. A culture where seniority is all that matters.

C. The corporate tail wagging the operating dog.
After Kerr-McGee it was on to Devon in Jeff Agosta's unit. I ran the "cash management" function which included the investment of excess assets as my primary job but I also performed as somewhat of an overflow worker for other corporate finance projects as needed.

What was the corporate culture at Devon? Well, it depends on what part of it you worked in. In accounting it was just as bad as as Kerr-McGee. There were massive, bloated staffs of people who did their job the way they did it and simply wanted it to stay that way and didn't want anything to change. That didn't really matter too much except that corporate expenses were higher than they should be and landowners would be pissed off because they got their checks late. More than a few times in social settings when telling someone I worked at Devon the response would be "why can't you send your checks on time?"

Corporate finance, however was a lean and mean operating machine. We had less people performing the finance and treasury functions than Kerr-McGee had working on the weekly cash forecast - and we did a good job of it too. This was all under Jeff's leadership and direction.

How did the cash forecast work?

When I started there was already a cash forecast spreadsheet which I later revamped. Here is how it worked:

We pulled production estimates from an existing database. We pulled gas and oil prices from Bloomberg and applied a discount to them for what Devon would actually receive for oil and gas sales.

We knew corporate overhead data and when payroll was due, and we knew interest and swap payments already.

As to the level of accuracy achieved it was pretty straightforward. The conversation went something lie this:

Me: "Jeff, given interest rates and what we can do with extra cash in terms of investments (or lack thereof) and the manpower that we will have to expend in order to get a more detailed forecast it is cheaper to just leave an extra 100 million laying around than expend the effort to harass people so that we can do more detailed forecasts like Kerr-McGee does. Plus, we don't have to harass people who have other things they are working on."

Jeff: "Agreed"

And that was that.

A rational and efficient decision was made, without regard to "how things are always done" and taking into account that there is no need to be harassing operating units.

Not harassing the operating units was a theme that Jeff reinforced a few times.

I recall one event when a decision was made by an operating unit to bid on some blocks off of Brazil. The email I got was basically "We have to have $40 million dollars in an account in Brazil in three days". The $40 million wasn't a problem - remember we always had more than that just laying around. The problem was opening the account. This is was after 9/11 and the government was imposing all sorts of new Know Your Customer rules on the banks.

To open the account Bank of America wanted endless documentation that there was basically know way I could do within 3 days. In the end I just said to our representative at B of A "look, this is Devon energy opening an account for a Devon subsidiary, we have 120+ accounts with you. This account need to be opening tomorrow. I will send you whatever documentation you want later, but this account has to be open tomorrow. If you don't know your customer well enough to open the account then we will have to find someone who does".

He opened the account.

At some point during or after this event I said to Jeff "Hey, these guys (the operating unit) really have to give us more heads up next time". Jeff's response was "It is fine for you to send them an email asking them to give you a better heads up when they can, but always remember they are the one's who make the money. We work for them, not the other way around".
Meanwhile let's get back to Chesapeake. Aubrey McClendon the well liked and flamboyant founder had his own management approach. I can't speak too much to the internal culture as I was not a part of it, but Aubrey was generally highly regarded by his employees. The problem was as follows: He ran the company like it was his own as opposed to running it on behalf of the shareholders.

Although it is difficult to quantify this was apparent by the massive amount of money that Chesapeake through around the community in what appeared to me to be one big dose of self-promotion. Chesapeake funding was all over Oklahoma City, and the news articles praising McClendon were legion as he achieved celebrity status. Companies need to distribute money in their communities from time to time for their long run success, but Chesapeake's giving far outstripped anything Devon or Kerr-McGee was doing. I was constantly thinking to myself "I wonder how any of this benefits shareholders"?

Later events that are quantifiable proved me correct that indeed the company was being run in his own interested instead of the interest of the shareholders.

In short, McClendon has a sweetheart deal where, after shareholders paid to acquire land McClendon got an ownership stake of 2.5% of every well drilled. He had to pay 2.5% of the drilling costs. How did he come up with the 2.5%? He borrowed against his interest in the wells.

Here is the problem with that:

1. McClendon was competing with Chesapeake for access to capital.

2. Let's say the price of natural gas goes down and Chesapeake needed to curtail it's drilling or shut-in some wells. What decision should be made? Well, if McClendon has massive personal interest payments to make on his personal debt, he suddenly has a conflict of interest with the company.

McClendon of course denied any conflict of interest, but it is ludicrous to believe that shareholders ever would have approved such a situation had they known about it. One defense perhaps is that the board of directors (who represent the shareholders) knew, but this is the same board of directors that bailed McClendon out of his personal financial problems buy buying his private map collection from him and awarding him a massive bonus while Chesapeake's own fortunes were in decline.

In addition McClendon was using CHK employees to do personal work for him and also never disclosed that he had a hedge fund on the side which traded in the same energy markets that CHK did.

In short, he ran the company on behalf of himself, instead of on behalf of the shareholders.

To contrast this behavior to what I saw at Devon: One time a senior manager operating out of Houston donated $10,000 to a charity without prior approval. As Jeff relayed to me the manager was told "that is the shareholders money, either get it back or pay it back yourself".

All of this leads to an interesting situation:

Aubrey McClendon is the last person in the world I would want to look after my interests as a shareholder. Jeff Agosta is the first.

Now, Jeff works for Aubrey.

In January 2014 Jeff was fired as the CFO at Devon. I don't know the scoop and have not spoken to Jeff in 6 years, but as someone with more knowledge than I do tells me:

"He f****d up on a forecast/reporting issue, plus he alienated virtually everyone who worked under him with his management style, it seems."

I have no idea myself, but that he might have alienated people under him would not be a surprise. I for one liked working in his unit. With Jeff would always knew where you stood. If you did a good job you knew it, and if you did a bad job you knew it. Not everyone is like me however. Some people care more about the 5 minutes of pleasantries that need to occur when a conversation starts and need criticism of their idea in a roundabout manner. Jeff was not that guy.

More importantly, I would bet that Jeff attempted to impose his efficiency viewpoint on the rest of the company and got a lot of pushback.

American Energy Partners is said to be getting ready for an IPO. My advice: figure out who is really calling the shots on the finances. If it is McClendon then take a pass. If it is Agosta then go for it if you otherwise like the company and it's valuation.

Postscript:

So what does all this have to do with Petrobras? In the end and after years and years of attempted reform Kerr-McGee called it quits. The stock had basically gone nowhere for 20 years and eventually the chemicals unit was spun off and the Oil & Gas assets sold to Anadarko. The archaic corporate culture just couldn't be overcome.

In all companies the allocation of capital is incredibly important. The difference between Energy companies and many other companies is that the economic consequences few key decisions will be apparent in short order. Proctor and Gamble can make bad decisions and the result will just be a slow decline in overall market share over a long period of time - this is not the case with an energy company.

Petrobras can have all of the reserves in the world, but if management and the corporate culture are no good shareholders will never realize a profit from it.

Jan

12

 On December 20, 2011, at 9:38am, Jeffrey Buckalew, a successful investment banker and pilot, departed Teterboro, NJ bound for Atlanta in his Socata TBM 700 turboprop along with his wife, their two children, a business associate and the family dog. By 10:05, they were all dead.

The NTSB declared the probable cause(s) of the accident to be:

The airplane's encounter with unforecasted severe icing conditions that were characterized by high ice accretion rates and the pilot's failure to use his command authority to depart the icing conditions in an expeditious manner, which resulted in a loss of airplane control.

Happily, I wasn't working that morning, but I worked that sector for 25 years and the controller who was working the aircraft when it went down is a friend of mine.

The accident highlights a couple of issues that are highly relevant to trading. First, the threat of complacency which can lead to a failure to recognize that a dangerous situation is developing, and second, the need to take action to correct the situation immediately. We must be vigilant and nimble.

This excellent video by AOPA's Air Safety Institute gives a thorough discussion of the accident and its causes. I was particularly keen on the last two minutes or so (transcribed below) and it's insights. In the first paragraph, replace the word aircraft with "systems" and aviation and flying with "trading" and you can see what I mean.

Sometimes experience harms more than it helps. Rather than making us more vigilant, it can lead to a sort of comfortable complacency, not only about the dangers we face, but about our own capabilities and those of our aircraft. Complacency is arguably aviation's most common vice, and one of the hard truths about flying is that it's sometimes punished with extraordinary severity.

The pilot of N731CA was in the clouds for a total of approximately five minutes. Roughly two minutes passed between his first indication to ATC that icing was a problem and the beginning of the final plunge.

It takes time for the human mind to spin up when suddenly confronted with a problem. It takes time to recognize that things have changed and process the idea that an extraordinary response is called for. All during that time, part of the mind is fighting against the new reality, arguing "stay the course".

Two minutes isn't much time, but it's enough time. Enough time to make a decision, declare an emergency and reverse the climb. Or, just push the nose over and worry about ATC later.

Or at least, that's what we'd like to think. The truth of the matter, which is that two minutes really isn't much time for someone who is surprised, conflicted and almost certainly frightened, is decidedly less comforting.

Anatoly Veltman writes: 

Yes, there is an adage that biggest losses come immediately following biggest gains. It's also possible that big gains may follow big gains. My explanation is that what brought the initial big gains was the increase in volatility.

Gary Rogan writes: 

So if either big losses or big gains follow big gains what is one supposed to do after big gains?

Stefan Martinek adds: 

Theoretically, we should de-leverage and adjust for volatility (I assume our initial position was volatility normalized). Practically, doing nothing and ignore some vol. spike usually does not hurt as much as believed especially for long vol. strategies. Exit/adjustment is therefore different if strategy does well in storms or if it is killed by storms. Some trading storms are good.

Jan

12

 The notion that the United States has had a two-party system over the last hundred years is largely a fantasy. This may be another successful schoolteacher fairy tale designed to discourage "conservatives" from having any patience with the minority party; it may be simply part of the American notion that the two teams on on the field have an equal chance that is to be determined by "how much they want it". Either way, the fantasy of equal competition does not fit the facts. The Republicans have only won the trophy once in the last hundred years - in 1928. That was the only time where the Republicans continued to control both houses of Congress as a member of their party was re-elected President. The results were these: Republican House margin of majority: 12%, Republican Senate margin of majority (including Vice-President's vote in the event of a tie): 10%.

The Democrats, on the other hand, have 4 Super Bowl rings: 1936, 1940, 1944, and 1964. Their first - Roosevelt's 2nd election - was the biggest blowout: Democratic House margin of majority: 30%, Democratic Senate margin of majority (including Vice-President's vote in the event of a tie): 34%.

Even in the era of divided government and less than landslide elections, the drift has remained in favor of the Democratic party.

2008 election results - Democratic House margin of majority: 19%, Democratic Senate margin of majority (including Vice-President's vote in the event of a tie): 21%

2014 election results - Republican House margin of majority: 17%, Republican Senate margin of majority (deducting Vice-President's vote in the event of a tie): 3%

What interests me is the likelihood that the United States may finally have a genuine two-party system. If it does happen, it will be because the Republicans finally become what Grant planned for them to be 140 years ago - the party of the new Constitution that included the 14th Amendment.is may actually change. The Democrats have been the party of Federal executive authority since their founding; whenever possible, they have looked to the White House to order the entire country to do what they wanted - i.e. buy Louisiana, chase slaves, regulate the sale of sick chickens, etc. During my lifetime, the notion that that the States who make up the Union have equal sovereignty suffered the same fate as Grant's reputation as President. It ceased being taught in any law or other type of school, and the presumption of absolute Federal authority became universal. Now, to my delight and surprise, the idea equal sovereignties and rights of citizenship for the States and the Union has revived. People, even judges, have read the 10th Amendment and understand the meaning of its plain language. We shall see.

Jan

12

 I recently connected a turntable to my professional sound system with equalizers, subwoofers, and running two 1700 watt power amps. I have a collection of several hundred vintage vinyl records from the 60s on. I was amazed anew at how full and involving the analog sound is. You can hear the wood tones in the guitar of George Benson. It makes you feel like lying down and just listening to the music, or dancing. That just doesn't happen with CD's or digital content. The digital sound algorithms leave out some of the feeling and nuance of the sound. Boosting the bass does nothing but cover the lack of content in the other registers. Also, they vinyl has lasted for 50 years with excellent quality. The art on the covers is fascinating. Meanwhile, my cd's have dissolved, the cases broken, and been transferred to hard drive and lacks the same fidelity.

Jan

12

High drama in the S&P. Like a Dumas or L'Amour n= novel.

(who else writes adventure like this?)

   monday change   -30
   tues change     -26
   wed change      +35
   thur change     +36
   fri change      -20
   prev week change -40

Perhaps this explains the movement up in Vix. It's like a boxing match in the final round, or a tennis rally in doubles with all 4 players at net blasting at each other. What other sport situation?

Jan

12

A very interesting article reminding us that we can estimate the standard deviation of most of our data as the range/4 or (b-a)/4 where b is the highest and a is the lowest obse ration.

This leads to many interesting augmentations. You can quickly calculate the significance of a result by 4u x n to 1/2 /(range).

I was led to this result by a very interesting 1980 Box on evolutionary manufacturing operations. I was amazed that the authors were so clear and precise about the statistics, but then I saw that the author was Box and Draper, considered two of the world's leading statisticians.

Jan

9

"The Amazing, Possibly True Adventures of Catman Keeley and his Corporate Hoboes: on the road with the former veterinarian, ex raquetball champ, and freight hopping adventurer who shows adventurers how the other half lives"

Jan

9

Dear Dailyspec,

Do you think there is a need and market for alleviating the pain when being different hurts?

On any given day we have many people on the site that feel differently and are proud and pumped up about it with all the wonderful possibilities it offers. On a good day, feeling different means feeling free and unconstrained and the world is your oyster and playground.

I know however that there is a dark side to feeling different and on a bad day it can get really dark. On such a day you can go from feeling on top of the world to wondering if you know anything about anything especially after an, "I can't believe I just did it again. How can such a smart guy as me do such a f-in stupid thing AGAIN!"

Having spoken to a number of site members over the years and I know that this is not an uncommon feeling, it's just not part of the spoken culture here.

One of the top things I like about the site is that it is a group of people who appear to give a damn and are making a difference on so many levels. I'm thinking that our giving a damn should extend to caring about each other especially during those bad times when some people go "radio silent" and hear from them for a while (and it wasn't to go and kick butt out in the world).

Here's my question: How prevalent are the dark thoughts of feeling different when you're in the negative end of it, how dark do you think they get and if so, what do you think the need and market is for alleviating some of those thoughts and feelings? I don't know about you, but if and when I were to hear about a member of our site blowing their brains out, it would get to me (especially me being a former shrink and specialist in suicide) and I would think that I, and we,  missed something important.

The site is a special group and I'm honored to be a member.

Wishing you all the best,

Mark

Jan

9

 To what extent are speculators like the wolves in this very interesting brief documentary on Yellowstone's ecosystem?

Gary Rogan writes:

Clearly the both the wolves and speculators improve their respective ecosystems, so in that sense they are alike. As far as I can tell speculators provide one main benefit to the world: they remove irrational anomalies from markets by making a profit off any irrationality they are capable of perceiving. They also provide liquidity under difficult circumstances, which could be thought of as a special case of the previous function. Is it the same as controlling the overgrazing deer? Seems like a stretch, but if I were on debate team where I'd have to argue this point, I'm sure I could come up with some plausible arguments.

Jan

9

 Mr. Sogi has posted some very informative things on understanding snow pack and avalanche likelihood.

Here is an interesting article on the science behind avalanches and some recent technological advances in avalanche survival: the avalanche airbag backpack.

This second link is a one minute video of an actual avalanche survival: Snake River Float Avalanche Airbag Save.

Jan

9

Investors in U.S.-based funds poured $36.5 billion into stock funds in the latest weekly period, marking the biggest inflows on record as U.S. stocks surged to record highs, data from Thomson Reuters Lipper service showed on Friday"

They forgot to highlight the 18 billion outflows the week before. I don't have access to this Lipper data feed, but it would be interesting to search for a relationship between inflows/outflows (values, changes, streaks) and prospective returns. Copper the public at all times?

anonymous writes: 

Check out trim tabs… .

Jan

9

 Try playing this hold'em game mano a mano against the computer which has solved limit games with two people using artificial intelligence.

Ed Stewart writes: 

This article has an interesting quote perhaps relevant to our field:

"Another change (In the algorithm) involves skipping the usual step of averaging the latest strategy with all previous strategies; the algorithm just uses the most recent strategy.

"The algorithm goes from three steps to two steps," Burch explains. "We throw away the final step."

Jan

7

We regret to inform you that Edward T. Dunne (more simply know as Ed, or Mr. E), a longtime friend and major inspiration for this site (in fact he was one of the 4 spec list founders, back in 1998), died on Monday of a heart attack.  To honor his memory, the Dailyspec will be in mourning for 1 week.

Information about the memorial service can be found here .

Some memories of Ed. He knew more about the technical details of the infrastructure of every market than any man alive. He always knew what the current and future weather conditions of every country in the world were and would call you up to wake you up , to stay out of the cold, or beware of a coming earthquake or tsunami, or get out of your positions.

He was the inventor and early user of many of the financial innovations in the fixed income and energy markets. He was a loyal friend who would always be by your side in a time of need.

He played a great piano, and confided that several of the pieces that Billy Joel and Chris Rock sang, he wrote for them.

He liked to tell you that grains were sure to go thru the roof because he had just driven thru the farms in Iowa and could tell you exactly what the growing conditions were.

When an attractive woman was in the audience, he would confide to her that he personally owned 50% of the entire world wide soybean crop and could guarantee that his market call would be rite.

The last time I saw him we sang Old Man river together . He had a great bass voice, and a beautiful operatic voice. The last time I spoke to him he called me up at 1 am to tell me that there was conspiracy going on in France particularly and that a eminent personage I mite have wished to communicate with was likely a spy, and that any contact with him mite bring us all down.

I had the pleasure of lending him money when he was in need, and he confided to me that he didn't wish to sell any of the 5 or 10 business magazine he owned at this time as they were worth in the hundreds of millions but he didn't want to sell them now because he cared for the employees.

When he entered a room, all conversation would stop and he would sit in a big arm chair and stentorianly regale the hundreds in attendance with the latest conspiracies that were going on, and how he had made billions by seeing thru it.

He liked to confide that he had picked up a check for the junior members of a firm, because of oblige. He was very proud of his son and confided that he was the best trader and squash player in the firm and was running it, except for the boss.

He and I liked to talk about his ancestors, who was the head of Tammany Hall, and the best handball player in the world and the power behind the building of the Brooklyn Bridge and every other important thing that happened in NY in those days.

If there were an attractive woman in the room, he would let her know just how powerful he was and all attention from the woman would gravitate to him. He liked to send 200 newspapers from around the world to you every day so that you could not be the only one to miss out on the skinny.

He confided that he was one of the three people who had seen the keys to Rebecca and in that book, it told him what each day was going to bring for the next 1000 years in the markets.

He was a character out of Shakespeare ( Falstaff ), Louis Lamour ( Old Doc Yak ) and Rabelais ( Pantagruel ), and he loved to play the role. No one knew how to work the phones better than him, and he loved to call up important talk shows and get on with his certainty of being connected with his battery of phones, only to get the host in a conversation that would move markets in his direction.

He grew the best tomatoes in the world, and caught the largest tuna in the world in his boat, and would often bring a portion of two of tuna to the spec parties. He was a very good athlete surprisingly mobile, and confided that he once won the pivotal game against Princeton.

He often had personal ones on ones with the Chair of the Fed at Princeton soirees which only he and a few select friends were allowed to attend. He could game the system and pretend to be various persons in Email better than anyone in the world.

He confided that his bonus for the last year was in the nine figures but that he hadn't taken it for fear that it would create too much havoc. He loved to call people a girl if they made a market prediction based on regularities that was in an opposite direction from his recently taken 100% gain.

He and Yale Hirsch were always fighting about his conservative views and Yale's opposite and Yale demanded a vote as to who would stay on the list, and he won the vote 100 to 1.

He loved to tell you how he just made 100 million and was up 100% in the
month, and better yet, he got it from the pockets of the atheists,
people of  the wrong persuasion, immigrants, and liberals.

I could go on, but there never was a man like him. He was powerful, multi-talented, omnivorous, ad totally sagacious, and completely cognizant of all his assets, and he only wished that you could share in them. There never will be one like him and the world is a much smaller place. He was highly religious, and certainly believed that he would be watching over us in the unlikely event that he ever died, which was impossible because he had just lost 50 pounds and exercised every day. Vic

Jan

7

Ed Dunne was an endless number of different people for the endless number of different people in this world. Appropriate to each and appropriate for every occasion.

My initial year on the list led me to a feeling that he is a Samurai, ever ready for a battle with a massive sword, on any idea that touches speculation remotely. As I got to eventually know him somewhat closer, I realized he was an even greater Monk ready to give as well.

Full of wisdom, his fatherly advice was encouraging, realistic and purposeful.

I will recount just one anecdote, how he always set examples for one to emulate:

The first and the only time I met him in person was in the summer of 2011. I was packing my bags from a hotel off Wall Street to leave for India and meet with Ed Dunne for an hour before I set out to the airport. I was expecting a man in his 30s with the body of a baseball player.

He walked in to the Hotel Lobby and I found a man with the body of a baseball player at 70 perhaps. Yet, the same energy, the same vibrancy as he always emanated on our Googletalk chats (he used to love offering as gifts free accounts on gmail.com to everyone), phone calls and emails was radiating.

During this meet-up I realized he personally drove down 200 miles as his scheduled car pick up failed on him. He didn't want me to go back disappointed without meeting with him and kept his word.

While he appeared to have very strong views against any specific persons, it was to my mind his penchant for just skimming the truth. He always loved you. Even during the days that it seemed you and he are at odds, he would be ready to gnaw the flesh out of any face that may even begin to utter anything unseemly. Yes, I knew it from the very moment he has immense love and respect for you. When he one day asked me about you, I hesitated at first and then eventually told him, "When two big boys appear to be at odds on the school soccer field, stay apart has been my mantra since eventually the two big boys are the two big boys." He fumed back, " you are too smart" and then after a pause recounted endless stories of your and his camaradries and how you both went out of your ways to care for each other over a long time.

How will I ever find anyone who can take his place?

- Sushil

Jan

7

I first met Ed sometime in 1997 or 1998. I was in graduate school and trying to earn a few bucks by working as a data cleaner and spreadsheet builder at a hedge fund not far from the university. I and the rest of the staff worked in cubicles in the  middle of a big trading room, while the important people had glass enclosed offices around the perimeter. One of these people, a well dressed, tall and large gentleman soon introduced himself as Ed Dunne. In the following few days he would often stop by and chat about what was going on in markets all over the world. Most often I could see him in the office of the head of the firm, the billionaire Mr. Why, talking and gesturing while Mr. Why nodded politely from time to time. I never talked to Mr. Why, but I felt I had a indirect link to him via my conversations with Ed. And he knew or spoke with so many other important people in the investment world.

Ed was to me was the quintessential expert on international financial markets. He would explain how hedge funds and re-insurance companies work together, how oil can be stored in idle ships for later delivery, what factors affect the prices of grains, and a hundred other things. All things that I was very curious to learn about. To become as savvy and as wealthy as Ed seemed within easy reach if I could have a few more discussions with him. One time he invited me to attend one of his meetings at Princeton University with several economics and statistics professors (though I did not see Ben Bernanke there), and afterwards to a sumptuous lunch in a nearby restaurant. That was just one example of his generosity.

Later on Ed claimed that he introduced me to Victor and got me the dream job that I now have. I think it was more complicated than that and that there were several people involved but I don't remember the details. But certainly Ed played a role and I am grateful to him for that.

Jan

7

You always knew where you stood with Ed. He didn't mince words.

And you always knew what he stood for and believed in. His debate style was very much scorched earth which alienated many. But he was forgiving and quickly forgot the interactions ready to move on with the relationship.

On a few occasions Ed and I tangled….and he would usually (always) eviscerate me.

But from these interactions, I learned that I either needed to shore up my beliefs/positions with stronger/better research….or……..was forced to recognize the cognitive dissonance that was bouncing around in my head from the new information/POV Ed would expose me to.

But what I found most interesting about this man that I never met in person was the kindness he was capable of…..and the layers of his kindness.

On the list, he was always rough and tumble and ready to rumble and deflate what he saw as ballyhoo.

On private emails he was often cryptic and quick to criticize. But I never took the criticizer personally. I saw it as generosity…him giving of his time to help learn what was so obvious to him….but elusive to a mere mortal such as myself.

On Gmail chats, though, he was a nice guy. He was a like a coach/teacher helping me to learn and grow and come to my own conclusions (with his guidance, of course).

But on the phone….well that was a different story. He was a larger than life figure with a booming but kind voice. He was always glad to spend a few minutes talking. And even though we never met, I always felt like I was an "old friend" when we spoke.

For some reason, when I think of Ed and his emphatic beliefs and ability to express those beliefs, I always thought of that firebrand founding father, Patrick Henry.

Ed was a founding father of our group, so in his memory, I leave you with Patrick Henry's most famous speech.

http://www.history.org/almanack/life/politics/giveme.cfm

Jan

7

Though i am but one of myriads of females who admired and adored him, Ed was a keeper, and a sagacious pip whenever he appeared, and was gargantuan, as Vic indicated, in all of his parameters, including his appetites and affections. Whether what he said turned out to be accurate or no, his views were persuasive and compelling, and he was a titan in the many ways that few can hope to emulate. We shall all miss him greatly, and among those, I miss him already as a rapscallion prince who flashed by our way for too brief a transit. Lucky were those who spent much time with him. I shall cherish the times i got to speak and listen to this cornucopoetic man. I think he is looking over us all and smiling, knowing he is so missed. and keeping his angel fingery-wings crossed that his predictions will come to fruition, no doubt, within the next fiscal quarter.

Jan

5

 Here's my prediction: the DXY is on it's way towards 100…110 or 120. I'm buying calls on the UUP and will check in on them in about 90 days.

Alston Mabry writes: 

And if you wanted to hedge that bet, you could go long silver, in whatever safe format you prefer…calls on AGQ being a safer way to do it. But you'd need to check in on them often.Just in the spirit (ghost?) of making an actual call.

Jan

5

 Media advice is of little worth, except for a fade perhaps. After all, the primary purpose of the typical financial reporter is to make his/her quota in inches. Quantity over quality. The purpose of the financial media is to sell ads, make money, and hook you like a fly fisherman casting a fly at a trout. The TV financial media has been taken over by guest experts(touts). I avoid reading or listening to them like the plague as I prefer to make my decisions looking through my own lens, not the lens of others(who are observers, not players), second hand.

This broken down old grain trader looks at the financial media with a very flinty eye, much like one looks at the guys at the track who sell tout sheets when you walk past the turnstyle. Make your own decisions, keep your own counsel, and play your own hand. If you need advice, there are private subscription services, for a high price, that might, sometimes be worth listening to, but unless they have skin in the game avoid them like the plague.

Craig Mee writes: 

Everyone is now a salesman trying to justify themselves…listener beware. Funny how the country boys seem to do less talking and more listening and see things more clearly. I suppose that happens when you're not selling your soul on every deal as a means to pay the rent.

Jan

5

 For those with a bloomberg professional terminal, "live" bitcoin prices are now available. The symbol is XBT <CURNCY> <GO> … so we can now run all of those essential analytics.

But standing in the way of this analysis is the fact that the forward, interest rate parity, etc. pages are all blank. Because they don't exist….

VCCY <GO> is the "virtual currency monitor" page.

Henrik Andersson writes:

Rocky, I found a way for you to short Bitcoin. btcjam.com is a peer 2 peer Bitcoin lending web site. If you sign up under the alias 'RockyHumbert' I promise to help fund the loan provided you pay a decent rate….

Rocky's Ghost writes:

Rocky will be heading back to the Northwest Territory shortly, but before he departs, he wants to give a shout out and thanks to Henrik for what Business Insider ranks as the single worst investment of 2014. Bitcoin declined from about 800 to 314 over the course of the year (which is even worse than Rocky's daughter's Mattel stock which she owns for the "long run". )

If Rocky were going to make a similar bet for 2015, it would be to buy calls on UUP. Wishing everyone a happy and healthy 2015.

1. Trade with the trend.
2. Ride winners and cut losers.
3. Manage risk.
4. Keep mind and spirit clear.

Ralph Vince writes:

Interesting post indeed. I have no predictions for 2015, other than to put as much as I can behind my trading. As there is more than one way to skin a cat, in reading Rocky's Ghost's post (and I admire his market acumen as I do his physical self) I would amend his four points, most interestingly, as follows:

1. Trade as though the data is entirely random and fat-tailed (RG :Trade with the trend.)
2. Always be taking profits (RG :Ride winners and cut losers.)
3. Manage risk. (RG: Manage risk.)
4. Shake it - but don't break it (RG: Keep mind and spirit clear.)

Point #3 bears repeating.

anonymous writes:

Some Seykota additions:

#5. Follow the rules.

#6. kKnow when to break rule #5.

Jan

5

 "Millennials regard McDonald's as unhealthy, outdated and downmarket"

I Noticed the dismal quality and service on a road trip in 2013, were I tried all the "new" menu items and found them worse than sub-par.

Ive noticed that many of the Downtown McDonalds (Chicago) are underclass hangouts nearly 24/7, to the extent I would not take my kids to one, period. Even the neat "Rock n Roll McDonalds" was recently hit by a flash mob, as you can see here.

I was happy to see the rumor that the Ackman might be targeting the stock, would love to see a shake-up including (first thing) removal of the failed CEO before things get worse. And I'd bet that there is a mountain of bureaucracy to cut.

Gary Rogan writes: 

The first article seems like a not-too-subtle Shake Shack PR piece. The Shake Shack propaganda is suddenly everywhere, helped by the slow news period when the IPO was announced and its NYC roots. The hamburger marketplace is just crap, pure and simple. It's saturated (with fat and otherwise) and a lot of exploration of alternatives has occurred due to the age and low barriers to entry of the basic concept. There is not that much to be done about McDonalds unless someone serendipitously hits some goldmine with some random menu item or trend. It may make sense for them to be associated with the urban delinquents if a lot of them congregate and eat there. Or maybe go full Angus and get the upscale clientele. Probably six of one, half a dozen of the other. There are better places to fish for both growth and value.

Ed Stewart writes: 

I agree, it was definitely a Shake shack PR placement. However I also agreed with most of the criticism it offered of McD, including the notion that niche, more targeted business models are more workable given the transformation from a relatively homogeneous population.

At this point I don't think the underclass is big enough to sustain a chain as big as McDonalds in the USA. The issue is that when they become a critical mass, they start to lose everyone else. Plus, the antics increase operating costs — stores with that situation become tainted very quickly.

Chipotle has been a great success for investors, but it is a health disaster. It's amazing that it is mentioned as one of the new "healthier" options.

Gary Rogan writes: 

I guess I'm simply looking at the present situation and not seeing much of a nationwide opening, either in terms of "fixing" McD or some deterministic success for a wide-footprint competitor.

McD and pre-existing large competitors have penetrated every nook and cranny of the US market (and quite a bit of the world's). This is not new. McD historically has been somewhat experimental as replicating local menu item additions and any other gimmicks on a wider scale.

There are "upstarts" like In-N-Out that are actually more than half-century old that have expanded greatly in the west and are still rapidly expanding. Should any gimmick like serving wine with your burger work anywhere they will copy it in a nanosecond or someone else will. Yes, it's possible that there is some solution either for an existing player like McD or a new entrant that will produce a Chipotle-like effect nationwide, but knowing in advance that anything in particular will work in the nationwide, and more so in the world-wide market seems like a risky bet.

As a rule, restaurants fail. Fast restaurant expansion plans usually fail. Once in a blue moon something succeeds and your availability bias will always move you in the direction of pointing at it and saying "See!", but it's still risky to predict a great success no matter what they do.


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