I have just finished reading Joseph Conrad's "Typhoon", which was first published in Pall Mall Magazine in 1902. The story is about Captain Macwhirr, who sails the steamer Nan-Shan into a typhoon in the northwestern part of the Pacific Ocean.
The personality of the Captain is interesting. He is a dull, ordinary, methodic, decent professional, who lives an emotionally uninvolved life.
"Captain MacWhirr had sailed over the surface of the oceans as some men go skimming over the years of existence to sink gently into a placid grave, ignorant of life to the last, without ever having been made to see all it may contain of perfidy, of violence, and of terror. There are on sea and land such men thus fortunate–or thus disdained by destiny or by the sea".
He was confronted with a decision that might endanger the life of his men. When the barometer and other clues began to hint at trouble ahead, he decided not to lose time on an alternate course. However, he made up his mind without being fully aware of the risks and consequences. The conversations between the Captain and Jukes, the first mate, are enlightening: ….."How can you tell what a gale is made of till you get it?"…..
….."If the weather delays me–very well. There's your log-book to talk straight about the weather. But suppose I went swinging off my course and came in two days late, and they asked me: 'Where have you been all that time, Captain? ' What could I say to that? 'Went around to dodge the bad weather,' I would say. 'It must've been dam' bad,' they would say. 'Don't know,' I would have to say; 'I've dodged clear of it.' "
…"A gale is a gale, Mr. Jukes," resumed the Captain, "and a full-powered steam-ship has got to face it. There's just so much dirty weather knocking about the world, and the proper thing is to go through it with none of what old Captain Wilson of the Melita calls 'storm strategy.'
This is a story about destiny. The decision of the Captain started the ball rolling putting inexorably in motion a predetermined set of events. Nothing could stop them. There are immense forces that cannot be escaped once engaged. Why should a Captain of a fully efficient brand new ship change course? "Keep her facing it. They may say what they like, but the heaviest seas run with the wind. Facing it–always facing it–that's the way to get through. You are a young sailor. Face it. That's enough for any man. Keep a cool head."
99,999 out of 100,000 times, changing course would be a waste of time. But that ONE time you enter the perfect storm, you can only suffer the violence of the sea and hope in the benevolence of destiny. What is a calm and flat surface can suddenly erupt into a storm capable of destroying anything in its way. This reminds me of the inherent unpredictability of oceans and of complex systems.
There are many similarities with life and trading. You can either run away from risks and dangers. Hiding. Or you can face your choices rationally, based on facts, on models that, somehow inflexibly, frame and contextualize events. The limited experience one has of events and ever-changing cycles does not include all possible variables. Black swans happen and can have devastating effects. The fat tail of distributions cannot be simply ignored because sooner or later you may run into it. And in that situation, there is no "storm strategy". You can only trust the ability of your helmsman to face the wind and keep going. You can only trust the structure of your ship.
This is fascinating and applies to life and trading. It is this balance between fear and rationality, between the trust in our own capacities to build the future and the awareness that destiny can be stronger than us. It is the dignity of the human being, which faces bravely the unknown. With the awareness of these limits one has to navigate both calm and turbulent waters.
Far as the mariner on highest mast Can see all around upon the calmed vast, So wide was Neptune's hall … — Keats
I happened to visit this small XII century church near Pontremoli a few weeks ago and I was surprised how easily you can find historic gems that are not well known. There are too many. This millenary building is built on a pre-romanic site in a valley along the main roads of communication through the mountains. The first document about the parish dates to 1148. It was built with stones and cobbled paving coming from the banks of a nearby stream. Its X-century Romanesque layout has remained unchanged. Its inside has been changed and only recent restorations have revealed the ancient Medieval decorative frescoes under the plaster-work and some sculptures. A perfectly preserved pre-Christian idol is also kept in the church. The area of Sorano was settled in Prehistory. Many stelae-statues have been found in the area. These carved stones confirm the presence of settlements since the Bronze Age. As civilizations alternated through centuries, new structures were built over the remains of previous buildings and settlements. However, the signs of past cultures manage to survive until today. Services are still attended daily in this consecrated church. This is probably the reason why the church is so well preserved. It is fascinating how through wars and dramatic changes it was passed on from one generation to the next in exceptionally good condition.
Italy is for sure a place full with history and culture. The artistic and architectural heritage is immense. They are not just "old stones" from dead civilizations. They are part of our ordinary and daily life. They are living testimonies of where we come from and who we are. They help us understand how we got here. They enrich us every day when we visit our "open air" museums. We proudly preserve this patrimony because we feel it is our home. With these ideas and values in mind, Italians will navigate these turbulent times.
Moving to single digits? The market moves slowly but in long runs to the upside. It squeezes shorts like frogs boiled in water getting warmer and warmer and it attracts new buyers. On progressively lower volumes.
For anyone who thought the worst is definitely over for the EMU, it might be helpful to watch Italy over the next couple of months. The irresistible force meeting the unmovable rock sort of thing, as the Germans preaching austerity are met by Italians saying no way as they head home for their mid-day pennichella. I thought the European banks were close to being buyable again, but I guess I was wrong. As Carder observed, beware the Ides of March. They seem to be an interesting time for things happening in Rome.
Paolo Pezzutti writes:
As an Italian once again I have to observe how prejudices are still widespread. I don't know many people in my country who head home for the mid-day pennichella. I work at least 12 hours a day and like me there many who work pretty hard. Often with low salaries and unfair contracts. This article references the position of the left party (Democratic Party) which is bringing forward, very similarly to other countries in Europe like France, the idea that the kind of austerity we are implementing has very tough implications socially and on the economy (we entered in a deep recession because of higher taxes). One can agree with this position or not, but frankly speaking, I don't think this kind of silly humor is appropriate.
It has been a while since the dailyspec discussed the potential for mayhem in the Straits of Hormuz. So far, the greatest threat to American interests has come from our own Navy. It has been nearly 4 years since the USS Hartford collided with the USS New Orleans. The "accident" injured 15 sailors; the repairs to both ships cost over $100M.
The folks at StrategyPage just reported some of the details of the accident report:
1. There was no one supervising the sonar operator when the collision occurred
2. The sonar operator was not, in fact, looking at his screen at the time but talking to a fellow crew member
3. The ship's navigator was not plotting the ship's course but "doing something else, while listening to his iPod"
4. The officer in charge failed to raise the ship's periscope to scan the horizon before the ship breached the surface
In total there were 30 errors in procedure.
Chris Tucker writes:
Complacency and sloppy work are very difficult to control after they have taken hold of a work group. The proper place to kill them is in early training. People who are responsible for large numbers of other peoples lives and/or for highly valuable property need to be trained in active vigilance early in their careers. Unfortunately, safety is a boring topic to most — it lacks the intrigue of the higher mission, it lacks the luster of fancy technical gadgetry, and because it is something that has to be practiced with diligence day in and day out, at all times, it is difficult to keep at it.
But safety and its execution is absolutely essential to any complex operation. Organizations and systems that require precautions have to inculcate a culture of safety and then impress it into their people regularly. It can never be treated as a one off training item and then checked off as completed, it has to be pressed, again and again and drilled into the subconscious so that it comes automatically. Active surveillance, much like active listening, is a skill that requires practice to master.
I suspect that in the crossing of an active shipping lane like the Straits of Hormuz, that submarines use active sonar, but I have no idea how frequently they ping. Probably on the order of once every two or three seconds, much more than that and there is insufficient time to capture reflected signals without interfering with them. The point is that an operator, especially at a time that requires extra vigilance — like surfacing, needs to actively direct his attention to his equipment and scan for threats at least once every three seconds.
While this sounds easy enough, it requires a great deal of will and energy. Distractions constantly compete for attention and need to be reduced. Again, training is the only way to control this and create an environment that rewards attentive execution of duty and punishes the creation of distractions and sloppy behavior. I suspect that if the navy chose to drill procedures in vigilance and active surveillance as often as they train for emergencies or attack maneuvers, the frequency of these incidents would be dramatically reduced.
Excellent stuff on complacency, but "culture of safety" might be too strong a goal for any place in the military. It's true that the Navy is the service where war most closely resembles peace. Most naval ships in WWII saw only a few hours of combat over the years' duration. Day-to-day operations were quite similar to peacetime ops, with the environment (including friendly ships) being the principal enemy. But the few hours of combat were the whole point, and it seems to me that safety must not be so deeply ingrained that it cannot be easily discarded when the necessity arises.
Paolo Pezzutti writes:
Western navies nowadays are dealing with decreasing budgets, changing operational scenarios and threats, issues in recruiting and retaining the professionals they need. All these factors are tightly linked. The level of ambition of naval forces is questioned in terms of requirements and capabilities needed. The threats is different from what it was at least two decades ago and attention is growing mainly for maritime security tasks. Hard to justify expensive investments to develop complex and futuristic weapon systems. For sure maintaining the fleet efficient and effective is tough at times when navies are struggling not to reduce numerically their fleets below critical thresholds. Recruiting highly skilled professionals and most of all retaining them is also critical. They need to find a motivating environment that meets their expectations. Innovation and technology are allowing the reduction of manning on board ships and submarines in order to achieve the compression of operating costs. This is also introducing risks because each member of the crew has more tasks than in the past to perform and no redundancy. On the job training and management of emergencies are issues to deal with. More focus over the past years is on modelling & simulation to train crews ashore although any sailor knows that these solutions cannot fully replace experience gained at sea. Some have questioned the extent of manning reduction that was envisioned as acceptable only a few years ago based on lessons learned developed on new constructions. The quality of training is key as days at sea spent each year tend to decrease. Incidents are the expression of this situation. Training concepts and processes have to change and adapt rapidly to this environment. As budget and personnel decrease, this is the challenge of this decade.
An interesting sidenote about, "Stick close close to your desks and never go to sea, And you all may be rulers of the Queen's Navee!":
The object of Gilbert's satire is not so much the person of publisher and politician W. H. Smith as the system that in essence de-professionalized command positions in the British armed forces, and promoted those with wealth and political connections rather than military ability. Thus, Gilbert was in effect attacking the long-standing aristocratic tradition of purchasing commissions. Instead of "serving a term" as a midshipman (which was the conventional route leading to officer status and ship's command), Sir Joseph has taken a strictly political route to the Admiralty.
Russ Herrold writes:
A former officer (here: identified as JG) from the US Navy who served in submarines inter-lineates replies to the article you linked to:
Sub commanders are under a lot of pressure to keep their sailors from leaving the navy (JG agrees). But the long periods submarine sailors spend away from their families creates pressure to get out and take a civilian job close to home. (JG agrees) The submarine sailors are very capable, and highly trained, people. Getting a better paying civilian job is not a problem. So sub captains try to keep the crews happy. That often leads (JG: Bull Shit!) to lax discipline. (JG continues: just lax discipline with this command)
Interestingly the article's remarks about generally available better substitutions employment were not addressed in the initial comments back to me; in following up privately, JG thinks the author is over-stating the substitution opportunities …
But then that makes for a more urgent article, then, doesn't it?
Chris Tucker adds:
My whole point is that these people are professionals and should be behaving like professionals. They are in positions of responsibility and need to act as such. There is a tremendous amount of self validation that comes with knowing that you know your business and that you act accordingly. People that understand this arrive at work with their heads held high and don't just talk the talk but actually walk the walk. They don't feel entitled to anything unless they've earned it themselves. This is the kind of behavior and path to self esteem that needs to be engendered. It is not about safety, per se, probably a bad choice of words on my part. It's about being a professional, about being an expert. And about wanting to be those things. It's about knowing what needs to be done and doing it properly, correctly and without fail.
Discussions and analysis about financial contagion are not attractive nowadays. "They" have found out that risk complacency is more remunerative as there will always be the political will to "sustain" the system. Whatever it takes.
A commenter writes:
The paper you linked to deals with financial contagion. What about politico-financial contagion? I'm thinking about what happens to the markets if Iran turns around in June, say, and explodes a nuclear device somewhere in the Indian Ocean. Do the markets panic? To the same degree? While the idea may strike some as a wild hypothetical, the reality is that such a scenario may yet come to pass, perhaps this year perhaps next year. There are many types of contagion (pity those traveling through De Gaulle on the bio front), and for the markets, it may not much matter which one is the triggering event. Complacency isn't limited to financial affairs, even if there may be a financial dimension to the outcome.
My submission for article of the day: "Why is the Euro so Perky? "
The article presents a medium term bearish view of the Euro. The view that the Euro is relatively strong because of the 200 days moving average seems ridiculous. Moreover, the ECB as a lender of last resort has been brought on only recently, while the Euro crisis is a long process started back in back 2009. The idea of a weaker Euro because of structural issues that cannot be solved by a divided group of leaders and nations can be shared, however, this has been a European problem (actually THE European problem) for centuries.
The Euro resiliency is a temporary phenomenon. Right, there are several outstanding reasons for the Euro to be near parity vs the USD. None of them has been sufficient, however, over the past 3/4 years to weaken significantly the Euro. If you compare prices between Europe and the US prices are at least 20% lower in the US. One example: the Ipod Touch 32 Gb cost 329 Euro vs 299$ in the US.
The Fed's "quantitative easing" program has provided underpinning for the Euro. The push of the Fed in the direction of a weak dollar is very strong and has so far outweighed the structural Euro weakness. In relative terms, it has to seen how quickly the 2 trends evolve respectively in Europe and in the US. If the US "system" is more resilient and the crisis in Europe accelerates because from the sovereign financial level it spreads heavily at the social and political level then we'll see the parity of the EURUSD. In this context, the unemployment rate in the Eurozone and especially in the southern nations is an important indicator. It is steadily increasing and it emphasizes the risk of a deterioration of the social structure should this trend continue longer.
David Lilienfeld writes:
Based on what I saw and heard in Barcelona in August, I think the matter has now gone out the ECB's domain. Granted it's a very small sample, but as I've noted before, many Barcelonians have become disillusioned with the EU and with their country in particular. That will, at some point, manifest in spending patterns and capital flight–and I doubt that that thinking will change soon. The European leaders "successfully" kicked the can down the road, but with the result of raising both the cost and the pain of the inevitable crisis resolution. Hence, the issue is no longer whether the Fed's efforts with regard to the dollar are stronger than the impact of the EU's structural problems. Those structural problems, in part because they've been unattended to for so long, will ultimately lead to the euro depreciating relative to the dollar. What the Fed is doing is at best temporary, ie, tactical. The problems with the euro, however, are strategic.
Bottom line: I agree with your concern, and at this point, I'm not sure I see how even the exit of Spain and Greece would help matters much. France is now stagnating. That doesn't bode well for crisis resolution anytime soon.
Paolo Pezzutti replies:
David, actually this is not temporary…
John Floyd writes in:
The key, I believe, is to recognize the Euro is a political animal. The politics are now unraveling from both the top (core countries) and bottom (peripheral countries). Bad economics have led to bad politics and the circle is becoming self-reinforcing. The U.S. dollar, rightly or wrongly, remains the world's reserve currency at the moment. There are approximately $200 trillion in derivative contracts denominated in Euros. The size of the decline in European growth, the politics, and the market product entanglement is making the Euro's ultimate price more difficult than ever to forecast as it may be 1.0 or .80, or lower. The expected returns of the thesis that the Euro goes lower in value however are increasing rapidly as the vortex of the deciding forces gather momentum and power.
Anatoly Veltman writes:
That was interesting reading, until you got to "forecast, may be". How to interpret what follows?
John Floyd responds:
My point was not to be interesting but to outline what I think are the key drivers of the Euro and the potential feedback mechanisms through trade and financial channels globally.
As to how to interpret what follows that is up to you. As a guide I would think outside the box and remember some combination of the following: the Tequila Crisis, the ERM crisis, why "hedged GKO's" were not really hedged, the Malaysian Ringgit fixing, how a butterfly flapping its wings in Iceland had a major global impact, etc.
Jeff Rollert writes:
I like to think of it as the behavior of the passengers in a plane, which just lost altitude suddenly.
They suddenly realize the only ones in control are in the cockpit, yet are unable to see where they're going (just where they are and a little of where they've been).
John's point is very good. History is not a (literal) guide but how investors react to the unexpected is useful.
I'm finding many pieces of evidence of avoidance behavior, including an overweight of whatever was last read.
The model may be a reversal from highly regulated markets to highly unregulated ones.
I've been going to ethnic markets for insight recently, as the calmest investors I observe are immigrants, for insight on their interaction.
Very European that Draghi would make some vague heroic comments to save the Euro sending the market up 20 points, mid-day on Thursday. Most on the continent take off Friday and the August vacation soon approaches so the timing in retrospect seems obvious.
Paolo Pezzutti writes:
Quite impressive how markets are reacting to Draghi's remarks. Assuming that it is hard to believe that effective actions will follow his statements. I wonder if this another opportunity to short the Euro. Unless actually they are counting more on the US printing presses getting ready…..
Anatoly Veltman writes:
One absolutely should have a long-term EUR shorting program. The European experiment was flawed at its core. The result will be eventual technical breach of the currently defended 6-7 year low. It happens to coincide with the same price area, from where the just-introduced EUR slid non-stop in 1999-2000, until it landed near 83.00. This time, the matching of the initial 1.6->1.2 leg will again target 1.2->.8 straight slide. Being involved in the world's most liquid trade is a must for every spec!
I recently read Michael Burry's keynote speech to 2012 UCLA class. I think the last sentence of the following quote points out a sad reality about western countries and the political elites in particular. They do not intend to pay the bill today and face the issues. They need to postpone the moment of truth in order to preserve their position and priviligies and continue to milk the cow until there's something left for them. With very little transparency, statement after statement, and summits after summit, they explore solutions that would enable them to remain in power and win the next election. Exchanging long term term risk for short term benefit. Their benefit and the benefit of those who continue to make money thanks to their policy. Bad news hit the public and the situation gradually deteriorates month after month. As frogs put into a gradually heated pot filled with water, the public does not jump out. Until they realized they are boiled.
In any environment and situation there are opportunities to speculate and make money. This time is not different. Burry profited from the 2008 crisis. I have no idea yet how to profit from the next big wave that will hit us (it is not a black swan and it is only a matter of time). The point is that it is sad that our kids have to pay the bill for wrong choices they have not made. And that our societies are wasting the quality of life standards, the competences developed over the past decades because of greed and power of a few:
"Ben Bernanke continues to backfill this logic and I fear that history is being written wrong yet again that ignorance is willful. Our nation's economic policies are born of a synthesis of theories on how to deal with the great depression of the nineteen thirties yet seem unable to honestly examine the most recent one. Sadly at the highest levels of economic thought in government questions are not tolerated. It is as if we are dealing with the binary judgment of a fundamentalist religion. Finance theory and practice fare no better; the continuing crisis makes a mockery of the principles which have guided credit policy and risk management since the 1960s. As it turns out information is not perfect, volatility does not define risk, markets are not efficient, the individual is adaptable. But the dark ages of finance allow no such light. Mainstream economists and finance practitioners please check your premises. You have contradictions before you. Truthfully I do not expect much to change. Practically speaking, history has demonstrated the ability of sovereign nations to justify themselves and to postpone the moment of crisis."
Kim Zussman adds:
Doctor used to be the zenithal career: near impossible barrier to entry, rigorous education, prestige and high income for improving people's lives.
Now it is the financial manager.
Maybe during his lifetime the meme will swing back and Michael will go back into practice.
Rocky asked this question once a year or so ago about the outlook for the Euro after one of the many EU/peripheral events, and I thought it was a good one. So how might we measure and estimate, and what are people’s expectations for moves on Sunday-Monday following the Greek elections?
I am of the opinion in the medium term the elections don’t even matter. But, that is a different topic and exclusive of any short term opportunities.
Anatoly Veltman writes:
A quick note on S&P: I think current risk is enormous (due to recent complacency).
Paolo Pezzutti writes:
I think that we have to be aware that if Germany accepts the eurobond concept, Europeans will buy a lot of time although will only delay to pay the bill. That may have a significant impact on eurusd and equities. Not sure how likely is that, but as the situation worsens pressure on Germany increases. Especially after that in France, an important player, it prevailed the idea that socialists can improve things by increasing public spending.
John Netto writes:
Long gold / short silver. I've been working this position for most of this week and it is telling us about some of the macro variables at play. This ratio is currently shy of 57 and can ascend to 60 given all of the global macro variables at play. Silver has been trading very heavy and under most circumstances I put together, the long gold short silver one helps me take on the sort of risk-adjusted exposure I like…
GL in the markets…
Anatoly shared this interesting article with me: "Jack Schwager explains why trading is more difficult now".
So Uncle Ben's innovative efforts and the endless bailout/disappoint cycles, currently centered in Europe, have nothing to do with making the situation more unpredictable by a non-flexionic observer?
Anatoly Veltman writes:
Hmmm, was trading actually "easier" a few decades ago? I don't think so. I think returns may have been, on average, a few hundred basis points higher. I think that is what he (Schwager) is referring to).
So too were rates a few hundred basis points higher though. In short, I think the difference is, (ceteris paribus) attributable to differences in rates, not that trading on things that move are moving in ways that elude us any more than they always have.
Reasonable size orders are played against by HFT algorithms. That's exactly how they take billions in profits out of the zero-sum every quarter
Ralph Vince adds:
If I have an order in for BA to sell, say, at 70.10 limit, what do I care if it's done by one big tuna or a school of piranha? I'm not following you I think on the last point.
Anatoly Veltman responds:
All depends on the size you're trying to execute. If small, your fill will be random. But a reasonable size limit order at 70.10 will only get filled, if algos figured out that there will be no chance to sell at 70.10 immediately thereafter — according to what they automatically sniff in order books. Thus you are only allowed to buy a loser. If your 70.10 is currently a good buy — you'll never execute, which is the highest level of slippage.
Ralph Vince writes:
Anatoly, doesn't that argument though say that there are no other sellers around at 7010? Would there be the same number of sellers at 7010 as if there were no HFT? (I'm not trying to taunt you here, I'm trying to see if this really MAY be a problem to me that I am oblivious to.)
Anatoly Veltman writes:
You're implying "fair" market as you used to get via direct execution. But there is no direct execution now, as HFT's are co-located. Thus the execution of your limit order (that seems fast to your eye) is in fact a slow-mo replay of the actual market that experienced multiple biases in the meantime. I'm not sure why you should be "oblivious to the problem", if a handful of HFT entities report consistent billions of profits every single quarter. These ARE modern commissions.
Paolo Pezzutti comments:
Trading is as difficult as it was I guess. Each time has its challenges though. In the past you had less access to real time data, software, information, but higher commissions. Today you have more sophisticated players and technology (hft), which can provide an expensive edge to some. There always be an edge and niche for everyone in some market, some product, some time frame. And it is everchanging. So if you are fast and adaptive you can find new ways to make money and abandon old and exhausted patterns. This is the beauty.
January 30, 2012 | 11 Comments
I am often asked what ten steps one should take to become a successful speculator.
Next I would read the papers of Alfred Cowles in the 1920s and try to compute similar statistics on runs and expectations for 5 or 10 markets.
Third I would get or write a program to pick out random dates from an array of prices, and see what regularities you find in it compared to picking out actual event or market based events.
Fourth, I would read Malkiel's book A Random Walk Down Wall Street and update his findings with the last 2 years of data.
Fifth, I would look at the work of Sam Eisenstadt of Value Line and see if you could replicate it in real life with updated results.
Sixth, I would start to keep daily prices, open, high, low, and close for 20 of so markets and individual stocks and go back a few years.
Seventh, I would go to a good business library and look at the old Investor Statistical Laboratory records of prices to see whether it gave you any insights.
Eighth, I would look for times when panic was in the air, and see if there were opportunities to bring out the canes on a systematic basis.
Ninth, I would apprentice myself to a good speculator and ask if I could be a helpful assistant without pay for a period.
Tenth, I would become adept at a field I knew and then try to apply some of the insights from that field into the market.
Eleventh, I would get a good book on Statistics like Snedecor or Anderson and be able to compute the usual measures of mean, variance, and regression in it.
Twelfth, I would read all the good financial papers on SSRN or Financial Analysts Journal to see what anomalies are still open.
Thirteenth, of course would be to read Bacon, Ben Green, and Atlas Shrugged.
I guess there are many other steps that should be taken that I have left out especially for the speculation in individual stocks. What additional steps would you recommend? Which of mine seem too narrow or specialized or wrong?
Rocky Humbert writes:
All the activities mentioned are educational, however, notably missing is a precise definition of a "successful speculator." I think providing a clear, rigorous definition of both of these terms would be illuminating and a necessary first step — and the definition itself will reveal much truth.
Anatoly Veltman adds:
I think with individual stocks: one would have to really understand the sector, the company's niche and be able to monitor inside activity for possible impropriety. Individual stocks can wipe out: Bear Stearns deflated from $60 to $2 in no time at all. In my opinion: there is no bullet-proof technical approach, applicable to an individual enterprise situation.
A widely-held index, currency cross or commodity is an entirely different arena. And where the instrument can freely move around the clock: there will be a lot of arbitrage opportunities arising out of the fact that a high percentage of participation is inefficient, limited in both the hours that they commit and the capital they commit between time-zone changes. Small inefficiencies can snowball into huge trends and turns; and given the leverage allowed in those markets - live or die financial opportunities are ever present. So technicals overpower fundamentals. So far so good.
Comes the tricky part: to adopt statistics to the fact of unprecedented centralized meddling and thievery around the very political tops. Some of the individual market decrees may be painfully random: after all, pols are just humans with their families, lovers, ills and foibles. No statistical precedent may duly incorporate such. Plus, I suspect most centralized economies of current decade may be guilty of dual-bookeeping. Those things may also blow up in more random fashion than many decades worth of statistics might dictate. Don't tell me that leveraged shorting and flexionic interventions existed even before the Great Depression. Today's globalization, money creation at a stroke of a keyboard key, abominable trends in income/education disparity and demographics, coupled with general new low in societal conscience and ethics - all combine to create a more volatile cocktail than historical market stats bear out. 2001 brought the first foreign act of war to the American soil in centuries. I know that chair and others were critical of any a money manager strategizing around such an event. But was it a fluke, or a clue: that a wrong trend in place for some time will invariably produce an unexpected event? Why can't an unprecedented event hit the world's financial domain? In the aftermath of DSK Sofitel set-up, some may begin imagining the coming bank headquarter bombing, banker shooting or other domestic terrorism. I for one envision a further off-beat scenario: that contrary to expectations, the current debt spiral will be stopped dead. Can you imagine next market moves without the printing press? Will you find statistical precedent of zooming from 2 trillion deficit to 14 trillion and suddenly stopping one day?
Craig Mee comments:
Very generous post, thanks Victor…
I would add, in this day and age, learn tough typing and keyboard skills for execution and your way around a keyboard, so you don't wipe off a months profit in the heat of battle. I would also add, learn ways of speed reading and information absorption, though these two may be more "what to do before you start out".
Gary Rogan writes:
Anatoly, I don't think really understanding the sector and and the niche is all that useful unless one knows what's going on as well as the CEO of the company, which means that in general understanding quite a bit about the company isn't useful to anyone without access to enormous amount of information. It's the subtle, little, invisible things that often make all the difference. There are a lot of people who know a lot about pretty much any company, so to out-compete them based on knowledge is usually pretty hopeless. It is nevertheless sometimes possible to out-compete those with even better knowledge by sticking with longer horizons or by being a better processor of information, but it's rare.
That said, it has been shown repeatedly that some combination of buying stocks that are out of favor by some objective measure, possibly combined with some positive value-creation characteristics, such as return on invested capital, do result in market-beating return. Certainly, just about any equity can go to essentially zero, but that's what diversification is for.
Jeff Watson adds:
In the commodities markets it's essential to cultivate commercials who trade the same markets as you(especially in the grains.) One can glean much information from a commercial, information like who's buying. who's selling, who's bidding up the front month, who's spreading what, who's buying one commodity market and selling another, etc. When dealing with a commercial, be sure to not waste his time and have some valuable information to offer as a quid pro. Also, one necessary skill to develop is to determine how much of a particular commodity is for sale at any given time…. That skill takes a lot of experience to adequately gauge the market. Also, in addition to finding a good mentor, listen to your elders, the guys who have been successful speculators for decades, the guys who have seen and experienced it all. Avoid the clerks, brokers, backroom guys, analysts, touts, hoodoos etc. Learn to be cold blooded and be willing to take a hit, even if you think the market might turn around in the future. Learn to avoid hope, as hope will ultimately kill your bankroll. When engaged in speculation, find one on one games like sports, cards, chess, etc that pit you against another person. Play these games aggressively, and learn to find an edge. That edge might translate to the markets. Still, while being aggressive in the games, play a thinking man's game, play smart, and learn to play a strong defensive game……a respect for the defense will carry over to the way you approach the markets and defend your bankroll. Stay in good physical shape, get lots of exercise, eat well, avoid excesses.
Leo Jia comments:
Given that manipulation is still prevalent in some Asian markets, I would add that, for individual stocks in particular, one needs to understand manipulators' tactics well and learn to survive and thrive under their toes.
Bruno Ombreux writes:
Just to support what Jeff said, you really have to define which market you are talking about. Because they are all different. On one hand you have stuff like S&P futures with robots trading by the nanosecond, in which algorithms and IT would be the main skill nowadays, I guess. On the other hand, you have more sedate markets with only a few big players. This article from zerohedge was really excellent. It describes the credit market, but some commodity markets are exactly the same. There the skill is more akin to high stake poker, figuring out each of your limited number of counterparts position, intentions and psychology.
Rocky Humbert adds:
I note that the Chair ignored my request to precisely define the term "successful speculator," perhaps because avoiding such rigorousness allows him to define success and speculation in a manner as to avoid acknowledging his own biases. I'd further suggest that his list of educational materials, although interesting and undoubtedly useful for all students of markets, seems biased towards an attempt to make people to be "like him."
If gold is up a gazillion percent over the past decade, and you're up 20%, are you a successful speculator?If the stock market is down 20% over a six month period, and you're down 2%, are you a successful speculator?If you have beaten the S&P by 20 basis points/year, ever year, for the past decade, without any meaningful drawdowns, are you a successful speculator?If you trade once every year or two, and every trade that you do makes some money, are you a successful speculator?
If you never trade, can you be a successful speculator?
If you dollar cost average, and are disciplined, are you a successful speculator?
If you compound at 50% per year for 10 years, and then lose everything in an afternoon, are you a successful speculator?
If you lose everything in an afternoon, and then learn from your mistake, and then compound at 50% for the next 10 years, are you a successful speculator?
If you compound at 6% per year for 10 years, and never have a meaningful drawdown, are you a successful speculator?
If the risk free rate is 6%, and you are making 12%, are you a more successful speculator then if the risk-free rate is 0% and you are making 6%?
If you think you are a successful speculator, can you really be a successful speculator?
If you think you are not a successful speculator, can you be a successful speculator?
Who are the most successful speculators of the past 100 years? Who are the least successful speculators of the past 100 years?
An anonymous contributor adds:
In conjunction with the chair's mention of valuable books and histories, I would append Fred Schwed's Where are the Customers' Yachts?.
While ostensibly written with a tongue-in-cheek hapless outsider view of 1920s and 1930s Wall Street, it has provided as many lessons and illustrations as anything by Henry Clews. In this case, I am reminded of the chapter in which Schwed wonders if such a thing as superior investment advice actually exists.
Pete Earle writes:
It is my opinion that the first thing that the would-be speculator should do, even before undertaking the courses of actions described by our Chair, is to open a small brokerage account and begin plunking around in small size, getting a feel for the market, the vagaries of execution quality, time delays, and the like. That may serve to either increase the appetite for such knowledge, or nip in the bud what could otherwise be a long and frustrating journey.
Kim Zussman adds:
The obligatory Wikipedia* definition of speculation is investment with higher risk:
Speculating is the assumption of risk in anticipation of gain but recognizing a higher than average possibility of loss. The term speculation implies that a business or investment risk can be analyzed and measured, and its distinction from the term Investment is one of degree of risk. It differs from gambling, which is based on random outcomes.
There is nothing in the act of speculating or investing that suggests holding times have anything to do with the difference in the degree of risk separating speculation from investing
By this definition one must define risk and decide what comprises high and low risk — which may be simple in extreme cases but (as we have seen repeatedly) is not very straightforward in financial markets
*Chair is quoted in the link
Alston Mabry writes in:
I'm successful when I achieve the goals I set for myself. And rather than a target in dollars or basis points or relative to any index or ex-post wish list, those goals may simply be to act with discipline in implementing a plan and then accepting the results, modifying the plan, etc.
Anatoly Veltman adds:
And don't forget Ed Seykota: "Everyone gets out of the market what they want". I find that everyone gets out of life what they want.
Plenty a market participant is not in it to make money. Fantastic news for those who are!
Bruno Ombreux writes:
This will actually bring me back to the question of what is a successful speculator.
In my opinion success in life is defined in having enough to eat, a roof, friendships and a happy family (as an aside, after near-death experiences, people tend to report family first). You can forget stuff like being famous, leaving a legacy or being remembered in history books. If you are interested in these things, you have chosen the wrong business. Nobody remembers traders or businessmen after their death except close family and friends. People who make history are military and political leaders, great artists, writers…
So you are limited to food, roof, friends and family. Therefore my definition of a successful speculator is a speculator that has enough of these, so that he doesn't feel he needs to speculate. I repeat, "a successful speculator does not need to speculate."
Paolo Pezzutti adds:
I simply think that a successful speculator is one who makes money trading. Among soccer players Messi, Ibrahimovic are considered very successful. They consistently score. They experience short periods without scoring. Similarly, traders should have an equity line which consistently prints new highs with low volatility and a short time between new highs. Like soccer players and other athletes it is their mental characteristics the main edge rather than knowledge of statistics. One can learn how to speculate but without talent cannot play the champions league of traders and will print an equity line with high drawdowns struggling losing too much when wrong and winning too little when right. Before dedicating time to find a statistical edge in markets one should assess his own talent and train psychologically. In this regard I like Dr Steenbarger work. In sports as in trading you very soon know yourself: your strengths and weakness. There is no mercy. You are exposed and naked. This is the greatness and cruelty of markets and competition. This is the area where one should really focus in my opinion.
Steve Ellison writes:
To elaborate a bit on Commander Pezzutti's definition, I would consider a successful speculator one who has outperformed a relevant benchmark for annual returns over a period of five years or more. Ideally, the outperformance should be statistically significant, but market returns can be so noisy that it might take much of a career to attain statistical significance.
Jeff Rollert writes:
I propose a successful speculator dies wealthy, with many friends. Wealth is not measured just in liquid terms.
Should a statistical method be preferred, I suggest he is the last speculator, with capital, from all the speculators of his college class.
In both cases, I suggest the Chair and Senator are deemed successful, each in their own way.
Leo Jia adds:
If I may wager my 2 cents here.
I would define a successful speculator as someone who has achieved a record that is substantially above the average record of all speculators in percentage terms during an extended period of time. The success here means more of a caliber that one has acquired which is manifested by the long-term record. Similarly regarded are the martial artists. One is considered successful when he has demonstrated the ability to beat substantially more than half of the people who practice martial arts, regardless of their styles, during an extended period of time. It doesn't mean that he should have encountered no failures during that time - everyone has failures. So, even if that successful one was beaten to death at one fight, he is still regarded as a successful martial artist because his past achievements are well revered.
With this view, I will try to answer Rocky's questions to illustrate.
Julian Rowberry writes:
An important step is to get some money. Preferably someone else's. [LOL ]
January 17, 2012 | Leave a Comment
I was reminded today that when the U.S was downgraded in the summer U.S. bond yields went down. Despite the moves by European officials spreads continue to widen, etc. Furthermore, some of the starlets of the pageant like Ireland are now beginning to tire. While I think the movement in prices in Europe and the Euro are far from complete it is not too soon to consider the knock on effects and feedback mechanisms throughout other currency pairs globally. Consider the size of European GDP (along with the US and Japan at the very least below trend growth) and the impact on the world via trade, sentiment, growth, etc. The math is not dissimilar to the impact of mortgage equity withdrawal, housing, consumption as it impacted U.S. growth and through the U.S. the rest of the world.
Paolo Pezzutti writes:
Europe will drag the US into a recession. Unless markets accept further QEs from the fed, ECB and why not the Chinese. This because the only acceptable way for equity markets is ti go up in this situation? What is the limit to central banks balance sheets? If this solves the problem in the short term to politicians ans at the same time provides profits to corporates and keeps alive banks, it looks like the holy grail. Except that at some point someone has to pay the bill? But when?
No way bears can succeed until these stocks continue to trade near all time highs. AAPL quadrupled since 2009 and also GOOG performance is impressive. How can these trends be reversed? It seems they do not have much to do with the European debt issues, housing crisis and middle east tensions. People buy ipads, iphones and android devices to play Angry Birds anyway. There is a cultural shift ongoing that needs to be understood and Blackberry might be doomed.
On a sunny and breezy day she brought me to visit a blacksmith's workshop in the countryside of Tuscany. It was like being on the run for some reason. Far from our responsibilities. Far from our daily routine. I was living a parenthesis that would be forgotten the next day.
The place was quiet and took us a hundred years back to the past. The workshop was located along the course of a creek. It would produce electric power through a rudimentary water mill. It was intriguing how it would exploit the energy of that flow. I discussed with her parallels between the ever changing shapes and speed of water and trading. Even if characteristics and parameters would rapidly and unpredictably change, nonetheless there was energy in there that was transformed and utilized. That power was used to build something that you could touch, use. Something that you could see and weigh. Not some obscure and confusing virtual service.
Here was this old guy in a little village in Tuscany who would make a living manufacturing handmade nails, knives, tools. At times when in a globalized market you can buy nails from companies in China, which manufacture 600 tons of low carbon common nails per month. She gave me as a gift one of his nails. It looked strong and hard. But it was bent. And crushed.
She handed it over to me and did not say a word. She was waiting to see my reaction. That was her way of communicating ideas and feelings. Through objects. It was a fascinating challenge. Someone clearly tried to hammer that nail into something and failed. When you drive a nail into something you have to hit it hard several times and be accurate. You have to be determined. I thought she was referring to my long quest to be a better trader and my stubbornness. Regardless of my inability to professionally structure my trading operations. Even the hardest and quality nails could end up bent. That nail was about failure. My failure. I was somehow disappointed. I always wanted to be encouraged in my effort. She noticed it. "That is not the right answer", she said. "Unrequited love is very painful. It is something irreversible. You can be tough and strong. But you end up like a bent nail. You can try to straighten it up, but you will never fully succeed. It's like having butterflies in your stomach forever…".
This happened a long time ago, but I still have that nail. It reminds me that we can be hammers or nails and there's not much we can do about it.
Jim Lackey comments:
A post of greatness. Passion for the markets waxes and wanes over time and with results… but there is never anything more enjoyable or motivating to me as to read posts such as these. Thank you. lack
I believe we've had enough of the grist for the chair and that we return from commodities. We have learned from the exchange. The market is down 7 days in a row. Where's it going? I note only 3 other occasions in the last 15 years. There is not necessarily light at the end of the tunnel 10 days later based on the past.
Ken Drees writes:
With the euro news winds moving US equities and the "bad" German bund auction capper for the moment, the inner core begins to feel the fallout and therefore the closer we are to a plan B coming up out of the blue. Every euro bond auction is now going to be bad until something is done. I would say we are close to the rumor stage of rescue and that equities are tilted for a rally. I think the 7% retail spending increase may be enough to get things started if some positive rumors surface for rescue in euroland.
Paolo Pezzutti writes:
Who should be the rescuer? Unless in Europe somebody questions the excessive welfare state built over the years, nothing can change. People still give for granted "rights" and privileges that cannot be afforded any more. Somebody has to question the size of governments and the perimeter of their interests and actions. Nobody is doing it so far. They are still looking for lenders and trying to find money rising taxes. How can we be optimistic?
We've had 6 down days in a row taking us down 100 points with every variety of way to do it. 2 up opens, 2 big down opens, small declines, big declines. The kids book Caps For Sale comes to mind. Every kind.
Paolo Pezzutti adds:
Maybe this down streak of 6 anticipated lower sales is for Black Friday. Or simply, the market is schizophrenic, printing huge up and down swings driven by algos. My view is that with Europe already in a recession and the US with very few weapons left (practical and political), hoping to provide additional stimulus to the economy, even Apple will sell far fewer iPads and iPhones.
Of course, as far as weapons are concerned, we need to closely follow the Iran and Syria crisis. It could provide new elements of instability and deception from other issues. In this environment during sell-offs I am always tempted to buy lower opens…
Some years ago I was a tourist in Turkey and I hired the captain of a small sailboat to take me out for the day. The captain could only speak a little English but enough for me to learn he was a retired Sergeant from the Turkish Army.
When I said to him the Turkish Army had a reputation as very fierce fighters, he explained that was necessary because Turkey was surrounded by bad countries — the Syrians, the Iraqis and, shaking his head, the worst of all, "the Greece people".
As I scan financial news reports from Europe over recent weeks, the Sergeant's words echo back to me: "The Greece people, very bad."
[No offense to SpecListers or others who may be of Greek descent. I just liked his serious and striking English phrasing: The Greece people, very bad.]
Paolo Pezzutti comments:
I think an extremely weakened Greece could destabilize the area. You heard also that "the government of Greek Prime Minister George Papandreou has sacked the top commanders of the Greek Armed Forces in one afternoon.
The move came within 24 hours of Papandreou's announcement that he intends to hold a referendum on the European Union's bailout package, which is widely seen in Greece as a ploy to forestall early elections." Very unusual move in a NATO country.
Unless I am mistaken, the "twist" is not duration neutral; whereas
real bond investors tend to be duration sensitive. That is, selling $1
billion at the short end and buying $1 billion past the 10 year is
roughly equivalent to putting 7x the amount of real investor money into
the market. This is a point that has not been widely discussed — and
may explain why the bearish effects at the short end will be dwarfed by
the bullish effects at the long end.
Alston Mabry replies:
If 'duration' is the sensitivity of price to a change in 100 basis points of yield, and the Fed sells 2's and buys long bonds in equal amounts, and the Fed is effectively increasing their portfolio duration, does it follow necessarily that the Fed is putting around 7x more money into the bond market?
Doesn't it matter how the rest of the market participants decide to adjust to what the Fed is doing? What if long rates go up? I'm not saying they will, just wondering. Once QE2 was announced, the 5-year rate went up and stayed up until the end of QE2 was in sight. Now the Fed was actually printing money with QE2, and so the rise in the 5-year rate was coincident with a huge run-up in the stock and commodities markets. But it wasn't unreasonable to predict that QE2, aimed at 5-6 year maturity, would push the 5 year yield down.
Paolo Pezzutti writes:
For those who want to try and find quantitative relationships between Fed intervention and market moves…this operation schedule may be useful.
Bud Conrad writes:
I still wonder how they sell off the short end and maintain ZIRP. Something will have to give, and I expect it to be the selling of short term.
The new ECB plan may add liquidity to the system but I do not see how it can solve the sovereign debt problems, which are getting worse month after month. It seems, however, that Mr Market believes that the story may have a happy ending, which looks totally nonsense to me. In the meantime AAPL is once again near its highs regardless of negative economic data and the fast growth of Android.
The fact is that the Arab Spring could as well ignite instability (rather than bring democracy) in the region, altering established relationships and the balance of power. Recent events in Turkey, Egypt and Syria and the growing challenges from Iran, all indicate a quickly deteriorating situation.
All this at a time when Europeans and the US are very busy with internal problems. Moreover, in Israel protests over the economy are increasing.
This is to say that the dynamics of this bear market in Israel could be mainly driven by specific local conditions, which in turn could add to and influence the already grim global scenarios.
T.K Marks writes:
Hopefully there is little correlation between the Israeli open and my beloved if woebegone Jets open against the Cowboys tonight. I'll be taking it in from the spirited street of Telegraph Ave. in Berkeley, so I'm holding your karma personally responsible if things if things go awry.
September 9, 2011 | 2 Comments
The scientific method has two parts. There is theory, which requires knowledge and intuition to posit a cause and effect, and there is testing, collecting data to determine whether the observations refute the theory. If I understand your point correctly, empiricism is necessary but not sufficient. There should be a theory that is not entirely based on the observed data. As an imaginary example, “The S&P 500 is likely to decline on Friday afternoon because day traders are biased to the long side and want to be out of the market before the weekend” is better than “The S&P 500 was down on 19 of the past 30 Friday afternoons”.
Ralph Vince responds:
Steve, yes, but the premise, the cause, needs to be proven. “The S&P 500 is likely to decline on Friday afternoon because day traders are biased to the long side and want to be out of the market before the weekend” needs to be proven as causal, not merely posited as a possible cause.
Frankie Chui writes:
Yes, I always end up asking myself “why does it not work anymore after it has worked for so long?” when the moment I trade it the system stops working. It has also happened to me quite often where I backtest a strategy, everything seems ok, trade it for 2-3weeks and that’s the end of that system. Therefore, I am now experimenting with optimizing parameters in systems more frequently, perhaps once every two weeks on a rolling basis. Optimize two weeks of data, trade it for a week, optimize the past 2 weeks again, trade it for another week. Of course the 2 week/1 week time frame may not be the best (I just randomly chose it), but has anyone ever done anything with this kind if approach? I’m curious to see if this will work for day trading. I am new in mechanical trading, but I’m very curious to know if optimizing data fast enough will allow a trading system to work better and longer (for day trading).
Jeff Watson writes:
Frankie, you’re running up against Bacon’s ever changing cycles, which tend to render systems obsolete.
Phil McDonnell adds:
There is an insidious danger when you use optimization. The optimizer will fit the system to the data too well. It will never perform as well out of sample as in sample. It becomes especially important to use tests of statistical significance when you do optimizations.
The optimizer can actually create a multiple comparison problem in some cases. For example if you tested, looking for seasonality and wanted to find which month was the best to buy it would create a multiple comparison bias and any test for significance would have to have a much higher threshold than if you just tested September.
One way to judge a system and evaluate whether it will continue to work is to plot out the equity curve. If your testing assumes an equal sized investment each time then the system can be plotted on an ordinary arithmetic scale. If you compound it should be plotted on a log scale. Either way the most desirable system would be a system that looks like a smooth line going monotonically up to the right as time passes. If it starts to roll over then it may be a system about to fail.
Paolo Pezzutti writes:
The system should be quite robust. It should work pretty well with a sufficiently wide range of values of parameters. There should also be few parameters avoiding curve fitting.
To a non-hand-eye-athlete this article "Nadal's Lethal Forehand" was very interesting. Nadal's top-spin of 3,200 RPM versus Federer at 2,700 and Sampras at 1,700, is aided (if I understand correctly) by his palm pointing towards the sky prior to contact. At the same time his body angle and straight arm provide added force. To the novice spectator it would seem most players must concentrate on developing one or the other as increased ability in one area is detrimental to the other, at least in the same shot.
This reminds me of combining mean reversion with trend following. I started by constructing separate strategies in each area and using them as non correlated members of a portfolio. Later I found that I could do better by using the information from each in the same system. Note that I track performance statistics separately for risk management, but have combined the signals. Best of both worlds?
The article also notes how Nadal finishes his swing either at his shoulder for high hit balls or over his head for low hit balls. For any onlooker (though they may not be able to react) one can see if the ball is high or low but I think this is a good example of adapting the same strategy to multiple scenarios, if not even a regime.
Lastly, Nadal's returns bounce an average 33 inches on hardcourts and 64 inches on clay courts. In my humble opinion it seems as though the already increased volatility of global markets has provided an environment where macro driven price action is more likely to move further than usual. I understand that implied volatility is highly correlated to historical or realized volatility, but might it be predictive, or… might it allow for (not cause) more extreme moves? Vol rises, spreads widen, the same order can now move the market further?
Just thoughts. Any information on the tennis side of this post would be greatly appreciated! Wm
Paolo Pezzutti writes:
I find very interesting that he tends to use his forehand as often as he can. The main lesson here is that he focuses and leverages on his strength. Normally we tend to work on our weaknesses to reach a balanced performance. Rather, this is an example about it is more rewarding to insist and further exploit to the extreme your best shots. Nadal uses his backhand only if he really has to do it. Instead of working hard in order to become an average performer in many different areas, it is much more rewarding to concentrate your mental and physical energies to exploit the talent you have in one specific matter. This is something I may have realized too late in my life, but it is a good lesson anyway. Paolo
One would imagine the Sunday open to close in Israel might be predictive of the open in the US on Sunday night, and possibly the open to close of us on Sunday. By Israel open on Sunday, the US has already passed Friday close. And Israel would be catching. Of course the US Open is not a predictive thing since it can't be acted upon, but a descriptive one. The whole subject of the influence of Indian, European, Asian, and mideast markets on the US is an interesting one and calls for much counting, correlation, and finesse.
Anatoly Veltman writes:
I'd be the first one to stress the equities "rolling wave" over the timezones, as well as inter-market influences (as in currency-gold-stocks-bonds-oil, etc). Being said, there are two clear new ingredients that make historical statistics less than meaningful: central meddling and modern algos.
1. What can possibly be the use of percentile correlations and sequences observed over any historical duration, if current market interventions and near-global ZIRP are unprecedented.
2. Modern algos thrive on constant change/adjustments. To paraphrase Jim Simons: what feeds "our" fascination is that our former immersion into discoveries (within pure science) would eventually yield an ever-lasting law or theorem — while (market) discoveries we achieve today will only live a blip of time, and so you have to journey on (almost daily) to your next discovery and implementation.
So in consideration of the above major influences, my current MO would be: do not rely on hard stats. Do rely on your instincts, understanding of the new world financial order and good occasional privileged information — and trade discretionary.
Chris Cooper adds:
I can accept Anatoly's "two clear new ingredients" but reach different conclusions. My conclusions are:
1) Trade at a higher frequency so that you can get enough recent stats to be meaningful.
2) Trade fully automated, not discretionary, so that you don't fool yourself about your alpha. Also, it's the only sensible way to trade at a higher frequency.
"Relying on your instincts and understanding the new world financial order" are important only at the meta-level.
Paolo Pezzutti adds:
1. Cycles are ever changing. Today it is because of ZIRP, tomorrow it will be because of new rules or products coming on that influence market structure. I don't know if cycles will be shorter or longer. You trade them until they work. Counting still works.
2. Frequency depends very much on commissions. Some regularities at shorter time frames cannot be traded if your commissions are too high. Frequency depends also on technology you have available. Also, one should trade a frequency where you have less competition.
3. New cycles means new patterns to come up and old patterns to die. Keeping track of ongoing patterns is important and also establishing criteria to determine a pattern has stopped working. Early discovery of new patterns is vital for your performance. But how much data and evidence do you need to validate a new pattern? More importantly on the tech side is how you implement the search of new patterns. A continuously running search can scan the data according to certain criteria and propose pattern to be evaluated further.
4. Trading should be fully automated to trade higher frequencies, more markets simultaneously, and decrease stress.
Newton Linchen writes:
You said: "Keeping track of ongoing patterns is important and also establishing criteria to determine a pattern has stopped working."
I once asked this question (how to measure the "death" of a trading strategy) to the List, and the answers were disappointingly vague. ("They work until they don't anymore", and such kind of answers).
To my knowledge, this is a vital question.
Recently, I backtested a strategy a colleague was trading, to discover that in the last 6 years you would lose your entire wealth trading it. But he kept trading it, due to an anchoring with an event when "it worked", plus a kind of empirical testing of only few months.
This means he was caught by the siren song of a series of "lucky strikes" within a larger distribution of years of losses.
This behavioral concept ("anchoring") is quite interesting, and we smile at the poor guy who don't count.
But what concerns me is that we can behave the same way, (although counting), when we face a regime shift (ever-changing cycles) and keep trading the defunct strategy… Until when?
Perhaps a rough answer would be to establish a drawdown metric related to the maximum historical drawdown? (i.e., we trade it until a drawdown x% larger than the greatest historical, and then quit?)
Or maybe the reason to trade a strategy must be quantitative whether the reason not to trade it anymore should be qualitative? (i.e., acknowledgement of the regime shift…)
A final thought would be a strategy based on market microstructure — in the way it is present in ALL regimes.
I was interested 3 years ago in his views about the economy, but I was not aware of his negativity about capitalism, the welfare model of our societies and globalization. I thought his being pessimistic about the economy was linked to the temporary situation of the economy and not to his distrust in capitalism and globalization. His solution to the current mess is a mix of public and private, social welfare, public safety nets, increased regulation and supervision of the economy and markets, fiscal stimulus and progressive taxation provided by inspred governments in order to…..,as he says, enable workers to compete, be flexible and thrive in a globalised economy. A pseudo-socialist view of society very similar to what is being done in France is basically the vision of the future in a globalised world according to Mr Roubini.
The view of self-destructing capitalism is so politically driven and has no firm ground. Rather, we should consider that after several decades without any serious competitors which could challenge the leadership of western countries, today India, China, Brazil and others are able to provide goods and services at lower prices than our countries. This is causing a structural imbalance and money is quickly flowing away from Europe and the US towards other places in the world. The fact is that we are being slow in adapting to the new environment. How to educate our labor force, to do what? What is a sustainable economic model in this environment? Can we still be manufacturers? Of what? What can we export to those countries? These are the kind of questions we should try to answer as we compete in a globalized market. The problem is that now we risk to be the losers in a capitalistic "system" that we have created. The problem is that we were used to be the winners. The bitter truth is that we are getting poorer, ever more indebted and we do not want to accept that we should decrease our expectations and the living standards that we have given for granted. On the other hand, we should let the market forces at work to generate new opportunities, innovation, investments, ideas. It may take a few years, but we may come back stronger and a new balance would be found. Government intervention would only require more time for our countries to adapt because of stimulus to the wrong sectors, protectionism, unionism, bailouts of non competitive corporates, waste of scarce resources and so forth. The view of an international system a la Roubini is old, it has already failed and cannot work. It would be a disaster.
So Karl Marx, it seems, was partly right in arguing that globalisation, financial intermediation run amok, and redistribution of income and wealth from labour to capital could lead capitalism to self-destruct (though his view that socialism would be better has proven wrong).
Recent popular demonstrations, from the Middle East to Israel to the UK, and rising popular anger in China - and soon enough in other advanced economies and emerging markets - are all driven by the same issues and tensions: growing inequality, poverty, unemployment, and hopelessness. Even the world's middle classes are feeling the squeeze of falling incomes and opportunities.
To enable market-oriented economies to operate as they should and can, we need to return to the right balance between markets and provision of public goods. That means moving away from both the Anglo-Saxon model of laissez-faire and voodoo economics and the continental European model of deficit-driven welfare states. Both are broken. The right balance today requires creating jobs partly through additional fiscal stimulus aimed at productive infrastructure investment. It also requires more progressive taxation; more short-term fiscal stimulus with medium- and long-term fiscal discipline; lender-of-last-resort support by monetary authorities to prevent ruinous runs on banks; reduction of the debt burden for insolvent households and other distressed economic agents; and stricter supervision and regulation of a financial system run amok; breaking up too-big-to-fail banks and oligopolistic trusts. Over time, advanced economies will need to invest in human capital, skills and social safety nets to increase productivity and enable workers to compete, be flexible and thrive in a globalised economy.
Consider how often has S&P made mistakes in the past. S&P missed the Enron crisis, the Lehman collapse, the economic troubles of Spain, Ireland and Greece, the mortgage related bonds before 2008. This time, however, it is different because it seems they overreacted (at least some say so) to the US difficulties in finding the (in)famous debt deal. It is not clear why S&P has decided to expose the US vulnerability to a higher debt level. The risk of backlash to the downgrade is high. The “system” and the environment could now become hostile or, at least, unfavorable. The downgrade was likely “political” rather than the result of a cold and independent analysis. It was the trigger for the stock markets sell off. But it was just the trigger. It is interesting, however, because S&P’s move is a crack in the Wall Street-Washington DC connection. May be just a first crack. On thin ice.
Mr. Market has resumed the attack to Italy (and in particular banks). However, the news is that now also France, the big fish and a juicy prey, is under the spotlight with the possibility of a downgrade and SOCGEN down more than 20% today (with rumors about insolvency). Is there actually "someone" implementing a strategy behind this? Or is it just a sport looking for conspiracies everywhere? Whatever it is, it looks quite well coordinated. I think that pressure on Europe can help the US distracting the attention of speculators from its problems. Europe is much weaker both politically and economically. When we go again into a recession it is going to be tough for the Euro. And actually I don't understand why it is still so strong vs the dollar. This may be the next big opportunity when all of a sudden confidence in the Euro will vanish.
Some were saying to expect a big decline in case a debt deal would not occur. A failure to compromise was the "bad news". Eventually a compromise was found. An impressive bear trap was set up. Markets opened sharply higher and accelerated to the downside. So it seems that actually the "bad news", as the markets perceived it, was the done deal. The news is that Mr Market is finally reacting negatively to bad news. It was right about time. Today it went down because there are concerns about a "weak economy"… when over the past months nothing could shake the dip buyers' confidence. The game may be changed. I think a new cycle has emerged and we'll have to study and find new patterns and behaviors. But how many points does the S&P have to go down before they offer another stimulus?
Gary Rogan writes:
It is true and I even mentioned it earlier today that "a failure to compromise would be terrifying" was one of the big lies our sadistic fascist government has promulgated. I refuse to believe that that in itself was a bear trap. Why? Because it was clear to anyone with an ounce of common sense that while the Republicans had ALL THE CARDS to completely stop the insanity HAD THEY HAD THE WILL (how? by simply refusing to extend the debt limit NO MATTER WHAT) they DID NOT HAVE THE WILL, at least not to go through a few days like today while being blamed for them and not capitulate. So in some sense they HAD NO REAL CARDS, and thus the bear trap would have to be for very innocent bulls, more innocent than one can credibly believe in.
The deal in itself had no effect in my opinion. The market is a very imperfect predictive device in that it acts on emotion at least as much as on the information. A few days of turmoil and orderly declines did indeed shake the confidence enough so that the market finally had an excuse to react to the bad news it has known for a long time, weeks or months. The reversal yesterday gave an excuse to call the end of the improbable down run sequence. The Roadrunner suspended in mid-air for a few moments after running past the edge of a cliff comes to mind.
I found the article "The Optimism Bias" by Tali Sharot very interesting.
Our brain is hardwired for hope. The brain evolved over the ages to look positively into the future. Even in bad outcomes our brain tends to find some positive conclusions. There is a neural mechanism that generates optimism:
…these precise regions - the amygdala and the rACC - show abnormal activity in depressed individuals. While healthy people expect the future to be slightly better than it ends up being, people with severe depression tend to be pessimistically biased: they expect things to be worse than they end up being. People with mild depression are relatively accurate when predicting future events. They see the world as it is. In other words, in the absence of a neural mechanism that generates unrealistic optimism, it is possible all humans would be mildly depressed.
I try to draw some parallels with trading. Most traders tend to look positively to news and expect positive outcomes to challenges. This could explain why buying a dip is more successful than selling an expansion of price to the upside. It explains also why crashes catch by surprise the optimistic herd, that continues to look positively into the future although all the elements are there to understand that things are very bad. Only a few "mildly depressed" investors manage to sail macro and micro events maintaining a good understanding of what is going on. (I am not sure whether this is good or bad news because it is not very exciting to be "mildly depressed" in order to make money…).
"How do expectations change reality? ….. To induce expectations of success, she primed college students with words such as smart, intelligent and clever just before asking them to perform a test. To induce expectations of failure, she primed them with words like stupid and ignorant. The students performed better after being primed with an affirmative message". “Expectations become self-fulfilling by altering our performance and actions, which ultimately affects what happens in the future. Often, however, expectations simply transform the way we perceive the world without altering reality itself.”
The majority of the people display optimism (which is generally considered as a winning attitude), but they are surprised by negative events that happen more often than not. They take risks because they see a bright future and are self-confident. They make more mistakes (and win less frequently) than pessimists although being positive can improve their results and their performance. When few of them win, they win big.
At the same time it is hard for pessimists (which are are seen as "losers") to be surprised. They analyze all the various scenarios, especially the negative, and are ready to cope with them. They see the world as it is. They make less mistakes. They tend not to take risks because things could easily turn bad. They have more winners, but have a lower average winning trade. Their results are less volatile. When they are caught by surprise, it is very, very painful.
After euro leaders announced a new (big) aid package for Greece and measures to prevent bond yields rising further in Spain and Italy, it seems that Europe has solved its sovereign debt problems…. Markets celebrate the European version of QE. Also Europeans (we'll see what Americans will now do about it, but I think the answer is pretty clear and markets know it) can now delay any tough decisions on deficits. Someone else will pay the bill. Pretty sad. However, markets go up and everybody is happy so far.
Kim Zussman writes:
Do not recall the oft-heard warning that a Greek default or failure to raise US debt limit will result in financial Armageddon prior to the Lehman collapse. That not yet distant memory still has usable power. Perhaps a day's meal in that.
Bruno Ombreux writes:
The 100s of billions will mainly come from the pockets of the German, French and Dutch taxpayers, since the ECB printing powers are limited. As for the Greek, they have lost their sovereignty but they will find freedom though work. You know. Arbeit macht frei. That is at least for the next few months until bailout 3 is needed and the whole show starts again.
Also, about the question from the bleachers: How are the ECB's "printing powers" more limited than the U.S. Federal Reserve's?
read this: European Central Bank
They need to maintain some capital and this capital is provided by the central banks of the member states. They cannot do too outrageously stupid things, because they can get bankrupt if some member state central banks stop capitalizing them.
And you can be sure that the German or Dutch have an uncle point.
Politically, the ECB is also far less inclined to print than the Fed:
- It has only one mandate, low inflation, whereas the Fed has a dual mandate: inflation and economic growth. In effect, the ECB doesn't really care about economic growth. - The German have been paranoid about inflation since Weimar and would not let the ECB go too far. - If you look at the ECB board, it is predominantly hawkish according to analysts and observers that spie every word uttered by these guys.
But the main reason they have less power to print than the Fed is that they have to please a lot of member states. Which creates checks and balances. Whereas the Fed only has to please one guy, the US president, who nominates board members.
John Floyd adds:
Leaving any debates on what is considered QE and what is not.
The ECB has lent to the periphery through its rediscount window Euro 330 billion, this is in addition to the Euro 75 billion in secondary market purchases of peripheral country bonds. The ECB has a capital cushion of about Euro 10 billion. One could argue this might be a stretch of the single mandate of the ECB's 1998 charter.
To Ireland alone the ECB has exposure of Euro 180 billion, or about 100% of Irish GDP.
Other thoughts on the most recent Euro summit:
The general reaction in markets and the street research has been this plan delivers slightly more than expected and is a bold plan. Not surprisingly this has been the analysis of most of the rescue packages globally since 2008. Yet, the failure of the packages on so many levels is fairly evident if one looks at economic growth, interest rate spreads, etc.
The most recent package clearly will buy some time. How much is an open ended question but I expect much less than previous packages as the Pavlovian reaction wears thin.
Amongst the many issues of implementation, political approval, private sector etc. I think the key failings are:
1) There was no increase in the size of EFSF. Furthermore, even the relatively paltry and debatable rating of current EFSF has yet to approved. To cover Spain and Italy would require 1.5-2.0 trillion Euros.
2) Concessions on rates and maturity extensions for Ireland and Portugal are nice but small relative to the fiscal adjustment required.
3) The debt relief to Greece is insignificant and will bring debt to GDP from 172% to around 150-160%, depending on whose estimates you are using.
4) Given that there is not much debt relief and the fiscal adjustment is massive there cannot be much hope that the domestic political willingness in Greece will be there to stay the course.
Why does the S&P, when in a certain stage, go down when there is good economic news because the interest rates go up when there is good news, and stocks are valued as an infinite stream of discounted earnings so the interest rate is more important because it is compounded recurringly while the effect of output is ephemeral as everyone knows. I believe that the reason that stocks go down on the rating announcements is it impacts the desire of everyone to hold risky things during uncertain times, but the more that the ratings are cut back, the greater the chances that a deal to cut spending will be made and this is good for interest rates.
Rocky Humbert responds:
I'm probably being dense, but I still don't follow your logic. You first sentence doesn't address my point about what's happening in the PIIGS right now — sovereigns are being shut out of the bond market, but blue chip borrowers are conducting business (pretty much) as usual. The rising sovereign interest rate seemingly is becoming less and less relevant to the conduct of business to business lending. In pointing out this 7-sigma phenomenon in a private correspondence with a very knowledgeable spec this morning — that this is a a very different world than we've seen for the past 40 years — the spec replied, "[This is closer to ]the world that JP Morgan inhabited, where sovereign credits were more risky than sound companies and the banks bailed out the Treasuries. I grasp what you mean in the context of not-owning-risky assets when things seem uncertain. However, this is a mindbending paradox. The risk is arising from the riskless asset. So if the riskless asset is becoming more risky, does it follow that the risky assets are proportionally more risky? Because if you sell the risky asset because you're scared of the riskless asset, do you buy the riskless asset even though it's becoming risky even though it's what made you sell the risky asset to begin with??? Off to the gym…
George Parkanyi adds:
Corporations (at least the true going concerns that serve a broad economic need) seem to have the resiliency of cockroaches (e.g. the Japanese and German companies that survived the massive bombing in WWII being case in point). Companies have more flexibility than governments (in general) to adapt to changing economic environments. They can more quickly re-deploy capital and can cut costs more quickly and aggressively.
It has occurred to me that if sovereign debt, massive amounts of which are out there, eventually are widely perceived as crap, there could be a veritable stampede out of it - especially in conjunction with declining currency and/or inflation. So where is that money to go? The first look would probably be commodities - especially precious metals, and the initial panicky inflows will likely drive up prices dramatically. We've seen some of this already, facilitated by the advent and growth of commodity ETFs. By the same token, there are legions of equity ETFs, funds and well-run companies which will be perceived as a safer than sovereign debt because of the survivability advantages of corporations. As commodities soar, equities will start to look like screaming bargains in comparison. Dividend-paying big-caps may very well become the new bonds from an institutional investor's perspective. This transfer of capital from debt to equity could drive stocks much higher as well in a boom similar to what commodities are experiencing. Interest rates may not matter. At high stock prices, companies will be able to raise capital through equity offerings, and dividends may come into vogue as another way to attract that outflow from bonds. As bonds are being sold, they may get to the point where they are so low that governments (that still wish to avoid default) may start buying them back on the cheap to retire them. If you had a trillion in debt that just got marked down to $500B, and you had that money and/or could print some to fund the buy-back, wouldn't you take that opportunity to wipe the $500B off your balance sheet and improve your credit rating?
Now that I think about it, jacking up interest rates to short your own debt (to buy back later) could be one bizarre option the Fed could try at some point. Although you'd likely strengthen your currency doing that and it could backfire … unless … you short the other guy's currency first … and use those profits to buy back your debt. You could probably do this once.
Interesting times indeed. Rocky's PIIGS observations are very well worth thinking about.
Paolo Pezzutti adds:
As a country defaults I do not expect to see all companies go bankrupt. The financial health of a government does not imply that companies cannot make a profit. In a sell off type of environment where asset managers weigh down their portfolio in a troubled country, I agree you can find good bargains. One problem may be the timing. When in 2008 prices plunged I started to buy stocks of very solid companies in Italy. Unfortunately prices continued to the downside some tens of percent. It took more than a year to see prices go back to my level. during a panic also good quality stuff can sink. In Italy there are some of these companies. I look at the utilities sector,luxury, oil. I look also at banks. Most of them are well managed and are mispriced right now. But we'll probably could buy at much lower prices. Imagine what could happen in these troubled countries in case of a slow down of the global economy.
Eyeballing June and July turns shows the turn off the bottom characterized by volatility and a range but the turn at the top is characterized by stagnation, a few doji's, then a sharp reversal. Is this a generalizable characteristic of big turns a la Magee or Nison? Second question. Will the top of the June range at bottom provide "support" at this level? What is "support" and how does it work? Is it psychological, or are the actual orders in place? Despite despised topic of the question its kind of hard to ignore. Certainly patterns can be quantified and tested but not without problems of generalization.
Paolo Pezzutti writes:
The top was printed as exhaustion of buyers. But the importance of the 1300 level should also be considered. It means that at present few people have the guts to buy new highs. However there are still many out there willing to buy dips, supports (such as round numbers), retracements, new moons and so forth. Don't know what would be needed to change this approach of investors and traders and start a new 'cycle' with different behaviors. What is needed to shake this confidence? Bad news about the US debt? Or the European crisis? No way. Already tried… Probably an unsatisfactory earnings report by Apple…. Paolo
With Google cap above $ 191b and price up more than 12%, I wonder if the earnings surprise is really worth about 20B$. Google+ may finally be the solution to the next stage of goog growth, but I am always skeptical of these big gaps (probably because I never own the stocks when they happen …. and I am a contrarian by nature).
Once again the market has been fast in recovering, and it seems that certain levels cannot be broken to the downside. What are the structural reasons for the US market better performance? One is tempted to say that the bear case has no hope. However.
Allen Gillespie writes:
The bear case is as strong as ever in real terms. There are only 4 ways out of a debt crisis.
1) Inflation = losses to bond holders in real terms
2) Deflation = losses to other claim holders and parasites (austerity)
3) Default/Restructure = shared burden between all claim holders
4) Productivity Gains = actual improvement in debt servicing capabilities
Historically losses in sovereign defaults are estimated to be around 40% over 8 years. Recall the official policies are thus
1) Fiscal = "I want to spread the wealth around" - notice the use of the word wealth not income. Wealth is all accumulated savings of income. And how do you tax wealth - inflation and regulation.
2) Monetary = Inflation targeting at 2%. Inflation targeting is nothing more than a gold standard with a higher base rate. Under the gold standard there was no long term inflation, so short rates tended to be volatile but long rates very steady. Flat yield curves prone to violent inversions like the one we got prior to 2008 (19 months).
I think the government model is the 1940s where government was ramped up during the War and then handed things back off after the war to the private sector. This was a time of 2.5% interest rates and 5.5% inflation because inflation would go from 0 to 10% twice in the decade.
We are close to inflection - the food companies have announced that food inflation will be 7-8% next year.
The saddest part is that the powers that be think only #1,2,3 are possibilities because they have no appreciation or trust in people for #4. Peter Thiel is the best thinker on that issue.
Take energy as an example - are earnings up because of #4 or #1? Obviously, more #1 than #4 but some of both looking at nat gas. However, the Prez wants to determine the winners and losers so that is disadvantaged to other lobbies. It's sad.
Are you shorting in nominal or real terms - important question.
Despite the news about the debt in the US and the crisis in Europe, the S&P danced up and down in a trading range for weeks. It is a sign of uncertainty but also a sign of strength in times of bad news. I find interesting however that the dollar remained pretty weak over the past weeks which means markets are weighing more the problems of the Us debt rather than the Euro crisis. In fact, last year in May the dollar went down to 1.19 when the problems of the Greek bailout started. Today it is above 1.40.
Raising the yearly rate to hold a stock or bonds account will push away small investors from markets. More importantly it shows once again how in Italy private investing is made difficult if not discouraged. Italians over the past decades have invested their money in housing. The percentage of home owners is very high. Also it is well known the initiative of small companies run by families. This is at the same time the strength and weakness of the country. The development of the stock market was always neglected. Private savings are high but what could happen (or is it already happening?) is that capitals move abroad to safer places.
A new phase of the European crisis started with the attack to Spain and Italy in particular. It was launched by rating agencies and supported by strong forces. Some hope it may find self sustaining strength. This side of investors or speculators or financial armies are close to those who have an interest to profit from a crisis of the euro and/or of Europe in general not only financially but also from a geopolitical standpoint. The beginning of this phase was carefully orchestrated. It may support the dollar and the perception of the American system as a safe haven in a critical moment for the US and the Wall Street establishment. Mors tua vita mea. And actually it is Europe and the Pigs that are the weak part of a declining western 'system'. In a balance based on relative strength and weakness who goes down first could matter. With the huge outstanding debt, it's hard for these countries to defend themselves.
Ken Drees writes:
In a Bacon type fashion instead of one at a time like Ireland, and then Greece last year, we now have the two largest countries hit at once.
These loans are the price to keep things going with public money as usual. Strong forces in Europe are pushing in this direction. I am not sure if the Euro is in danger or not but German and French leaders do not want their banks be hit by this situation. Also because it would be a setback as elections get closer. On another level Greece is a piece of a puzzle in the war among economic areas; and to many a weaker Europe would be an advantage.
Moody's late yesterday slashed Portugal four levels to Ba2 from Baa1 with a negative outlook. The decision came two months after Portugal got a 78 billion-aid package ($112 billion) and hours before today's sale of 1 billion euros of treasury bills.
The sovereign debt crisis is not going away throwing money at the problem. The participation of the private sector in the Greek debt restructuring could impact Portugal ability to access the capital markets. The public sector had to save the private sector almost 3 years ago. Funny how after the huge transfer of money to the banks, governments now ask the private sector to step in and help them buy time. And time is getting more and more expensive as the crisis progresses and the effect of their injections of "trust in the system" are shorter and shorter. They look like an ostrich who does not want to raise its head from the hole. Almost pathetic are also ratings agencies that rise up championing the cause of "guardians of the markets" when they lost their credibility in the events that led to the crisis of 2008.
This is a great article about the NYSE, capitalism and nostalgia.
It's the little things that you do that make losing happen. The Heat were up by 15 with 5 minutes to go, and were shadow boxing (James and Wade) and making howling noises, Bosch, and smiling all around. Loose as a goose. Their joy turned to concern, then fear, then paralysis. Same kind of error as the Heat made could cost you your life in trading. I've been up for 48 hours straight to stay out of the Abbey, and it's those little things that sometimes enable one to pay the bills.
Paolo Pezzutti writes:
In Paris, defending champion Francesca Schiavone battled from a set (6-1) and 4-1 down to defeat Russian teenager Anastasia Pavlyuchenkova and reached the French Open semi-finals. It ended 1-6, 7-5, 7-5. What kind of heart and mind it takes to accomplish such things and never give up. In the semi-finals the adrenaline was still there and she beat the French opponent 6-3 6-3.
This sort of "momentum" exists also in trading. This looks like a bear trap. When prices spike to the downside and then return within the range and explode in the opposite direction. Hopefully it will continue today vs. the Chinese Li Na.
This may finally be the time when bad news start to be considered as
such and the market reacts badly. After months and months when bailouts,
earthquakes, wars, skyrocketing oil prices were not considered by Mr.
Market now things may be changing.
Yesterday with prices up and a strong close, I was actually wondering
why even the falling housing prices could be a good news for stocks.
Today someone finally realized that the US economy is slowing down and
this recovery is simply not sustainable. May be it is the same banks
which fueled the market to the upside… and that are aware that in this
political climate further stimulus is impossible.
U.S. stocks skidded on Wednesday as more weak economic data cemented fears the U.S. recovery was running out of steam and prompted Wall Street firms to slash forecasts ahead of the closely watched payrolls report on Friday. Goldman Sachs and several other big financial institutions cut estimates for non-farm payrolls growth in May after ADP Employer Services reported much lower-than-expected growth in private payrolls last month.
One wonders if in Europe politicians want to replace GDP as an indicator
because the old continent is clearly incapable of growing economically
(with unemployment problems and so forth) and they are not able to show
the public how well they perform. Or rather if it is true that in
developed countries efforts should go into other endeavors and that
growth does not mean better quality of life:
"The European Commission has held a series of conferences focusing on measuring sustainable development and the need to think Beyond GDP, and its statistics agency Eurostat has started to work on developing well-being indicators for the European Union."
"There is a huge distance between standard measures of important socioeconomic variables like growth, inflation, inequalities etc… and widespread perceptions. Our statistical apparatus, which may have served us well in a not-too-distant past, is in need of serious revisions."
"…governments should adopt new headline measures of sustainable well-being and progress that encapsulate this vision of national success. But that these new measures will only matter if they actually influence government policy."
"Creating new measures of progress will be a statistical and political challenge. But if we want to create a world that is happier, fairer and more sustainable then we really do urgently need to find a replacement for GDP."
The UAE has the 6th world's largest reserves. It is a federation of 7
absolute monarchies of about 5 millions of which less than 20% are UAE
nationals, while the majority of the population are expatriates. It
appears they feel pretty vulnerable and the instability domino may not
be over in the region:
"The United Arab Emirates (UAE) has hired the founder of the controversial US security company Blackwater, to set up a paramilitary force made up of foreign mercenaries in Abu Dhabi.
Blackwater founder Erik Prince is to set up an 800-member battalion of foreign troops. Documents obtained by The New York Times (NYT) on Sunday showed the crown prince of Abu Dhabi being behind the $529m deal."
Victor Niederhoffer adds:
In response to our Paolo's heads up on mid east activities, it reminds me of the time my father and his partner– the best team of cops ever, with Miltie being the toughest and my father the smartest, they always got their men and gang– went into a pool room to check on a robbery in my house.
Miltie rushed in drew his gun and made every pool hustler stand up against the wall. "Put up your hands and don't say a word."
A hustler leaned over to my uncle next to him and mumbled "F cken cops". Miltie said, "What did you say, I heard that you son of a gun."
The hustler said, "yeah, so what, that guy (Howie) asked me who you were."
A very easy trading system is proposed by the author of this article Louis Woodhill:
Because oil always returns to its average value of 0.0735 ounces of gold per barrel, there is an opportunity for arbitrage. The federal government has 726.6 million barrels of oil (worth about $74 billion today) and about 261 million ounces of gold (worth about $373 billion today). When oil/gold price ratio is significantly (say, 10%) above its long-term average of 0.0735, the government should sell oil and use the proceeds to buy gold. When the oil/gold price ratio is significantly (again, say, 10%) below 0.0735, it should do the reverse. Right now, with the oil/gold price ratio at 0.0715, it should be doing neither.
Who knows if he has tested it?
Since last December, the aggregate open interest (OI) in WTI futures has gradually risen, and notably, it has continued to rise even after the violent reversal on 5/5/11. (The OI in RBOB, HO and Brent have very different complexions.)
Anatoly, I believe that you are student of OI. How would you interpret the continuing rise in Crude OI?
Anatoly Veltman responds:
My answer will shock you: you will not hear a solitary thing of what I've learned over 25 years of O.I. analysis applied to real-time markets! You might as well listen to a person who never heard the term O.I.
Firstly, you may get a hint of modern environment from this article.
I will go much further, but this is what I'm in agreement with: the make-up of participation has changed. From individual speculation to institutional. It used to be that shadow governments speculated via discrete funds, dealers and accounts amounting to billions. Well, as we all know: it is trillions of dollars of taxpayers' money that have recently found their way into investment domain, mostly via certain privileged bank and fund channels. The never-spoken-of process that used to be confined to Russia and its neighbors, the Middle East, Africa, Central America, etc - was finally enabled right here, within world's biggest economy…
So what you have right now: all this pool of money that never went to stimulate a retail consumer and onwards via multiplier effect. It went into investment funds instead: some invested in equities and some increasingly in commodities. Oil being the premier commodity, the jewel contract that you see rising to peak participation. Peak "oil contracts", not necessarily peak "oil"!
Futures O.I. make-up has lost its properties. Even in yesteryear, its analysis had to be multi-dimensional. I remember Larry saying that even the S&P's breakdowns may be meaningless, unless all indexes are aggregated into data. Well today even all futures thoroughly examined for their price action, overlaid onto O.I./C.O.T. data will yield distorted results - due to explosion in ETF arena. Those institutional players became so prolific today, that daily SLV volume dwarfed SPY!
And thus 2011 commodity speculation has become instantly dependent on slightest change in perception re: volume of new investment liquidity. All analysis of particular raw material supply and demand is so 2005!
Paolo Pezzutti writes:
Something began to change mid 2007 when certain relationships between some commodities (for instance gold) and SP futures started to develop. They are still working well now. But now that a small fish like me has found them it means that the party is almost over… What is the next theme?
The debt crisis in Greece has taken on a dramatic new twist. Sources with information about the government's actions have informed SPIEGEL ONLINE that Athens is considering withdrawing from the euro zone. The common currency area's finance ministers and representatives of the European Commission are holding a secret crisis meeting in Luxembourg on Friday night.
Paolo Pezzutti writes:
I think Europe will be in a serious crisis when a slowdown or recession comes. The system is so fragile and some countries are so close to the edge of non sustainability of debt payment that it is only a matter of time before we see them sink. However, the system is so resilient that you don't know how long this situation can last. I have been betting on this event for months and months now and I have put together only losses on this scenario.
Yesterday's release of GBP PMI Manufacturing number saw the market drop 60 points 2 minutes before the announcement in a 74 point 1 minute range, and in line with the weaker than expected announcement. The market than went back to its happy 5-10 point 1 minute range for the rest of the evening. More flexions at work?
Paolo Pezzutti writes:
All algos working around the globe now are working to buy any type of dip following "bad" news. I don't know if there's an agreement among strong forces to do so or if, more simply, this kind of behavior has generated "spontaneously" because of other considerations (quant, fundamental or whatever). It would be interesting to learn what would take to change their trading approach. Probably a sudden and "unexpected" big loss. I don't think that "smooth"adjustments of market sentiment could influence this raging river of money flowing into the markets. However, it is well known that some believe that the least beating of wings of a butterfly is able to cause a hurricane on the other side of the world. Paolo
Today is the anniversary of the death of "Grandfather" Michiel de Ruyter– the greatest of all the admirals.
Paolo Pezzutti writes:
His fame was not built as a bureaucrat in the government palaces where power is managed, but it was earned in an impressive number of actions and battles. This is very good. Like a successful trader with an edge, his wins were so consistent in time that they could not be random.
Interesting how, over the past three weeks, the sequence of colors
related to bonds and S&P has been exactly the same: blue, green
April 21, 2011 | Leave a Comment
It's amazing, once again, how Apple drives market sentiment:
A large spike in sales of Mac computers, driven by the refreshed MacBook Pro, beefed up March-quarter earnings. Apple said it sold 3.76 million Macs, up 28 percent from a year ago. It also sold 18.65 million of the high-margin iPhones, which is the technology company's most important product line. ….Apple's iPad sales in the quarter fell well short of Wall Street's expectations: some analysts had projected shipments of closer to or even more than 6 million… It moved just 4.69 million iPads.
I don't think this hype is so deserved. I own an IPhone and I think its fame is way too much for what the object really provides (nice apps vs poor battery and poor signal).
I would like to give a book to the young officers of my ship when I leave my command in a few months. The idea would be to transmit the idea that one should look at opportunities today having a vision, a road map for tomorrow's journey.
As Randy Pausch said: "It is not about how to achieve your dreams. It's about how to lead your life."
Basically it is all about the curiosity to experiment and explore your dreams. Mistakes made are not about being good or bad. Don't be afraid to pursue your dreams. Opportunities occur randomly. If the environment is favorable there is a great chance that these opportunities will be favorable. Work to create this environment. If you are not happy, change. Do something. Don't whine. Do things with passion. Exploit and realize your potential and talent to the maximum extent.
Could you please give me some advice? What is the best book?
George Parkanyi writes:
Yes Man by Danny Wallace is a lot of fun. It's very funny (not sure if its translated into Italian though), but the central idea is that Danny wasn't happy with his life as it was and decided to see what would happen if he simply said "yes" to every opportunity and request that came along, without filtering. The book documents what happened. This addresses the curiosity/exploration part of the message you wish to convey, done in a fun way.
Think and Grow Rich by Napoleon Hill is an excellent book. It has many very good, uplifting life messages and very practical prescriptions for success.
Scott Brooks writes:
I agree with George that Think and Grow Rich is a must! It had a huge impact on my life.
Since part of vision is proper communication, I also recommend Dale Carnegie's, How to Win Friends and Influence People. I know the officers of a ship aren't there to "win friends", but communicating properly and in a manner that is receptive to the listener is a vital characteristic of all great leaders.
1. "There is no such thing as easy money"
2. Events that you think are affected by cardinal announcements like the employment numbers at 8:30 am on Friday are often known to many participants before the announcement
[An example supplied on April 18 by Mr. Rogan: "The Reason For Geithner's Weekend Media Whirlwind Tour: White House Learned About S&P Downgrade On Friday" (zerohedge )]
3. It's bad to try to make money the same way several days in a row
4. Markets that have little liquidity are almost impossible to profit from.
5. When the stock market is way down, policy makers take notice and do what they can to remedy the situation.
6. The market puts infinitely more emphasis on ephemeral announcements that it should.
7. It is good to go against the trend followers after they have become committed.
8. The one constant, is that the less you pay in commissions, and bid asked spread, the more money you'll end up with at end of day. Too often, a trader makes a fortune on the prices showing when he makes a trade, and ends up losing everything in the rake and grind above.
9. It is good to take out the canes and hobble down to wall street at the close of days when there is a panic.
10. A meme about the relation between today's events and those of x years ago is totally random but it is best not to stand in the way of it until it is realized by the majorit of susceptibles
11. All higher forms of math and statistics are useless in uncovering regularities.
Mark Schuetz comments:
A point about # 2: This one might be fun to try to rigorously measure and test, looking at price movements in the time leading up to and including certain announcements (knowing this type of thing has been shown by list members before, but usually it's more descriptive instead of measured). Is it possible to show which types of announcements are more often known by participants beforehand as opposed to other types? Also, if certain participants are informed ahead of time, how far ahead of time do they know and in which way will they "front-run" the announcement (there can sometimes be many different ways to make a position on one economic statistic) ?
Victor Niederhoffer replies:
Certain participants know it and they react to it, and you can figure out which announcements are go with and go against——-but but but. The pre and the post regularities are always changing vis a vis the flexions and cronies and their nephews.
Ralph Vince writes:
What a great post. Thanks Vic. I certainly must second points 1 and 11, the bookends….and they have me thinking…
1. There is no such thing as easy money
This is so true, in the markets, in everything. Those who happen upon money where it DID come to them easily, it seems, as a witness, have had it very fleetingly. In my own case, although I am supremely confident in the profitabliity of what I am doing, in practically any market, in virtually any "regime," doesn't mean it's easy. It works like clockwork and is incredibly painful and distressing. It would be so much easier to simply sell buckets of blood."
11. All higher forms of math and statistics are useless in uncovering regularities.
Certainly in a post-'08 world, quants are out of favor, and for good reason. Most anyone I know who DOES make money in the markets, does so with very simple, robust techniques. Having considered going to quant school, and studied a good deal of it, I finally came to the conclusion that they are simply working with "models." Models of how the world behaves. unlike hard sciences like Physics and such where you can perform a test, come back a year from now, perform it again and get the same results, you don't have this in financial modeling. And I think this is where the quants have fallen short. Models are NOT reality, and they never got down to the bedrock, the reality of what his game is about. Of course it had to fail, and in a large way, at some point. A good rule of thumb is that if I need a computer, if it isn't simple enough to do in my head on the fly in the foxhole after I have been awake for over 100 hours, I can't use it.
Jim Lackey writes:
About point # 10: It takes no time at all for the information to spread. Yet how many times have we acted, lost a bit, recovered, then seemingly too much market time expires, and we close out a position. We say "awe everyone knows that it's priced in." The meme is then repeated for the 57th time and on a low pressure day, month, or year and then, kaboom!
Of course, I can think of the few times where we missed a huge score, being short YHOO in 2000 or selling some short in 2008. Yet there are hundreds of low magnitude fantastic long only ideas that we forget about. I look back 6 months later and say wow look at that beautiful rise, what happened? It went up very small, day after day, and only buy and hold would have worked.
Alston Mabry adds:
12. One should not make one's analysis more precise than one's actual trading could ever possibly be.
13. If the rational mind has not determined the parameters of a trade, then upon execution, the lizard brain will decide.
14. Never go on vacation with open trading positions.
Or, zooming in:
<click><click> to lunch
<click><click><click> to the bathroom
Paolo Pezzutti writes:
One could test how the stock market reacts to good (very good, wonderful) or bad (very bad, terrible)(a sort of matrix) news when the news is released and after some time. It might help build a strength indicator. Amazing how the earthquake in Japan and the unrest in Middle East, admittedly extremely bad news, were absorbed by the strong trending markets without any problem (so far). In other times, stock markets might have crashed confronting with the same news.
Alston Mabry comments:
Amazing how the earthquake in Japan and the unrest in Middle East, admittedly extremely bad news, were absorbed by the strong trending markets without any problem (so far). In other times, stock markets might have crashed confronting with the same news.
Chris Tucker adds:
Stick to your guns, but realize when you are wrong. Easier said than done. Good ideas can lead to conviction, but only experience can strengthen ones resolve. Forget the last trade, look to the next. Try, try, try to learn from your mistakes, but also from your wins.
Anton Johnson writes:
15. When correlations among many typically disparate markets become high, one should reassess leverage and seek novel opportunity.
Jeff Rollert writes:
17. Sell side liquidity is an inverse function of cell signal strength and micros0ft patch frequency, especially at lunch time.
Rocky Humbert writes:
The First Law of Rocky – In every "macro market" (indices, bonds, commodities), all prices WILL be seen at least twice. The only unknowns are: (1) how long it takes and (2) how far prices go, before the price is re-visited. This Law is true 99.999999999% of the time.
The Second Law of Rocky – Rocky always keeps his calculator precision set to two decimal places. Any trade that requires more precision than the hundreth decimal place, is a trade that Rocky leaves for smarter participants
Jeff Sasmor writes:
About Jeff R's # 16:
16a. Never go to the doctor when you have a profitable position as it will reach its maximum profit and reverse exactly at the time that you enter the doctor's office.
Happened to me yesterday…
Ralph Vince comments:
With regards to the First Law of Rocky…."Unless it is a new high, that price has already been seen before."
Victor Niederhoffer adds:
Beware of using hard stops as it's bad enough that the floor can always know your physical hard stops.
Jay Pasch comments:
No wonder over-leveraged daytraders always lose as they are required to deposit a hard stop with their leverage, along with their hard earned money…
Ralph Vince adds:
Despite numerous posts on this thread, it has not been opened up beyond Vic's original 11…
T.K Marks writes:
Aristotle felt the same way about drama, posited that it could be comprehensively reduced to 6 elements. And any additional analysis would by definition be but variations on those original half-dozen themes:
"…tragedy consists of six component parts, which are listed here in order from most important to least important: plot, character, thought, diction, melody, and spectacle…"
Jim Sogi writes:
Always be aware of and consider current market conditions and how they might affect or even negate your prior analysis.
Even the the weather forecast says sunny, if the clouds look dark and the wind is blowing, stay home or dress warm.
James Goldcamp writes:
One good anecdotal rule I've found that works for investing is that the market that causes you the most psychological pain, revulsion, and visceral response from prior bad investments, or overall perception, is probably currently the best opportunity since others may also have a similar overly pessimistic view (or over assign risk premium). This seems to be especially true for post calamity emerging markets, high yield bonds, and fallen growth stocks (tech). If for no other reason, this is why I think stocks like Citi and the West Virginian's company are good buys now (and perhaps government motors and Russian stocks).
Ralph Vince comments:
Thinking on this a great deal the past 24 hours, I think I would add one more, which is to me the most important of them all perhaps, or at least tied with #1 and #11. And that is that most people have no business being here. They don't know why they are here, and, if pressed, can only give a sloppy, struggling answer. "I'm here to make money." "I'm here to improve my risk-adjust return," or some other nonsense.
They are here for action– whether they know it or not, whether they acknowledge it or not. The market is a magnet for gamblers, a magnet for those who compulsively seek out the very action she puts out. People are here because they want to feel they have one-up on the masses, the system, or that they are not as inadequate as they suspect. The very proof of that is their utter inability to instantly articulate their criteria in specific terms. Absent that– they're in a bad place.
They're looking for girls in the wrong dark alley.
It makes no difference how well-capitalized the individual is. The world is full of guys with $10,000 accounts who will lose it all and then some, and full of guys with very fat checkbooks who will lose all of it equally as quickly, in similar fashion.
They still think it is about what you buy, when you buy it and when you get out, facets that have nothing to do with what is going on here (which is specifically why mathematics, simple or higher-order, fails in this endeavor; people are applying to aspects they mistakenly think this thing is about.)
If you examine institutions, they may be equally as clueless as to what this thing is about, but they have one big up on the individuals– they have a specific, well-defined criteria in most cases about what they are in this for, what they are willing to do to achieve something very specific.
Most individuals– of all gradations of wealth– can't, and that's the red flag that they here for all the wrong reasons.
Jeff Rollert adds:
Amen. If it doesn't hurt a little, you're wrong.
I have always been optimistic about the long term prospects of the global economy. However, since the 2008 crisis I have radically changed my attitude. Strong forces within western countries are greedy and willing to retain their privileged access to resources and easy money. More simply, it could be that politically in our democracies it is paramount not to make tough choices that require sacrifices to voters. The result is that in the name of keeping the economy going (that is keeping the standard of living excessively high compared to what we can afford), we have indebted ourselves to an unsustainable level. What makes things worse is that we have done this at a moment when interest rates were artificially kept at historical lows. This looks like committing suicide. Or setting a time bomb. It is only a matter of time before we have to pay this expensive bill. This folly is continuing. They do bailouts borrowing money for the bailout. Does this make sense? When is this huge scheme going to fall apart? What is going to be the trigger? I find it interesting to see how Japan, the US and Europe are all running fast toward beyond a point of no return. It seems, however, that in the alternation of bad news about the European sovereign debt, the US debt ceiling and the tragedy in Japan, focusing the attention toward the weakest link of the chain is paramount. It is not matter of avoiding collapse, it is a matter of letting (or inducing?) others to fall first as the only way to survive…a kind of economic warfare for survival. Right when difficulties in the US budget fuel speculations about a US default and a free fall of the dollar, you have once again maneuvers to put under the spotlight the Greek debt situation and even the elections in Finland…
Jim Sogi comments:
It's the same mistake consumers made after the boom was over. In order to continue their extravagant life style, they continued to 2nd mortgage the house, kept high fancy car payments, used credit to finance life style, clothes, dinners, travel. The US is using high debt to finance its lifestyle under the rubric of high employment. Like the overspending consumer, it refuses to cut out spending. It relies on debt rather than production to finance extravagance. The consumer got hit and was forced to cut back. Can the US cutback?
The last 2 paragraphs of this article about US servicemen on a french carrier has an interesting fact: the Op Tempo for each of the U.S 11 carriers is 4x what it is for France's 1 carrier.
Paolo Pezzutti writes:
Please keep also in mind that the ships are VERY different so it is not mainly an issue of training. The French carrier can carry less than 50% of the planes (35+ vs 75+), it is smaller (255 meters vs 335), the complement is SO MUCH smaller (1350 vs 4000+). Let's be careful not to compare apples with oranges. Sorry if figures are not 100% correct, I am quoting from memory.
There are similarities in trading when the press wants to give resonance to a certain idea providing numbers that are correct but not put into context and so misleading readers.
March 29, 2011 | Leave a Comment
We have discussed the role of government in the economy and during crisis many times on this site. Greenspan writes about this topic with the paper "Activism" that I recently read. He writes:
The current government activism is hampering what should be a broadbased robust economic recovery, driven in significant part by the positive wealth effect of a buoyant U.S. and global stock market.
Equity values, in my experience, have been an underappreciated force driving market economies. Only in recent years has their impact been recognized in terms of 'wealth effects'. This is one form of stimulus that does not require increased debt to fund it. I suspect that equity prices, whether they go up or down from here, will be a major component, along with the degree of activist government, in shaping the U.S. and world economy in the years immediately ahead."
Considerations about the wealth effect are in my view interesting, but well known to those who tried (and managed) to steer a recovery from the crisis.
The wealth effect has supported the economy so far. How much compared to the "stimulus" is hard to say however. "Manipulation" of markets in order to favor a continued move to the upside concerted by strong hands was (and is) in the interest of many forces who have a prominent role.
Victor Niederhoffer writes:
The wealth effect was very big in the 1960s and before, and Latane had good papers on it. Everyone at the Fed has believed in it for 70 years, to the exclusion of looking at interest rates themselves. And Bernanke often times his qualitative announcements with market lows or highs. A good way to trade.
Phil McDonnell writes:
Most of the so called wealth effect is really artificially induced by the QE programs. If the price of your stock rises but the value of the dollars the stock will fetch falls then are you really wealthier? How rich do the folks in Zimbabwe feel?
Jeff Watson writes:
One only has to look at the Weimar to see how the business class in Rhodesia feel. In 1913, the German stock market was at 126. Fourteen years later, the German stock market was at 26,890,000. At the index peak, the value of the Daimler company was only worth 327 of its cars. Interest rates were 900% and the exchange rate went from 4-5 marks per dollar in 1913 to 4+trillion marks per dollar in 1923.
Ian Brakspear writes in:
My portfolio in 1994 was worth aprox ZIM$10 million in 2005 worth ZIM $ 44 billion.
Victor Niederhoffer comments:
What they did to the farmers makes one cry. Brakspear is the guy that posted the funniest spec post ever. He ordered 2 beers for lunch. It was 10 million Zimbabwe. Then by the time he finished lunch, he ordered two more. The price had risen to 15 million Zimbabwe.
Kim Zussman asks:
So does inflation illusion work? What does it feel like to be a billionaire?
Ian Brakspear comments:
I have in my wallet 2 fifty billion dollar notes, a one hundred billion dollar note and one ten trillion dollar note-worthless.
Today the main currency in the streets of Zimbabwe is the US$– how all these US$ notes got here is anyone guess.
They are cleaned regularly in washing machines to prevent the spread of diseases– and hung out to dry on washing lines– always with someone on guard.
March 25, 2011 | 1 Comment
Here is an interesting article about oil: "we are in the middle of an epochal tectonic shift" by Lars Schall.
The hegde funds and banks, who control and own the NYMEX, the ICE Futures and the Dubai Exchange, are using the Middle East events. I think they want to try to use that to push the price up to maybe $ 150 to 200 per barrel over the next months. And why? In order to put massive political pressure on Germany and the European Union.
Since the end of the First World War, I would say, that the quality of the strategic economic thinking in Germany has become significantly reduced, especially after 1945 and the US-guided German "re-education" efforts. How well the Berlin government understands that this is a currency war against the euro, because the euro is the only currency on the block today worldwide, certainly not the Chinese Yuan or the Japanese Yen, which could challenge the hegemony as a reserve currency of the dollar, I can only speculate. That euro challenge has to be eliminated from the game. The next target will bw Spain. If they can crack Spain, then they will move on to Italy – and then it will really escalate into a colossal mess for the euro as an alternative to the dollar.
Stefan Jovanovich writes:
The numbers for U.S. energy consumption suggests that the U.S. might only need to put one knee on the ground. 37 years ago, with 214 million people, the country consumed 6,453,000 Barrels per day of Gasoline and 2,552,000 Barrels per day of Diesel Fuel. The most recent numbers have consumption of Gasoline at 8,779,000 Barrels per day and Diesel at 4,099,000 Barrels per day for a population 50% larger.
Dylan Distasio writes:
I found your original link very interesting, and hearkening back to the 70s energy shock, I would not put anything past Henry Kissinger, but I don't know what to make of Engdahl's theories, quoted above. The conspiracy nut in me finds them appealing, and after what we've seen happen over the last few years of the "financial crisis," nothing would surprise me.
That said, and this may simply reflect my naivete, but I don't believe the oil market can be easily manipulated long term. I'm sure speculators help trends in motion stay in motion until the positive feedback loop breaks down and the music stops, but I am skeptical of his beliefs that this is a coordinated effort to bring down Europe and China.
This may be my ugly American speaking, but I think the only thing propping the Euro up is the interest rate differential between the USD and it, and the perception that the Fed will continue to allow easy money to flow while the good burghers are tightening the reigns. I don't see the underlying structural issues with the PIIGs going away anytime soon, and despite the US's fiscal mess, still believe it will end up growing faster than the Eurozone ultimately. I don't think it is going to take $150 oil to bring down the Euro.
But concerning this:
CNG has always been 40 percent cheaper then gasoline," Oldham said. "Everyone fears that gas will hit between $4 and $5 a gallon, while CNG is expected to remain steady.
I guess Mr. Oldham, in that article, has not heard of the concept of supply and demand. Granted, the shale finds have changed the face of domestic NG supply, but if the demand were to change radically for NG, the price is going to go up significantly. There is still the issue of the cost of building out a national infrastructure as mentioned also.
I'm not arguing CNG is a bad idea, just that it is foolish to assume prices are not going to move towards a new equilibrium compared to oil if we start to get power plants converting over to NG on a widespread basis combined with this hypothetical fleet of CNG vehicles on the road.
Paolo Pezzutti writes:
The issue is about using energy as a strategic weapon to win currency "wars" and much more… Does it make sense or is it a delirium of pseudo opinionists or worse "conspirationists" at any cost?
Ken Drees adds:
"The conspiracy nut in me finds them appealing, and after what we've seen happen over the last few years of the "financial crisis," nothing would surprise me."
Do we all have a little conspiracy flake inside, the need to believe an extreme idea, the need to see one more card and maybe hit that straight, the need to go short against the trend, the need to date that "troubled yet sexy person", the need to get some action to offset the boredom of accepted reality, accepted principles, the correct fold of the hand, the trend is your friend continuation trade or the usual date or evening at home?
Our gambling flake needs to be rewired into a creative outlet that excites the spirit yet reshapes risky behavior into worthwhile enterprise. risky activity is rooted in ego and power–that force needs to be applied in a new direction instead of being repressed.
According to an article in Bloomberg today the sad and dramatic events in Japan should not stop the bull market. "Global Stock Rally May Withstand Japan Disaster". "Investors said that barring a nuclear disaster, the country’s worst earthquake on record is unlikely to halt the two-year bull market in global equities". You would think that it is because of the resilience of the global economy….
Here is the "real" reason: "Bank of Japan Governor told reporters he’s ready to unleash “massive” liquidity starting this morning in Tokyo to assure financial stability". And a fund manager said:"The purely economic consequences will be modest: some reconstruction, some more government spending".
Since the 2008 crisis it has become prevalent the idea that government spending is the holy grail of economies. You have a problem ? Pump liquidity and it will go away…. You do not grow fast enough? Just plan to increase your deficit and that's it….
How can they be wrong when the stock market doubled in 2 years? But when will we wake up from this dream….(or nightmare?).
Alex Castaldo adds:
Here is the latest news headline:
8:20 BN *BOJ ADDS 7 TRILLION YEN TO SYSTEM IN EMERGENCY OPERATION
That is US$85.5 billion.
The view of the bay was breathtaking. The evening breeze caressed her skin. She shivered. "I am sure he loves me," she said, "but I'll never manage to get out of this situation. It hurts so badly."
"I cannot command winds and weather," he started. "Nelson was the greatest Admiral of all times. He meant to say that you cannot change the facts of life. You have to adapt, understand the forces at play and use them to your advantage".
He would not follow the herd. When prices plunged 50% he bought those stocks although there was no real setup. From there the market panicked, the pain seemed to be unbearable. Nevertheless he did not close the trade. It would have been a blow to his self-esteem. Then the market printed a long rebound and he recovered half of his losses. The pain became less intense. With time wounds heal and only scars remind you what happened. Even if you are still losing big money.
He explained: "I learned from markets that taking a loss does not mean there is something wrong with you. Get rid of his ghost, wait for a set up and open a new trade. It is as simple as that."
He was lying to her and to himself. They were friends, but he had always considered the possibility of a different relationship. She was beautiful; there was something intriguing about her. But he was well aware there was no future. She would not be the right person. Her unhappiness, her attitude towards life would drain his energy and he was already exhausted. He needed a dreamer; someone that would give him strength, incentives to do things and not complain or regret something that had not happened or could never happen. Nevertheless, he stuck to this relationship. The same way he stuck to his loss in the stock market. It had been pretty painful at the beginning. Now he had scars to remind the pain and he was still uncomfortable. This would never go away.
Suddenly, as if she was reading his mind, she said: "I will love him forever. Nothing will change this. I must try to forget him even if I know it will not work. I need to replace him in my mind with someone else. That someone cannot be you". He had been awaiting his turn, sitting with his legs at the edge of an abyss and helping her whenever she allowed him to do it. It was like a flash, and he realized he had to do something about it. He turned on his IPhone, accessed the trading account and introduced a sell market order at the next day's open. He had decided to get rid of his long held position and to close a losing trade in his life.
Then he said: "There is no reason for me to be in this trade, I need to get out. I want to look to the future, to the next trade". He thought he would also be a better trader from now on. She looked at the dark sea: "It is your choice. I will not ask you to change your mind. Maybe one day…" He did not let her continue. "Hope is for losers in trading as in life. He managed to say, holding back his tears: "Once a trade is closed, you don't want to look back…to feel regret…or remorse."
He left without turning back. He could imagine her on the terrace, as beautiful as ever.
There was a lady in Sorrento wearing a pink dress at a party that night…
George Coyle asks:
This is great. I thought it might be literature but for the inclusion of the iPhone. The patterns in romance and trading are so similar. Good trades are easy to get into, they go in your direction almost immediately, and they require minimal effort and are a pleasure to have on. Thinking about them makes you feel good. Bad trades inspire doubt and rationalizing, can result in sleepless nights, and usually begin with immediate loss which results in more rationalizing such that even if you are down 50% a small rally inspires unwarranted optimism (even though you are still down 45%). And one generally winds up in emotional distress and makes rash decisions exiting at inopportune times. I have drawn the parallels many times; hope and human psychology seem to be at the core.
I think this is why systematic approaches are so popular in the short-term in trading, the human element is removed. But a systematic approach to dating doesn't really work. For one, by definition if you are in fact part of the dating pool, every relationship you had up until now has failed so it seems a fool's game to even play based on odds. It becomes worse if you have an adequate enough sample size to have approximated the population via the central limit theorem! And you could be viewed as cold and calculating, two things which seldom result in romantic success. Inevitably the initial honeymoon goes awry and a rolling stop results in the end of a relationship. And the vig can be very high so it might pay to approach relationships with a long-term hold investment bent post some initial time based rolling stop out (if one wanted to use a pseudo scientific method). But being a trader, one is always aware when the trade feels bad which can lead to dismay as the patterns usually don't lie!
Craig Mee writes:
The market mistress plays with one's inner demons. On a big turnaround, you can't help but get on, though your immediately exposed to the gun slingers, but as traders know the worst of the two evils is when that baby pops to the moon, and you're not on. To commit and face certain high winds or not commit and be left in the shallows. .. mmm I hate harbour.
January 20, 2011 | Leave a Comment
Did people just jump in and buy the dip, or was that the result of legions of traders going flat overnight? Wasn't a huge move, but I kind of expected more of a panic.
Victor Niederhoffer comments:
One who was short and waiting could cover his shorts short of the big house.
Paolo Pezzutti writes:
…interesting to know if there is a ten minute effect…
Victor Niederhoffer responds:
Believe it much dissipated and changed in 2010.
Russell Sears writes:
What shocked me was the out performance of the Dow compared to the S&P, especially given the relatively low inter-day vol.
To check this out I did the following, took the ln close to close Dow - ln close to close S&P then ranked them. Today was rank 37th of the 2700 days I look at. Then I took this out performance divided by the max (interdayvol Dow, inter-day vol S&P) where inter-day vol is LN(high/low) for the day. This ratio placed was number one !
I do not know what this out performance means, but looking at the dates that "beat" today or came close did not bring pleasant memories back. They were 2000 to 2001 vintage then big time gap and appeared again in Sept 2008-Jan 2009 and another small time gap. This would indicate that when things get volatile and down it often best to be in the big Dow.
What this means with a relatively weak volatile period I do not know.
I will leave it to the reader to come up with a test to see if this is a indicator of Large over small cap shift that is reverse the small outperforming large gap the last couple of years.
In the Eurozone, Greece is downsided to junk and Portugal is trying to reassure markets (and political leaders) that they can manage without a rescue package. The "strong" continental countries are discussing how to politically make viable a rescue plan that would be paid by thier taxpayers. Aid talks are running in parallel with the effort to establish new EU legislation to strengthen fiscal restraints that failed. In this case, for example, Greece would be sanctioned for never meeting the euro area’s limit on deficits of 3 percent of GDP. "Some" countries are calling for “quasi-automatic” sanctions or for a political vote to fine high-deficit countries be left up to a political vote. In my view it is almost ridiculous, hypocritical and not credible to fine a country that is almost bankrupt when you have to lend the money putting together an emergency rescue package… In the meantime, the Greeks may complain that Germans want to make money lending them money at an inequitable interest rate and "control" politically and economically their country. …..and the Euro gained 3.7% last week on the dollar……
Employees of FIAT, the Italian auto-maker, voted for the investment in the Mirafiori plant in Turin in exchange for measures to limit strikes and curtail absenteeism.
Today, productivity in this plant is about one third of productivity in a similar plant that FIAT has in Poland. At the same time in China inflation and the increase in salaries are a predominant theme. Global imbalancies are going to be coped with in 2 ways in the long term.
On one hand, if western countries want to remain (or become?) competitive they have to realize that the current labor conditions should be revisited. There is obvious resistance, but the agreement at FIAT (in Italy unions are strong) shows that this is the only sensible way ahead although it can be very painful. Workers are starting to realize that unemployment is the alternative to renegoniating their contracts as entrepreneurs move their plants abroad.
On the other hand production costs are increasing in emerging markets. This trend is accelerating and this convergence will continue to unfold over the next years. The problem is we could import higher prices without being able for quite some time to print significant growth rates (especially in Europe).
January 13, 2011 | Leave a Comment
This presentation of GaveKal's, which is about emerging markets, eventually derives conclusions exclusively from the analysis (very interesting) of China. It gives the perception (on purpose?) that China=Asia. It does not take into account specific local realities, but it may be correct because a bubble bursting in China would have effects all over Asia. Structural forces at work in China would influence the whole region (or better continent).
These forces are pushing toward higher interests rates and currency valuations in Asia. Agricultural prices should also go up because of an expected increase in imports. Eventually, it poses to investors (for the next decade at least) the dilemma of Growth (emerging countries) vs Value (developed countries) on a global scale. The answer is: go for emerging countries. There may be difficult times ahead globally and also regionally (a bubble in Asia?), but that is in the long term where money is made. Being long emerging markets and short developed countries could be an option. Especially Europe appears pretty weak with PIIGS chronically below average growth level and paying higher interest on their debt. How long can they manage? This could be the plan of financial forces (seen as evil, aka speculators) (with a lot of politics involved).
Side-channel attack on high-frequency trading networks could net a hacker millions of dollars in seconds– and leave everyone else much poorer.
Paolo Pezzutti writes:
Looking for "technical" inefficiencies rather than "market" inefficiencies may be probably easier. However, both have the same characteristic: they are ever changing.
January 11, 2011 | 5 Comments
Apple stocks more than tripled in just 2 years. Useless to say that I missed this move and that I did not triple my capital during the same period investing somewhere else. I am contrarian by nature, however I was "forced" by some type of compulsion to buy the IPhone4 (not the stocks unfortunately). I followed the herd. Now that I regret it (poor strength of network signal and a battery that lasts for half day at best…) I also understand how strong the AAPL trend is. They sell expensive products that sometimes do not meet expectations but that people are ready to buy at prices which are higher than products of competitors. What a money machine. Difficult, however, to keep the momentum…Time to short AAPL?
Marlowe Cassetti writes:
I will repeat my reply to the Chair's post of July 29th titled Mystical Ideas. I quote myself:
The chair has touched on a point of interest that has bothered me. I don't know about Lady Gaga, but Apple's climb towards the top of market valuation appears to be inline with the phenomenon of a bubble. Yes, I understand that we cannot declare a bubble until it bursts, but let's look at the facts: There are some 47 stock analysts that cover AAPL, all but two have either a buy or a strong buy recommendation. It is the darling of the market. Its market cap is approaching $ ¼ trillion and at the rate it is moving it is on its way to challenge Exxon Mobile Corp. XOM produces stuff that the world needs, AAPL doesn't produce stuff that the world needs just what they like to have, until something else strikes their fancy. It reminds me in the 1980's when people couldn't buy enough Wang stock. You hadn't arrived if your office didn't sport a Wang word processor. The bubble will burst when the last fool buys in at a nose bleed price.
Back to today, for Christmas I bought myself an iPod touch … my first Apple product ever. It cost only $58.00 plus some expiring frequent flier points. I was looking for a MP3 player and I got much more that a music player. I'm very impressed with its versatility and elegance. But at $300 retail it is certainly pricey. about what I paid for a very capable netbook for my wife.
Perusing a chart of AAPL it has relentless upward momentum. You cannot step in front of a freight train and short it.
William Weaver writes:
Marlowe touches on an interesting point regarding AAPL v XOM; more specifically, how AAPL, as a consumer discretionary stock, has approached the market cap of a consumer staple, which supplies a needed good versus a wanted good. For the past 6 months I have been working on scraping purchasing data from thousands of domestic websites as a way to gauge consumer spending; at some point I am looking to sell this as research, but so far trading it has been very successful.
What I've found is that it is very easy to measure discretionary purchases and very hard to measure staple purchases as most of the latter are done offline. That said, the spending data of only discretionary purchases has a .44 correlation coefficient to the following one-month return in the S&P 500 using 69 non-overlapping months. To me this says that discretionary spending drives market returns, which begs the question, is the market ever really in-line with needed value, the value of what one needs to survive, not what one wants? Would a bubble then be any return over the risk free rate assuming the risk free rate is not in a bubble itself?
With that notion, one should never short a discretionary stock like AAPL, as the market is driven by such companies. (just for fun) Remember in 2007-8 when the Washington DC metro banned Crocs because they were dangerous on escalators? We all asked "with what shoe laces" and then a day later it was found that the head of the DC metro had held a large short position for many months as the stock climbed? It doesn't pay off; the risk is much greater than the reward. At best, one could buy OTM put leaps.
Over the past 5 years the Dow and the EURUSD have amazingly printed the same performance that you can see in the chart (about 6.5%). Until the end of 2007, a weak dollar was getting along with a rising stock market. From 2008 to Mar 2009 EURUSD outperformed stocks. When the Dow low was printed in 2009 things changed and then last year they moved in opposite directions (+10% the Dow and -10% the EURUSD). Different forces moved them during the various periods but coincidentally (?) and accidentally (?) they ended up at the same point. What to expect now?
December 31, 2010 | 61 Comments
- 31 Spec-listers contributed to the 2011 Investment Contest with "specific" recommendations.
- Average 4 recommendations per person (mean of 4.2, median and mode of 4) came in.
- 6 contestants gave only 1 recommendation, 3 gave only 2 and thus 9 out of the total 31 have NOT given the minimum 3 recommendations needed as per the Rules clarified by Ken Drees.
- The Hall of Fame entry for the largest number of ideas (did someone say diversification?) is from Tim Melvin, close on whose heels are J. T. Holley with 11 and Ken Drees with 10.
- The most creatively expressed entry of course has come from Rocky Humbert.
- At this moment 17 out of 31 contestants are in positive performance territory, 14 are in negative performance territory.
- Barring a major outlier of a 112.90% loss on the Option Strategy of Phil McDonnell (not accounting for the margin required for short options, but just taking the ratio of initial cash inflow to outflow):
- Average of all Individual contestant returns is -2.54% and the Standard Deviation of returns achieved by all contestants is 5.39.
- Biggest Gainer at this point is Jared Albert (with his all in single stock bet on REFR) with a 22.87% gain. The only contestant a Z score greater than 2 ( His is actually 4.72 !!)
- Biggest Loser at this point (barring the Giga-leveraged position of Mr. McDonnell) is Ken Drees at -10.36% with a Z Score that is at -1.45.
- Wildcards have not been accounted for as at this point, with wide
deviations of recommendations from the rules specified by most. While 9
participants have less than 3 recommendations, those with more than 4
include several who have not chosen to specify which 3 are their primary recommends. Without clarity on a universal measurability wildcard accounting is on hold. Those making more than 1 recommendations would find that their aggregate average return is derived by taking a sum of returns of individual positions divided by the number of recommends. Unless specified by any person that positions are taken in a specific ratio its equal sums invested approach.
- A total of 109 contracts are utilized by the contestants across bonds, equity indices (Nikkei, Kenyan Stocks included too!), commodities, currencies and individual stock positions.
- The ratio of Shorts to Longs across all recommendations, irrespective of the type of contract (call, put, bearish ETF etc.) is 4 SELL orders Vs 9 Buy Orders. Not inferring that this list is more used to pressing the Buy Button. Just an occurence on this instance.
- The Average Return, so far, on the 109 contracts utilized is -1.26% with a Standard Deviation of 12.42%. Median Return is 0.39% and the mode of Returns of all contracts used is 0.
- The Highest Return is on MICRON TECH at 28.09, if one does not account for the July 2011 Put 25 strike on SLV utilized by Phil McDonnell.
- The Lowest Return is on IPTV at -50%, if one does not account for the Jan 2012 Call 40 Strike on SLV utilized by Phil McDonnell.
- Only Two contracts are having a greater than 2 z score and only 3 contracts are having a less than -2 Z score.
Victor Niederhoffer wrote:
One is constantly amazed at the sagacity in their fields of our fellow specs. My goodness, there's hardly a field that one of us doesn't know about from my own hard ball squash rackets to the space advertising or our President, from surfing to astronomy. We certainly have a wide range.
May I suggest without violating our mandate that we consider our best sagacities as to the best ways to make a profit in the next year of 2011.
My best trades always start with assuming that whatever didn't work the most last year will work the best this year, and whatever worked the best last year will work the worst this year. I'd be bullish on bonds and bearish on stocks, bullish on Japan and bearish on US stocks.
I'd bet against the banks because Ron Paul is going to be watching them and the cronies in the institutions will not be able to transfer as much resources as they've given them in the past 2 years which has to be much greater in value than their total market value.
I keep wondering what investments I should make based on the hobo's visit and I guess it has to be generic drugs and foods.
What ideas do you have for 2011 that might be profitable? To make it interesting I'll give a prize of 2500 to the best forecast, based on results as of the end of 2011.
David Hillman writes:
"I do know that a sagging Market keeps my units from being full."
One would suggest it is a sagging 'economy' contributing to vacancy, not a sagging 'market'. There is a difference.
Ken Drees, appointed moderator of the contest, clearly states the new rules of the game:
1. Submissions for contest entries must be made on the last two days of 2010, December 30th or 31st.
2. Entries need to be labeled in subject line as "2011 contest investment prediction picks" or something very close so that we know this is your official entry.
3. Entries need 3 predictions and 1 wildcard trade prediction (anything goes on the wildcard).
4. Extra predictions may be submitted and will be judged as extra credit. This will not detract from the main predictions and may or may not be judged at all.
5. Extra predictions will be looked on as bravado– if you've got it then flaunt it. It may pay off or you may give the judge a sour palate.
The desire to have entries coming in at years end is to ensure that you have the best data as to year end 2010 and that you don't ignite someone else to your wisdom.
Market direction picks are wanted:
Examples: 30 year treasury yield will fall to 3% in 2011, S&P 500 will hit "x" by June, and then by "y" by December 2011.
The more exact your prediction is, the more weight will be given. The more exact your prediction, the more weight you will receive if right and thus the more weight you will receive if wrong. If you predict that copper will hit 5.00 dollars in 2011 and it does you will be given a great score, if you say that copper will hit 5.00 dollars in march and then it will decline to4.35 and so forth you will be judged all along that prediction and will receive extra weight good or bad. You decide on how detailed your submission is structured.
Will you try to be precise (maybe foolhardy) and go for the glory? Or will you play it safe and not stand out from the crowd? It is a doubled edged sword so its best to be the one handed market prognosticator and make your best predictions. Pretend these predictions are some pearls that you would give to a close friend or relative. You may actually help a speclister to make some money by giving up a pearl, if that speclister so desires to act upon a contest–G-d help him or her.
Markets can be currency, stocks, bonds, commodities, etc. Single stock picks can be given for the one wildcard trade prediction. If you give multiple stock picks for the wildcard then they will all be judged and in the spirit of giving a friend a pearl–lets make it "the best of the best, not one of six".
All judgments are the Chair's. The Chair will make final determination of the winner. Entries received with less than 3 market predictions will not be considered. Entries received without a wildcard will be considered.The spirit of the contest is "Give us something we can use".
Bill Rafter adds:
Suggestion for contest:
"Static" entry: A collection of up to 10 assets which will be entered on the initial date (say 12/31/2010) and will be unaltered until the end data (i.e. 12/31/2011). The assets could be a compilation of longs and shorts, or could have the 10 slots entirely filled with one asset (e.g. gold). The assets could also be a yield and a fixed rate; that is one could go long the 10-year yield and short a fixed yield such as 3 percent. This latter item will accommodate those who want to enter a prediction but are unsure which asset to enter as many are unfamiliar with the various bond coupons.
"Rebalanced" entry: A collection of up to 10 assets which will be rebalanced on the last trading day of each month. Although the assets will remain unchanged, their percentage of the portfolio will change. This is to accommodate those risk-averse entrants employing a mean-reversion strategy.
Both Static and Rebalanced entries will be judged on a reward-to-risk basis. That is, the return achieved at the end of the year, divided by the maximum drawdown (percentage) one had to endure to achieve that return.
Not sure how to handle other prognostications such as "Famous female singer revealed to be man." But I doubt such entries have financial benefits.
I'm willing to be an arbiter who would do the rebalancing if necessary. I am not willing to prove or disprove the alleged cross-dressers.
Ralph Vince writes:
A very low volume bar on the weekly (likely, the first of two consecutive) after a respectable run-up, the backdrop of rates having risen in recent weeks, breadth having topped out and receding - and a lunar eclipse on the very night of the Winter Solstice.
If I were a Roman General I would take that as a sign to sit for next few months and do nothing.
I'm going to sit and do nothing.
Sounds like an interim top in an otherwise bullish, long-term backdrop.
Gordon Haave writes:
My three predictions:
Gold/ silver ratio falls below 25 Kenyan stock market outperforms US by more than 10%
Dollar ends 10% stronger compared to euro
All are actionable predictions.
Steve Ellison writes:
I did many regressions looking for factors that might predict a year-ahead return for the S&P 500. A few factors are at extreme values at the end of 2010.
The US 10-year Treasury bond yield at 3.37% is the second-lowest end-of year yield in the last 50 years. The S&P 500 contract is in backwardation with the front contract at a 0.4% premium to the next contract back, the second highest year-end premium in the 29 years of the futures.
Unfortunately, neither of those factors has much correlation with the price change in the S&P 500 the following year. Here are a few that do.
The yield curve (10-year yield minus 3-month yield) is in the top 10% of its last 50 year-end values. In the last 30 years, the yield curve has been positively correlated with year-ahead changes in the S&P 500, with a t score of 2.17 and an R squared of 0.143.
The US unemployment rate at 9.8% is the third highest in the past 60 years. In the last 30 years, the unemployment rate has been positively correlated with year-ahead changes in the S&P 500, with a t score of 0.90 and an R squared of 0.028.
In a variation of the technique used by the Yale permabear, I calculated the S&P 500 earnings/price ratio using 5-year trailing earnings. I get an annualized earnings yield of 4.6%. In the last 18 years, this ratio has been positively correlated with year-ahead changes in the S&P 500, with a t score of 0.92 and an R squared of
Finally, there is a negative correlation between the 30-year S&P 500 change and the year-ahead change, with a t score of -2.28 and an R squared of 0.094. The S&P 500 index price is 9.27 times its price of 30 years ago. The median year-end price in the last 52 years was 6.65 times the price 30 years earlier.
Using the predicted values from each of the regressions, and weighting the predictions by the R squared values, I get an overall prediction for an 11.8% increase in the S&P 500 in 2011. With an 11.8% increase, SPY would close 2011 at 140.52.
Factor Prediction t N R sq
US Treasury yield curve 1.162 2.17 30 0.143
30-year change 1.052 -2.28 52 0.094
Trailing 5-year E/P 1.104 0.92 18 0.050
US unemployment rate 1.153 0.90 30 0.028
Weighted total 1.118
SPY 12/30/10 125.72
Predicted SPY 12/30/11 140.52
Jan-Petter Janssen writes:
PREDICTION I - The Inconvenient Truth The poorest one or two billion on this planet have had enough of increasing food prices. Riots and civil unrest force governments to ban exports, and they start importing at any cost. World trade collapses. Manufacturers of farm equipment will do extremely well. Buy the most undervalued producer you can find. My bet is
* Kverneland (Yahoo: KVE.OL). NOK 6.50 per share today. At least NOK 30 on Dec 31th 2011.
PREDICTION II - The Ultimate Bubble The US and many EU nations hold enormous gold reserves. E.g. both Italy and France hold the equivalent of the annual world production. The gold meme changes from an inflation hedge / return to the gold standard to (a potential) over-supply from the selling of indebted nations. I don't see the bubble bursting quite yet, but
* Short gold if it hits $2,000 per ounce and buy back at $400.
PREDICTION III - The Status Quo Asia's ace is cheap labor. The US' recent winning card is cheap energy through natural gas. This will not change in 2011. Henry Hub Feb 2011 currently trades at $4.34 per MMBtu. Feb 2012 is at $5.14. I would
* Short the Feb 2012 contract and buy back on the last trading day of 2011.
Vince Fulco predicts:
This is strictly an old school, fundamental equity call as my crystal ball for the indices 12 months out is necessarily foggy. My recommendation is BP equity primarily for the reasons I gave earlier in the year on June 5th (stock closed Friday, June 4th @ $37.16, currently $43.53). It faced a hellish downdraft post my mention for consideration, primarily due to the intensification of news flow and legal unknowns (Rocky articulated these well). Also although the capital structure arb boys savaged the equity (to 28ish!), it is up nicely to year's end if one held on and averaged in with wide scales given the heightened vol.
Additional points/guesstimates are:
1) If 2010 was annus horribilis, 2011 with be annus recuperato. A chastened mgmt who have articulated they'll run things more conservatively will have a lot to prove to stakeholders.
2) Dividend to be re-instated to some level probably by the end of the second quarter. I am guessing $1.00 annualized per ADS as a start (or
2.29%), this should bring in the index hugging funds with mandates for only holding dividend payers. There is a small chance for a 1x special dividend later in the year.
3) Crude continues to be in a state of significant profitability for the majors in the short term. It would appear finding costs are creeping however.
4) The lawsuits and additional recoveries to be extracted from the settlement fund and company directly have very long tails, on the order of 10 years.
5) The company seems fully committed to sloughing off tertiary assets to build up its liquid balance sheet. Debt to total capital remains relatively low and manageable.
6) The stock remains at a significant discount to its better-of breed peers (EV/normalized EBITDA, Cash Flow, etc) and rightly so but I am betting the discount should narrow back to near historical levels.
1) The company and govt have been vastly understating the remaining fuel amounts and effects. Release of independent data intensifies demands for a much larger payout by the company closer to the highest end estimates of $50-80B.
2) It experiences another similar event of smaller magnitude which continues to sully the company's weakened reputation.
3) China admits to and begins to fear rampant inflation, puts the kabosh to the (global) economy and crude has a meaningful decline the likes of which we haven't seen in a few years.
4) Congress freaks at a >$100-120 price for crude and actually institutes an "excess profits" tax. Less likely with the GOP coming in.
A buy at this level would be for an unleveraged, diversified, longer term acct which I have it in. However, I am willing to hold the full year or +30% total return (including special dividend) from the closing price of $43.53 @ 12/30/10, whichever comes first. Like a good sellside recommendation, I believe the stock has downside of around 20% (don't they all when recommended!?!) where I would consider another long entry depending on circumstances (not pertinent to the contest).
Mr. Albert enters:
Single pick stock ticker is REFR
The only way this gold chain wearing day trader has a chance against all the right tail brain power on the list is with one high risk/high reward put it all on red kind of micro cap.
Basic story is this company owns all the patents to what will become the standard for switchable glazings (SPD smart glass). It's taken roughly 50 years of development to get a commercialized product, and next year Mercedes will almost without doubt use SPD in the 2012 SLK (press launch 1/29/11 public launch at the Geneva auto show in march 2011).
Once MB validate the tech, mass adoption and revenues will follow etc and this 'show me' stock will rocket to the moon.
Dan Grossman writes:
Trying to comply with and adapt the complex contest rules (which most others don't seem to be following in any event) to my areas of stock market interest:
1. The S&P will be down in the 1st qtr, and at some point in the qtr will fall at least
2. For takeover investors: GENZ will (finally) make a deal to be acquired in the 1st qtr for a value of at least $80; and AMRN after completion of its ANCHOR trial will make a deal to be acquired for a price of at least $8.
3. For conservative investors: Low multiple small caps HELE and DFG will be up a combined average of 20% by the end of the year.
For my single stock pick, I am something of a johnny-one-note: MNTA will be up lots during the year — if I have to pick a specific amount, I'd say at least 70%. (My prior legal predictions on this stock have proved correct but the stock price has not appropriately reflected same.)
Finally, if I win the contest (which I think is fairly likely), I will donate the prize to a free market or libertarian charity. I don't see why Victor should have to subsidize this distinguished group that could all well afford an contest entrance fee to more equitably finance the prize.
Best to all for the New Year,
Gary Rogan writes:
1. S&P 500 will rise 3% by April and then fall 12% from the peak by the end of the year.
2. 30 year treasury yields will rise to 5% by March and 6% by year end.
3. Gold will hit 1450 by April, will fall to 1100 by September and rise to 1550 by year end.
Wildcard: Short Netflix.
Jack Tierney, President of the Old Speculator's Club, writes:
Equal Amounts in:
TBT (short long bonds)
YCS (short Yen)
GRU (Long Grains - heavy on wheat)
CHK (Long NG - takeover)
BONXF.PK or BTR.V (Long junior gold)
12/30 closing prices (in order):
Bill Rafter writes:
Buy: FXP and IRWD
Hold for the entire year.
William Weaver writes:
For Returns: Long XIV January 21st through year end
For Return/Risk: Long XIV*.30 and Long VXZ*.70 from close today
I hope everyone has enjoyed a very merry holiday season, and to all I wish a wonderful New Year.
Ken Drees writes:
Yes, they have been going up, but I am going contrary contrary here and going with the trends.
1. Silver: buy day 1 of trading at any price via the following vehicles: paas, slw, exk, hl –25% each for 100% When silver hits 39/ounce, sell 10% of holdings, when silver hits 44/ounce sell 30% of holdings, when silver hits 49 sell 60%–hold rest (divide into 4 parts) and sell each tranche every 5 dollars up till gone–54/oz, 59, 64, 69.
2. Buy GDXJ day 1 (junior gold miner etf)—rotation down from majors to juniors with a positive gold backdrop. HOLD ALL YEAR.
3. USO. Buy day 1 then do—sell 25% at 119/bbl oil, sell 80% at 148/bbl, sell whats left at 179/bbl or 139/bbl (whichever comes first after 148)
wildcard: AMEX URANUIM STOCKS. UEC, URRE, URZ, DNN. 25% EACH, buy day 1 then do SELL 70% OF EVERYTHING AT 96$LB u http://www.uxc.com/ FOR PRICING, AND HOLD REST FOR YEAR END.
Happy New Year!
Ken Drees———keepin it real.
Sam Eisenstadt forecasts:
My forecast for the S&P 500 for the year ending Dec 31, 2011;
S&P 500 1410
Anton Johnson writes:
Equal amounts allocated to:
EDZ Short moc 1-21-2011, buy to cover at 50% gain, or moc 12/30/2011
VXX Short moc 1-21-2011, buy to cover moc 12/30/2011
UBT Short moo 1-3-2011, buy to cover moc 12/30/2011
Scott Brooks picks:
Evenly between the 4 (25% each)
Sushil Kedia predicts:
3) Japanese Yen
30% moves approximately in each, within 2011.
Rocky Humbert writes:
(There was no mention nor requirement that my 2011 prediction had to be in English. Here is my submission.) … Happy New Year, Rocky
Sa aking mahal na kaibigan: Sa haba ng 2010, ako na ibinigay ng ilang mga ideya trading na nagtrabaho sa labas magnificently, at ng ilang mga ideya na hindi na kaya malaki. May ay wala nakapagtataka tungkol sa isang hula taon dulo, at kung ikaw ay maaaring isalin ito talata, ikaw ay malamang na gawin ang mas mahusay na paggawa ng iyong sariling pananaliksik kaysa sa pakikinig sa mga kalokohan na ako at ang iba pa ay magbigay. Ang susi sa tagumpay sa 2011 ay ang parehong bilang ito ay palaging (tulad ng ipinaliwanag sa pamamagitan ng G. Ed Seykota), sa makatuwid: 1) Trade sa mga kalakaran. 2) Ride winners at losers hiwa. 3) Pamahalaan ang panganib. 4) Panatilihin ang isip at diwa malinaw. Upang kung saan gusto ko idagdag, fundamentals talaga bagay, at kung ito ay hindi magkaroon ng kahulugan, ito ay hindi magkaroon ng kahulugan, at diyan ay wala lalo na pinakinabangang tungkol sa pagiging isang contrarian bilang ang pinagkasunduan ay karaniwang karapatan maliban sa paggawa sa mga puntos. (Tandaan na ito ay pinagkasunduan na ang araw ay babangon na bukas, na quote Seth Klarman!) Pagbati para sa isang malusog na masaya at pinakinabangang 2011, at siguraduhin na basahin www.rockyhumbert.com kung saan ako magsulat sa Ingles ngunit ang aking mga saloobin ay walang malinaw kaysa talata na ito, ngunit inaasahan namin na ito ay mas kapaki-pakinabang.
Dylan Distasio comments:
Gawin mo magsalita tagalog?
Gary Rogan writes:
After a worthy challenge, Mr. Rogan is now also a master of Google Translate, and a discoverer of an exciting fact that Google Translate calls Tagalog "Filipino". This was a difficult obstacle for Mr. Rogan to overcome, but he persevered and here's Rocky's prediction in English (sort of):
My dear friend: Over the course of 2010, I provided some trading ideas worked out magnificently, and some ideas that are not so great. There is nothing magical about a forecast year end, and if you can translate this paragraph, you will probably do better doing your own research rather than listening to the nonsense that I and others will give. The key to success in 2011 is the same as it always has (as explained by Mr. Ed Seykota), namely: 1) Trade with the trend.
2) Ride cut winners and losers. 3) Manage risk. 4) Keep the mind and spirit clear. To which I would add, fundamentals really matter, and if it does not make sense, it does not make sense, and there is nothing particularly profitable about being a contrarian as the consensus is usually right but turning points. (Note that it is agreed that the sun will rise tomorrow, to quote Seth Klarman) Best wishes for a happy healthy and profitable 2011, and be sure to read www.rockyhumbert.com which I write in English but my attitude is nothing clearer than this paragraph, but hopefully it is more useful.
Tim Melvin writes:
Ah the years end prediction exercise. It is of course a mostly useless exercise since not a one of us can predict what shocks, positive or negative, the world and the markets could see in 2011. I find it crack up laugh out loud funny that some pundits come out and offer up earnings estimates, GDP growth assumptions and interest rate guesses to give a precise level for the year end S&P 500 price. You might as well numbers out of a bag and rearrange them by lottery to come up with a year end number. In a world where we are fighting two wars, a hostile government holds the majority of our debt and several sovereign nations continually teeter on the edge of oblivion it's pretty much ridiculous to assume what could happen in the year ahead. Having said that, as my son's favorite WWE wrestler when he was a little guy used to say "It's time to play the game!"
Ill start with bonds. I have owned puts on the long term treasury market for two years now. I gave some back in 2010 after a huge gain in 2009 but am still slightly ahead. Ill roll the position forward and buy January 2012 puts and stay short. When I look at bods I hear some folks talking about rising basic commodity prices and worrying about inflation. They are of course correct. This is happening. I hear some other really smart folks talking of weak real estate, high jobless rates and the potential for falling back into recession. Naturally, they are also exactly correct. So I will predict the one thing no one else is. We are on the verge of good old fashioned 1970s style stagflation. Commodity and basic needs prices will accelerate as QE2 has at least stimulated demand form emerging markets by allowing these wonderful credits to borrow money cheaper than a school teacher with a 750 FICO score. Binds go lower as rates spike. Our economy and balance sheet are a mess and we have governments run by men in tin hats lecturing us on fiscal responsibility. How low will they go Tim? How the hell do I know? I just think they go lower by enough for me to profit.
Nor can I tell you where the stock market will go this year. I suspect we have had it too good for too long for no reason so I think we get at least one spectacular gut wrenching, vomit inducing sell off during the year. Much as lower than expected profits exposed the silly valuations of the new paradigm stocks I think that the darling group, retail , will spark a sell-off in the stock market this year. Sales will be up a little bit but except for Tiffany's (TIF) and that ilk margins are horrific. Discounting started early this holiday and grew from there. They will get steeper now that that Santa Claus has given back my credit card and returned to the great white north. The earnings season will see a lot of missed estimates and lowered forecasts and that could well pop the bubble. Once it starts the HFT boys and girls should make sure it goes lower than anyone expects.
Here's the thing about my prediction. It is no better than anyone else's. In other words I am talking my book and predicting what I hope will happen. Having learned this lesson over the years I have learned that when it comes to market timing and market direction I am probably the dumbest guy in the room. Because of that I have trained myself to always buy the stuff that's too cheap not to own and hold it regardless. After the rally since September truly cheap stuff is a little scarce on the ground but I have found enough to be about 40% long going into the year. I have a watch list as long as a taller persons right arm but most of it hover above truly cheap.
Here is what I own going into the year and think is still cheap enough to buy. I like Winn Dixie (WINN). The grocery business sucks right now. Wal mart has crushed margins industry wide. That aside WINN trades at 60% of tangible book value and at some point their 514 stores in the Southeast will attract attention from investors. A takeover here would be less than shocking. I will add Presidential Life (PLFE) to the list. This stock is also at 60% of tangible book and I expect to see a lot of M&A activity in the insurance sector this year and this should raise valuations across the board. I like Miller Petroleum (MILL) with their drilling presence in Alaska and the shale field soft Tennessee. This one trades at 70% of tangible book. Ill add Imperial Sugar (IPSU), Syms (SYMS) and Micron tech (MU) and Avatar Holdings (AVTR) to my list of cheapies and move on for now.
I am going to start building my small bank portfolio this year. Eventually this group becomes the F-you walk away money trade of the decade. As real estate losses work through the balance sheet and some measure of stability returns to the financial system, perhaps toward the end of the year the small baileys savings and loan type banks should start to recover. We will also see a mind blowing M&A wave as larger banks look to gain not just market share but healthy assets to put on the books. Right now these names trade at a fraction of tangible book value. They will reach a multiple of that in a recovery or takeover scenario. Right now I own shares of Shore Bancshares (SHBI), a local bank trading at 80% of book value and a reasonably healthy loan portfolio. I have some other mini microcap banks as well that shall remain my little secret and not used to figure how my predictions work out. I mention them because if you have a mini micro bank in your community you should go meet then bankers, review the books and consider investing if it trades below the magical tangible book value and has excess capital. Flagstar Bancorp(FBC) is my super long shot undated call option n the economy and real estate markets.
I will also play the thrift conversion game heavily this year. With the elimination of the Office of Thrift Services under the new financial regulation many of the benefits of being a private or mutual thrift are going away. There are a ton of mutual savings banks that will now convert to publicly traded banks. A lot of these deals will be priced below the pro forma book value that is created by adding all that lovely IPO cash to the balance sheet without a corresponding increase in the shares outstanding. Right now I have Fox Chase Bancorp (FXCB) and Capital Federal Financial(CFFN). There will be more. Deals are happening every day right now and again I would keep an eye out for local deals that you can take advantage of in the next few months.
I also think that 2011 will be the year of the activist investor. These folks took a beating since 2007 but this should be their year. There is a ton of cash on corporate balance sheets but lots of underperformance in the current economic environment. We will see activist drive takeovers, restructures, and special dividends this year in my opinion. Recent filings of interest include strong activist positions in Surmodics(SRDX), SeaChange International (SEAC), and Energy Solutions. Tracking activist portfolios and 13D filings should be a very profitable activity in 2011.
I have been looking at some interesting new stuff with options as well I am not going to give most of it away just yet but I ll give you one stimulated by a recent list discussion. H and R Black is highly likely to go into a private equity portfolio next year. Management has made every mistake you can make and the loss of RALs is a big problem for the company. However the brand has real value. I do not want town the stock just yet but I like the idea of selling the January 2012 at $.70 to $.75. If you cash secure the put it's a 10% or so return if the stock stays above the strike. If it falls below I' ll be happy to own the stock with a 6 handle net. Back in 2008 everyone anticipated a huge default wave to hit the high yield market. Thanks to federal stimulus money pumping programs it did not happen. However in the spirit of sell the dog food the dog will eat a given moment the hedge fund world raised an enormous amount od distressed debt money. Thanks to this high yield spreads are far too low. CCC paper in particular is priced at absurd levels. These things trade like money good paper and much of it is not. Extend and pretend has helped but if the economy stays weak and interest rates rise rolling over the tsunami f paper due over the next few years becomes nigh onto impossible. I am going take small position in puts on the various high yield ETFs. If I am right they will explode when that market implodes. Continuing to talk my book I hope this happens. Among my nightly prayers is "Please God just one more two year period of asset rich companies with current payments having bonds trade below recovery value and I promise not to piss the money away this time. Amen.
PS. If you add in risk arbitrage spreads of 30% annualized returns along with this I would not object. Love, Tim.
I can't tell you what the markets will do. I do know that I want to own some safe and cheap stocks, some well capitalized small banks trading below book and participate in activist situation. I will be under invested in equities going into the year hoping my watch list becomes my buy list in market stumble. I will have put positions on long T-Bonds and high yield hoping for a large asymmetrical payoff.
Other than that I am clueless.
Kim Zussman comments:
Does anyone else think this year is harder than usual to forecast? Is it better now to forecast based on market fundamentals or mass psychology? We are at a two year high in stocks, after a huge rally off the '09 bottom that followed through this year. One can make compelling arguments for next year to decline (best case scenarios already discounted, prior big declines followed by others, volatility low, house prices still too high, FED out of tools, gov debt/gdp, Roubini says so, benefits to wall st not main st, persistent high unemployment, Year-to-year there is no significant relationship, but there is a weak down tendency after two consecutive up years. ). And compelling arguments for up as well (crash-fears cooling, short MA's > long MA's, retail investors and much cash still on sidelines, tax-cut extended, employee social security lowered, earnings increasing, GDP increasing, Tepper and Goldman say so, FED herding into risk assets, benefits to wall st not main st, employment starting to increase).
Is the level of government market-intervention effective, sustainable, or really that unusual? The FED looks to be avoiding Japan-style deflation at all costs, and has a better tool in the dollar. A bond yields decline would help growth and reduce deflation risk. Increasing yields would be expected with increasing inflation; bad for growth but welcomed by retiring boomers looking for fixed income. Will Obamacare be challenged or defanged by states or in the supreme court? Will 2011 be the year of the muni-bubble pop?
A ball of confusion!
4 picks in equal proportion:
long XLV (health care etf; underperformed last year)
long CMF (Cali muni bond fund; fears over-wrought, investors still need tax-free yield)
short GLD (looks like a bubble and who needs gold anyway)
short IEF (7-10Y treasuries; near multi-year high/QE2 is weaker than vigilantism)
Alan Millhone writes:
I note discussion over the rules etc. Then you have a fellow like myself who has never bought or sold through the Market a single share.
For myself I will stick with what I know a little something. No, not Checkers —
Rental property. I have some empty units and beginning to rent one or two of late to increase my bottom line.
I will not venture into areas I know little or nothing and will stay the course in 2011 with what I am comfortable.
Happy New Year and good health,
Jay Pasch predicts:
2010 will close below SP futures 1255.
Buy-and-holders will be sorely disappointed as 2011 presents itself as a whip-saw year.
99% of the bullish prognosticators will eat crow except for the few lonely that called for a tempered intra-year high of ~ SPX 1300.
SPX will test 1130 by April 15 with a new recovery high as high as 1300 by the end of July.
SPX 1300 will fail with new 2011 low of 1050 before ending the year right about where it started.
The Midwest will continue to supply the country with good-natured humble stock, relatively speaking.
Chris Tucker enters:
Buy and Hold
Wildcard: Buy and Hold AVAV
Gibbons Burke comments:
Mr. Ed Seykota once outlined for me the four essential rules of trading:
1) The trend is your friend (till it bends when it ends.)
2) Ride your winners.
3) Cut your losses short.
4) Keep the size of your bet small.
Then there are the "special" rules:
5) Follow all the rules.
and for masters of the game:
6) Know when to break rule #5
A prosperous and joy-filled New Year to everyone.
John Floyd writes:
In no particular order with target prices to be reached at some point in 2011:
1) Short the Australian Dollar:current 1.0220, target price .8000
2) Short the Euro: current 1.3375, target price 1.00
3) Short European Bank Stocks, can use BEBANKS index: current 107.40, target 70
A Mr. Krisrock predicts:
1…housing will continue to lag…no matter what can be done…and with it unemployment will remain
2…bonds will outperform as republicans will make cutting spending the first attack they make…QE 2 will be replaced by QE3
3…with every economist in the world bullish, stocks will underperform…
4…commodities are peaking ….
Laurel Kenner predicts:
After having made monkeys of those luminaries who shorted Treasuries last year, the market in 2011 has had its laugh and will finally carry out the long-anticipated plunge in bond prices.
Short the 30-year bond futures and cover at 80.
Pete Earle writes:
All picks are for 'all year' (open first trading day/close last trading day).
1. Long EUR/USD
2. Short gold (GLD)
MMR (McMoran Exploration Corp)
HDIX (Home Diagnostics Inc)
TUES (Tuesday Morning Corp)
PBP (Powershares S&P500 Buy-Write ETF)
NIB (iPath DJ-UBS Cocoa ETF)
KG (King Pharmaceuticals)
Happy New Year to all,
Paolo Pezzutti enters:
If I may humbly add my 2 cents:
- bearish on S&P: 900 in dec
- crisis in Europe will bring EURUSD down to 1.15
- gold will remain a safe have haven: up to 1500
- big winner: natural gas to 8
J.T Holley contributes:
The Market Mistress so eloquently must come first and foremost. Just as daily historical stats point to betting on the "unchanged" so is my S&P 500 trade for calendar year 2011. Straddle the Mistress Day 1. My choice for own reasons with whatever leverage is suitable for pain thresholds is a quasi straddle. 100% Long and 50% Short in whatever instrument you choose. If instrument allows more leverage, first take away 50% of the 50% Short at suitable time and add to the depreciated/hopefully still less than 100% Long. Feel free to add to the Long at this discretionary point if it suits you. At the next occasion that is discretionary take away remaining Short side of Quasi Straddle, buckle up, and go Long whatever % Long that your instrument or brokerage allows till the end of 2011. Take note and use the historical annual standard deviation of the S&P 500 as a rudder or North Star, and throw in the quarterly standard deviation for testing. I think the ambiguity of the current situation will make the next 200-300 trading days of data collection highly important, more so than prior, but will probably yield results that produce just the same results whatever the Power Magnification of the Microscope.
Long the U.S. Dollar. Don't bother with the rest of the world and concern yourself with which of the few other Socialist-minded Country currencies to short. Just Long the U.S. Dollar on Day 1 of 2011. Keep it simple and specialize in only the Long of the U.S. Dollar. Cataclysmic Economic Nuclear Winter ain't gonna happen. When the Pastor preaches only on the Armageddon and passes the plate while at the pulpit there is only one thing that happens eventually - the Parish dwindles and the plate stops getting filled. The Dollar will bend as has, but won't break or at least I ain't bettin' on such.
Ala Mr. Melvin, Short any investment vehicle you like that contains the words or numerals "perpetual maturity", "zero coupon" and "20-30yr maturity" in their respective regulated descriptions, that were issued in times of yore. Unfortunately it doesn't work like a light switch with the timing, remember it's more like air going into a balloon or a slow motion see-saw. We always want profits initially and now and it just doesn't work that way it seems in speculation. Also, a side hedge is to start initially looking at any financial institution that begins, dabbles, originates and gains high margin fees from 50-100 year home loans or Zero-Coupon Home Loans if such start to make their way Stateside. The Gummit is done with this infusion and cheer leading. They are in protection mode, their profit was made. Now the savy financial engineers that are left or upcoming will continue to find ways to get the masses to think they "Own" homes while actually renting them. Think Car Industry '90-'06 with. Japan did it with their Notes and I'm sure some like-minded MBA's are baiting/pushing the envelopes now in board rooms across the U.S. with their profitability and ROI models, probably have ditched the Projector and have all around the cherry table with IPads watching their presentation. This will ultimately I feel humbly be the end of the Mortgage Interest Deduction as it will be dwindled down to a moot point and won't any longer be the leading tax deduction that it was created to so-called help.
Short Gold, Short it, Short it more. Take all of your emotions and historical supply and demand factors out of the equation, just look at the historical standard deviation and how far right it is and think of Buzz Lightyear in Toy Story and when he thought he was actually flying and the look on his face at apex realization. That plus continue doing a study on Google Searches and the number of hits on "stolen gold", "stolen jewelery", and Google Google side Ads for "We buy Gold". I don't own gold jewelery, and have surrendered the only gold piece that I ever wore, but if I was still wearing it I'd be mighty weary of those that would be willing to chop a finger off to obtain. That ain't my fear, that's more their greed.
Long lithium related or raw if such. Technology demands such going forward.
Long Natural Gas. Trading Day 1 till last trading day of the year. The historic "cheap" price in the minds of wannabe's will cause it to be leveraged long and oft with increasing volume regardless of the supply. Demand will follow, Pickens sowed the seeds and paid the price workin' the mule while plowin'. De-regulation on the supply side of commercial business statements is still in its infancy and will continue, politics will not beat out free markets going into the future.
Long Crude and look to see the round 150 broken in years to come while China invents, perfects, and sees the utility in the Nuclear fueled tanker.
Long LED, solar, and wind generation related with tiny % positions. Green makes since, its here to stay and become high margined profitable businesses.
Short Sugar. Sorry Mr. Bow Tie. Monsanto has you Beet! That being stated, the substitute has arrived and genetically altered "Roundup Ready" is here to stay no matter what the Legislative Luddite Agrarians try, deny, or attempt. With that said, Long MON. It is way more than a seed company. It is more a pharmaceutical engineer and will bring down the obesity ridden words Corn Syrup eventually as well. Russia and Ireland will make sure of this with their attitudes of profit legally or illegally.
Prepare to long in late 2011 the commercialized marijuana and its manufacturing, distribution companies that need to expand profitability from its declining tobacco. Altria can't wait, neither can Monsanto. It isn't a moral issue any longer, it's a financial profit one. We get the joke, or choke? If the Gummit doesn't see what substitutes that K2 are doing and the legal hassles of such and what is going on in Lisbon then they need to have an economic lesson or two. It will be a compromise between the Commercial Adjective Definition Agrarians and Gummit for tax purposes with the Green theme continuing and lobbying.
Short Coffee, but just the 1st Qtr of 2011. Sorry Seattle. I will also state that there will exist a higher profit margin substitute for the gas combustible engine than a substitute for caffeine laden coffee.
Sex and Speculation:
Look to see www.fyretv.com go public in 2011 with whatever investment bank that does such trying their best to be anonymous. Are their any investment banks around? This Boxxx will make Red Box blush and Apple TV's box envious. IPTV and all related should be a category that should be Longed in 2011 it is here to stay and is in it's infancy. Way too many puns could be developed from this statement. Yes, I know fellas the fyre boxxx is 6"'s X 7"'s.
This is one category to always go Long. I have vastly improved my guitar playin' in '10 and will do so in '11. AAPL still has the edge and few rivals are even gaining market share and its still a buy on dips, sell on highs empirically counted. They finally realized that .99 cents wasn't cutting it and .69 cents was more appropriate for those that have bought Led Zeppelin IV songs on LP, 8-track, cassette, and CD over the course of their lives. Also, I believe technology has a better shot at profitably bringing music back into public schools than the Federal or State Gummits ever will.
Long - Your mind. Double down on this Day 1 of 2011. It's the most capable, profitable thing you have going for you. I just learned this after the last 36 months.
Long - Counting, you need it now more than ever. It's as important as capitalism.
Long - Being humble, it's intangible but if quantified has a STD of 4 if not higher.
Long - Common Sense.
Long - Our Children. The media is starting to question if their education is priceless, when it is, but not in their context or jam.
Short - Politics. It isn't a spectator sport and it has been made to be such.
Short - Fear, it is way way been played out. Test anything out there if you like. I have. It is prevalent still and disbelief is rampant.
Long - Greed, but don't be greedy just profitable. Wall Street: Money Never Sleeps was the pilot fish.
I had to end on a Long note.
Happy New Year's Specs. Thanks to all for support over the last four years. I finally realized that it ain't about being right or wrong, just profitable in all endeavors. Too many losses led to this, pain felt after lookin' within, and countin' ones character results with pen/paper.
Russ Sears writes:
For my entry to the contest, I will stick with the stocks ETF, and the index markets and avoid individual stocks, and the bonds and interest rates. This entry was thrown together rather quickly, not at all an acceptable level if it was real money. This entry is meant to show my personal biases and familiarity, rather than my investment regiment. I am largely talking my personal book.
Therefore, in the spirit of the contest , as well as the rules I will expose my line of thinking but only put numbers on actual entry predictions. Finally, if my caveats are not warning enough, I will comment on how a prediction or contest entry differs from any real investment. I would make or have made.
The USA number one new product export will continue to be the exportation of inflation. The printing of dollars will continue to have unintended consequences than its intended effect on the national economy but have an effect on the global economy.. Such monetary policy will hit areas with the most potential for growth: the emerging markets of China and India. In these economies, that spends over half their income on food, food will continue to rise. This appears to be a position opposite the Chairs starting point prediction of reversal of last year's trends.
Likewise, the demand for precious metals such as gold and silver will not wane as these are the poor man's hedge against food cost. It may be overkill for the advanced economies to horde the necessities and load up on precious metals Yet, unlike the 70's the US/ European economy no longer controls gold and silver a paradigm shift in thinking that perhaps the simple statistician that uses weighted averages and the geocentric economist have missed. So I believe those entries shorting gold or silver will be largely disappointed. However in a nod to the chair's wisdom, I will not pick metals directly as an entry. Last year's surprise is seldom this year's media darling. However, the trend can continue and gold could have a good year. The exception to the reversal rule seems to be with bubbles which gain a momentum of their own, apart from the fundamentals. The media has a natural sympathy in suggesting a return to the drama of he 70's, the stagflation dilemma, ,and propelling an indicator of doom. With the media's and the Fed's befuddled backing perhaps the "exception" is to be expected. But I certainly don't see metal's impending collapse nor its continued performance.
The stability or even elevated food prices will have some big effects on the heartland.
1. For my trend is your friend pick: Rather than buy directly into a agriculture commodity based index like DBA, I am suggesting you buy an equity agriculture based ETF like CRBA year end price at 77.50. I am suggesting that this ETF do not need to have commodities produce a stellar year, but simply need more confirmation that commodity price have established a higher long term floor. Individually I own several of these stocks and my wife family are farmers and landowners (for full disclosure purposes not to suggest I know anything about the agriculture business) Price of farmland is raising, due to low rates, GSE available credit, high grain prices due to high demand from China/India, ethanol substitution of oil A more direct investment in agriculture stability would be farmland. Farmers are buying tractors, best seeds and fertilizers of course, but will this accelerate. Being wrong on my core theme of stable to rising food/commodity price will ruin this trade. Therefore any real trade would do due diligence on individual stocks, and put a trailing floor. And be sensitive to higher volatility in commodities as well as a appropriate entry and exit level.
2. For the long term negative alpha, short term strength trade: I am going with airlines and FAA at 49.42 at year end. There seems to be finally some ability to pass cost through to the consumer, will it hold?
3. For the comeback of the year trade XHB: (the homebuilders ETF), bounces back with 25% return. While the overbuilding and vacancy rates in many high population density areas will continue to drag the home makes down, the new demand from the heartland for high end houses will rise that is this is I am suggesting that the homebuilders index is a good play for housing regionally decoupling from the national index. And much of what was said about the trading of agriculture ETF, also apply to this ETF. However, while I consider this a "surprise", the surprise is that this ETF does not have a negative alpha or slightly positive. This is in-line with my S&P 500 prediction below. Therefore unless you want volatility, simply buying the S&P Vanguard fund would probably be wiser. Or simply hold these inline to the index.
4. For the S&P Index itself I would go with the Vanguard 500 Fund as my vehicle VFINXF, and predict it will end 2011 at $145.03, this is 25% + the dividend. This is largely due to how I believe the economy will react this year.
5. For my wild card regional banks EFT, greater than IAT > 37.50 by end 2011…
Yanki Onen writes:
I would like to thank all for sharing their insights and wisdom. As we all know and reminded time to time, how unforgiven could the market Mistress be. We also know how nurturing and giving it could be. Time to time i had my share of falls and rises. Everytime I fall, I pick your book turn couple of pages to get my fix then scroll through articles in DSpecs seeking wisdom and a flash of light. It never fails, before you know, back to the races. I have all of you to thank for that.
Now the ideas;
-This year's lagger next year's winner CSCO
Go long Jan 2012 20 Puts @ 2.63 Go long CSCO @ 19.55 Being long the put gives you the leverage and protection for a whole year, to give the stock time to make a move.
You could own 100,000 shares for $263K with portfolio margin ! Sooner the stock moves the more you make (time decay)
-Sell contango Buy backwardation
You could never go wrong if you accept the truth, Index funds always roll and specs dont take physical delivery. This cant be more true in Cotton.
Right before Index roll dates (it is widely published) sell front month buy back month especially when it is giving you almost -30 to do so Sell March CT Buy July CT pyramid this trade untill the roll date (sometime at the end of Jan or begining of Feb) when they are almost done rolling(watch the shift in open interest) close out and Buy May CT sell July CT wait patiently for it to play it out again untill the next roll.
- Leveraged ETFs suckers play!
Two ways to play this one out if you could borrow and sell short, short both FAZ and FAS equal $ amounts since the trade is neutral, execute this trade almost free of margin. One thing is for sure to stay even long after we are gone is volatility and triple leveraged products melt under volatility!
If you cant borrow the shares execute the trade using Jan 12 options to open synthetic short positions. This trade works with time and patience!
Vic, thanks again for providing a platform to listen and to be heard.
Phil McDonnell writes:
When investing one should consider a diversified portfolio. But in a contest the best strategy is just to go for it. After all you have to be number one.
With that thought in mind I am going to bet it all on Silver using derivatives on the ETF SLV.
SLV closed at 30.18 on Friday.
Buy Jan 2013 40 call for 3.45.
Sell Jan 2012 40 call at 1.80.
Sell Jul 25 put at 1.15.
Net debit is .50.
Exit strategy: close out entire position if SLV ETF reaches a price of 40 or better. If 40 is not reached then exit on 2/31/2011 at the close.
George Parkanyi entered:
For what it's worth, the Great White North weighs in ….
3 Markets equally weighted - 3 stages each (if rules allow) - all trades front months
3 JAN 2011
BUY NAT GAS at open
BUY SILVER at open
BUY CORN at open
28 FEB 2011 (Reverse Positions)
SELL and then SHORT NAT GAS at open
SELL and then SHORT SILVER at open
SELL and then SHORT CORN at open
1 AUG 2011 (Reverse Positions)
COVER and then BUY NAT GAS at open
COVER and then BUY SILVER at open
COVER and then BUY CORN at open
Hold all positions to the end of the year
3 JAN BUY PLATINUM and hold to end of year.
. Markets to unexpectedly carry through in New Year despite correction fears.
. Spain/Ireland debt roll issues - Europe/Euro in general- will be in the news in Q1/Q2
- markets will correct sharply in late Q1 through Q2 (interest rates will be rising)
. Markets will kick in again in Q3 & Q4 with strong finish on more/earlier QE in both Europe and US - hard assets will remain in favour; corn & platinum shortages; cooling trend & economic recovery to favour nat gas
. Also assuming seasonals will perform more or less according to stats
If rules do not allow directional changes; then go long NAT GAS, SILVER, and CORN on 1 AUG 2011 (cash until then); wild card trade the same.
Gratuitous/pointless prediction: At least two European countries will drop out of Euro in 2011 (at least announce it) and go back to their own currency.
Marlowe Cassetti enters:
FXE - Currency Shares Euro Trust
XLE - Energy Select
BAL - iPath Dow Jones-AIG Cotton Total Return Sub-Index
GDXJ - Market Vectors Junior Gold Miners
AMJ - JPMorgan Alerian MLP Index ETN
VNM - Market Vectors Vietnam ETF
Kim Zussman entered:
long XLV (health care etf; underperformed last year)
long CMF (Cali muni bond fund; fears over-wrought, investors still
need tax-free yield)
short GLD (looks like a bubble and who needs gold anyway)
short IEF (7-10Y treasuries; near multi-year high/QE2 is weaker than
In order to avoid a US dollar debacle, it is important [for the US] to defeat possible credible alternatives. The only one is the Euro. Therefore, the US may have an interest in the acceleration of the PIIGS crisis. How to measure the forces at work in this grandiose scheme and chess game. Who is the weakest? What is the role of speculators? Is there a way to "influence" speculators' targets?
Gary Rogan writes:
It's more likely that the US, or more precisely Geithner and Bernanke want to to prolong the PIIGS thing for as long as possible without it getting resolved rather than accelerate it. It's hard to imagine a good outcome for them if the Euro goes completely caput in a short time. It may also be bad if it falls too rapidly with respect to the dollar. The biggest question is if ANYONE is in control. As Roubini said today, Spain is too big to fail and too big to save, and of course Italy is even more so. I don't know how to tell anything in particular, but it seems like something is up with Portugal and it's worth watching exactly what noises the US will be making about it. It's also worth watching how the Irish population will be handling being told take one for the European unity team after having rejected the whole concept so many times.
One wonders whether there is excessive pessimism at this time.
Vince Fulco comments:
Where is the bolt from the blue story to save all the longs and squeeze the life out of the shorts? Something along the lines of "Berkshire asking for outsized allocation of GM…"
Rocky Humbert writes:
Forgive me for asking, but where is the excess pessimism? Last week's AAII Survey had the second lowest level of pessimism of the year. And, even after this bond market shellacking, the five year tips are still NEGATIVE 11 basis points; and yes, the commodity space is having a Niagra Falls decline– but from the highest levels since 2008. If one's time horizon is twenty minutes, perhaps this constitutes "excessive pessimism" but in my world, one hopes the Chair's barrel is waterproof and well-lined should this evolve into a real waterfall (not that I'm predicting anything). I'll see y'all down river … !
Stefan Jovanovich writes:
There is still considerable pessimism in consumer sentiment, measured by the Conference Board and Michigan Surveys. But, at the same time, the general public has greater confidence about the possibilities of good results from the recent political change than the professionals in D.C. do.
So we have a Hugh Hendry paradox: as Rocky notes, the investor class continues to believe in the future of risk assets and is, at the same time, pessimistic about political change, while the common (sic) people know they are in hard times but have hopes that the Tea Party/Republicans will actually change things for the better.
That, and $8 will buy Vic the cup of coffee I will soon owe him.
Alston Mabry writes:
Everyone needs to fret for a while and then wake up one morning and think, "Oh yeah, the New York Fed is buying $6B a day! What was I thinking?"
Paolo Pezzutti adds:
In no way. Europe can be a better haven than the dollar as bailouts continue to be the only way to delay the payment of an expensive bill. The dollar found a wall at 1.40, which is too high even for QE.
Victor Niederhoffer responds:
Ultimately the public will go on strike. Enoch Powell predicted this so clearly 25 years ago. By what normal human instinct, can people in Germany or any other country be expected to spend their money and work, to give to visible needy in another country they've never met or who are not part of their family. When money is printed and given to a specific group, it reduces the value of everything that other people own, by that total I believe, the same way a discovery of a mineral reduces the value of every other holder of that minerals by the amount of the value of the find. Landburgh is good on this point, and I think I am correct in generalizing.
Stefan Jovanovich comments:
The Second National Bank had been chartered to act as an American cousin to the Bank of England - a private bank that would be the nation's depository for the taxes collected by the Treasury. When Jackson campaigned for reelection in 1832, he ran on a platform of "an independent Treasury" - i.e. the nation's precious specie would not be under a single bank's control but would be held "independently". What that meant in practical terms was that the specie on deposit in Philadelphia and the Bank of the United States' branches would be transferred to banks that favored the Democrats. (My own theory is that this was the first of several wars between the New York and Pennsylvania bankers. Henry Clay's running mate, the Whig Vice-Presidential nominee, was John Sergeant was from Pennsylvania; Jackson's Vice President was Martin Van Buren, "the Little Magician" from New York.) After Jackson's landslide victory in the 1832 election, he issued an executive order transferring the Treasury's gold to seven state-chartered banks. By the end of 1836 the Treasury had accounts at ninety-one of Jackson's "pet" banks. Most of these failed in 1837, causing the Panic that ended Martin Van Buren's political career.
Jackson and Clay - the first two prominent American politicians from west of the Appalachians - thoroughly hated each other. There survives a letter that Clay wrote to Nicholas Biddle, the 2nd National Bank's President, before the 1832 election. It says volumes about Clay's inability to count votes (in the election he won only 6 of the 23 states and gained 49 electoral votes compared to Jackson's 219 and the anti-Masonic candidate's 7) and his and Biddle's naïve optimism that people actually like bankers: "You ask what is the effect of the Veto (Jackson had vetoed the renewal of the bank's charter). My impression is that it is working as well as the friends of the Bank and of the country could desire. I have always deplored making the Bank a party question, but since the President will have it so, he must pay the penalty of his own rashness. As to the Veto message I am delighted with it. It has all the fury of a chained panther biting the bars of his cage. It is really a manifesto of anarchy such as Marat or Robespierre might have issued to the mob of the faubourg St Antoine: and my hope is that it will contribute to relieve the country from the dominion of these miserable people. You are destined to be the instrument of that deliverance, and at no period of your life has the country ever had a deeper stake in you. I wish you success most cordially, because I believe the institutions of the Union are involved in it."
I stopped reading Griffin's book when I got to this explanation of the Second National Bank crisis: Biddle's bank "had promised to continue the tradition of moderating the other banks by refusing to accept any of their notes unless they were redeemable in specie on demand. But when the other banks returned the gesture and required that the new Bank also pay out specie on their demand it frequently lost its resolve." Whatever Nicholas Biddle's faults, "resolve" was not one of them. Biddle used his position as the de facto central bank to call in the loans of the "country banks" in the year between Jackson's veto of the recharter and the October 1833 when Jackson's executive order took effect. Jackson turned that to his benefit by announcing that the country should not come to him for money but should go to Mr. Biddle: "he has all your money." Biddle proved to be a better banker than the state banks; but he was unable to survive the ravages of the Panic of 1837. By 1841 his bank was also gone.
Gary's theory about xenophobia is interesting but it does not fit the facts. Before the Civil War "the public" was chronically short money; there was very little for a central bank to steal, and there was no central bank. The episode from the Resumption Act to World War I is the exception in our history, not the rule; it is the only time when both the people and the government were net savers and the New York Clearing House handled all the transfers now handled by the Fed without finding it necessary to try to reconcile the divergent needs of the holders of money and the buyers and sellers of credit.
Russ Sears writes:
I guess we will see tomorrow if such a nice start deflating late in day to negative for S&P index yesterday was close enough to count.
Gary Rogan writes:
According to G Edgar Griffin, the author of "The Creature of Jekyll Island" (here's an audio link where he explains everything he believes) the only purpose of all central banks (from the government perspective) is to steal money from the public through inflation in order to avoid explicit taxation. All else is pretense. The mechanism is exactly the same: print, give to a particular group, dilute the value for all pre-existing owners. It's interesting that it takes doing this very thing, but giving the money to foreigners instead of the government which of course spends it on the favored domestic groups, for the public to become agitated. It takes xenophobia to make people care about what is equally objectionable in both cases.
Stefan Jovanovich adds:
There is no question that the Panic of 1907 created a trans-Atlantic consensus that trade had to be "better managed" by the financial authorities in London and New York through coordinated central banking. What is usually omitted from the story is how much of that consensus came from purely mercantilist interests. Both the Brits and the Americans had been literally shocked by how effective the Norwegians and Germans had become as competitors in the North Atlantic shipping trade. (J.P. Morgan's one conspicuous failure was his attempt to create a shipping trust; the Hamburg-American Line saw no reason why they should abandon their Wal-Mart approach to fare pricing.) Cecil Rhodes and Teddy Roosevelt contributed their view that the "Anglo-Saxon" race should rule the world and its gold supply. Gary's comment about xenophobia is, If anything, too polite with regard to Aldrich-Vreeland and what followed. Our modern monetary system has its founding in a joint desire of the more leveraged British and American banks to create a permanent imperial preference that would allow them to be able to clip their own coins in the name of "the money supply". What is amazing is that this is - even now - considered a good thing by the same academics who shudder at the idea that people should be able to ship goods and send services across sovereign boundaries by paying an ad valorem customs excise and not bothering the WTO.
Read more here.
What is completely forgotten is that the pre-WW I Left in the United States and France agreed with laissez faire capitalists on the question of open trade and the gold standard. As Michael Polyani's brother Karl puts it, "where Marx and Ricardo agreed, the nineteenth century knew no doubt." The Socialists and peaceful anarchists like my grandfather agreed with their class enemies: both opposed the Federal Reserve Act because it would allow the government to spend money it had neither borrowed nor collected in taxes. Both agreed that the gold standard and trade taxed at value but not otherwise restricted were the foundations of the capitalist economic order. The Socialists like Jean Jaures assumed that the growth of international commerce would lead to a peaceful transformation of world affairs because it would make war financially impossible. They were right, of course. And a lot of good it did them.
Without the Federal Reserve's literal monopoly over international transfers, it would have been impossible for the Wilson Administration to allow the Treasury Department to (1) suspend the domestic gold standard, (2) close the NY stock exchange for 4 months, and (3) reach swap agreements with Britain and France that allowed them to run a bar tab for war supplies. If international exchange had followed the old pattern of individual banks dealing with their foreign correspondents, the more cautious American banks would very quickly have come to the conclusion that their correspondent's IOUs could no longer be discounted and they would need to ask for some gold bars to be packed in barrels and put on a ship heading west before they sent the next shipment of artillery shell casings from Pittsburgh.
This article on Bloomberg provides good support to the Euroskeptics: "Euro Dominos Will Fall Until Currency Is Split"
The idea is that there is a domino effect at work. This process isn't going to stop until the euro is taken apart. First Greece went bust (is it over?). Now Ireland is on the brink of a bailout. Portugal is next, and why not Spain and Italy. In each country, it will be a different trigger that causes a collapse, but the root is the same. The economies are too different for a single central bank. This crisis will involve country after country. The only fix is splitting up the euro according to the author.
I think that what is happening in Europe is dramatic. With the slogan "the show must go on", in order to maintain the same living and welfare standards, each government for sound (?) political and internal stability reasons has decided (or there was no other choice to avoid a collapse?) to let the deficit grow, hoping that the crisis would go away after a reasonable time. However, what does "reasonable" mean? What we are missing is that the transfer of wealth toward other regions of the world is not temporary. It has become structural unless our countries are able to change significantly their social and industrial policies. Meanwhile, unless serious and unpopular measures are taken, the domino effect will continue sinking the Euro. We have to become "poorer" and lower our expectations.
This is the issue that also the US is facing. And Quantitative Easing is not the right answer. The question between the Euro and the dollar is who is going to sink first. So far, with the Euro at 1.36 it seems that a certain balance is maintained (agreed?). However, last May was the first attempt (and may be warning) that the Euro is the weak link of the chain.
November 14, 2010 | Leave a Comment
"Apple sold 4.19 million iPads last quarter, may have trouble hitting some analysts' estimates of 6 million sold in the fourth quarter".
Apple drop following to the news (may be this is an appetizer for what is going to happen this Christmas?) found new buyers at lunch time. If you read stocktwits or twitter now you can find Apple's fans brag about buying today's low. An indicator could be built using social networks' posts. The users normally are positively biased toward the stock they follow. They represent the "herd". Depending how large the group is, you could model their strength and ability to influence price in the short-term. Top trending tickers are AAPL, SPY, ES_F, GOOG, GLD. Does anyone know if this has already been tested?
Phil McDonnell comments:
A Googler did a research paper on the most searched ticker symbols on their engine and found that the top searches tended to go up for a few days. I do not have the link.
"Disappointing sales and profit forecasts from Cisco Systems Inc. show cutbacks in government spending that pose risks for companies that rely on the sector for growth." "State government orders fell 48 percent in the last quarter"
It is interesting to see how the times of the dot.com bubble are behind us. Now that the precipitous pace of growth is over they have to rely on increasingly indebted governments to keep their business going…Who is John Galt?
Gary Rogan writes:
If you superimpose the growth in the US GDP vs. growth in public debt since a little after 2000 you will realize that the entire US economy has been relying on the increasingly indebted government to keep the GDP growing, and that process went into hyperdrive since 2008. The entire growth for the last decade has been just a glorified game of check kiting.
Rocky Humbert responds:
GDP 3/31/01 = 10.3 Trillion
GDP 9/30/10 = 14.73 Trillion
US total Public Debt Outstanding 3/31/01: 2.10 Trillion
US total Public Debt Outstanding 9/30/10: 4.65 Trillion
Nominal GDP growth = 4.43 Trillion (43%)
Nominal US total public debt growth = 2.55 (121%)
Unless Mr. Rogan has become a Keynesian, one would have expected him to argue that had the US total public debt growth (and government spending in general) been smaller, the Nominal GDP growth would actually have been larger. It's peculiar that he's arguing the opposite.
Gary Rogan responds:
Rocky, take a look at the chart at the top of this article (a few months ago, but still) and you will realize that there is more than one definition of "US public debt" and some come closer than others to matching my statement.
I did not argue one way or another about what would happen had the overall government borrowing not been so large. I will argue, or rather state, now that in order for the free market forces to act to restart the non-subsidized GDP growth we would have had to experience a rather severe, non-government-corrected recession to clean out all the malinvestment of the last 15+ years. I will also state that not only had there not been any Keynesian multiplier on the government spending in a "greater than 1" sense for a while, but lately that multiplier has collapsed to a rather small fracton. Nevertheless, even now if you borrow and spend you will raise the GDP by more than if you don't borrow and spend. Nothing particularly Keynesian there.
The solemn and ominous sounding bear cultists are bringing out the flaming hydrogen ballons. Several mentions today of the Hindenberg Omen– not talked about on this site since an April 18, 2006 mention (at a time when the market found helium and moved up roughly 20% over the next year). Nattering nabobs of negativism…
The traditional definition of a Hindenburg Omen requires that:
The daily number of NYSE new 52 Week Highs and the daily number of new 52 Week Lows must both be greater than 79. (Source) The daily number of NYSE new 52 Week Highs and the daily number of new 52 Week Lows must both be greater than 2.2 percent of total NYSE issues traded that day. The NYSE 10 Week moving average is rising. The McClellan Oscillator is negative on that same day. New 52 Week Highs cannot be more than twice the new 52 Week Lows (however it is fine for new 52 Week Lows to be more than double new 52 Week Highs). This condition is absolutely mandatory.
Paolo Pezzutti comments:
More about it on this chronically bearish site. To me it looks like a nostradamus prediction more than a pattern. Bears are trying to find new ammunitions…and last week was encouraging.
Victor Niederhoffer comments:
I can't tell if everyone is kidding or not about Hindenberg. But in edspec, I show how a run of 25 in one direction is not inconsistent with randomness, and Birinyi turning points and come up with an infinitely better indicator than Hinden.
Marlowe Cassetti replies:
But The Chair should admit that Hindenberg Omen has such a funereal appeal, an air of foreboding. Rather like the Mayan 2012 Prophesies.
Russ Sears comments:
But could you come up with a better marketing name? It has great name recognition and implies that they know something that others do not, but will soon after the fact think it should have been obvious. It would seem the splashier the name of this or that indicator in the media, the more desperate their position and need to bring in the masses to offload their positions. May be profitable if one could quantify such an inverse correlation.
Sequoias are often thought of as the monarchs of the Sierra Nevada ecosystem with good reason if you think how tall and old they can grow to be. The main cause of their death is toppling, since they are so resistant to diseases. Sequoia groves adapted to natural processes that must continue if they are to remain healthy.
As a reader of this site, I wonder if there are similitarities between the natural processes that help sequoias remain healthy and markets. These monarchs remind me of big banks and corporations that dominate and have dominated the markets over the past decades.
During a visit to the Sequoia National Park, one of my girls asked me why there were fires in the forest and no one was doing anything to suppress them. I was surprised to find the answer as I was not aware of the importance of fires for sequoias. Fire is actually one of the major processes essential to the health of giant sequoia groves. In markets as well, fires can be important for the health and growth of the financial markets ecosystem. Researchers have determined that low intensity fires swept through the trees approximately every 5 to 15 years. Sequoias rely on fire to release most seeds from their cones, to expose bare mineral soil in which seedlings can take root, to recycle nutrients into the soil, and to open holes in the forest canopy through which sunlight can reach young seedlings. Sequoias also need fire to reduce competition from species such as white fir and Incense cedar, both of which compete with sequoias for water and nutrients. A natural fire cycle thins these competing species, and provides suitable conditions for sequoia growth. That is why forest management policies are aimed at restoring fire to its natural role in Sierran conifer forests. This is accomplished by prescribed fires burning.
Here are a few more reasons why fire is so precious to sequoias and how this could relate to markets:
- Seebed preparation. In a sequoia-mixed-conifer forest, moderate to heavy surface fires provide soft, friable, ashy soil on which the lightweight sequoia seeds fall and in which they are buried. Each crisis is good to prepare the environment for the next trend and expansion. Companies restructure and reorganize, governments improve the framework for investors.
- Nutrient recycling. Fire plays a significant role in returning various mineral nutrients to the soil. The ash deposit increases available phosphorus, potassium, calcium, and magnesium. Entrepreneurs reallocate efficiently capital to increase their returns.
- Impact on succession. Species requiring sunlight, such as pines and sequoia, were favored over shade-tolerant forms such as white fir and incense-cedar; and fire-resistant and fire-dependent species and associations were favored over nonfire-dependent forms. Big banks and corporations are favored in this environment of small and moderate fires because competitors don't manage to upscale their operations enough before the next crisis arrives.
- Formation of a vegetative mosaic. Periodic burning causes development of uneven-aged stands, comprised of even-aged groups of trees of various age classes. Crisis and recessions create a landscape of investors and entrepreneurs which is rich and varied as old farts disappear and new players appear on the scene.
- Faunal relationships. The influence of fire on wildlife is largely related to fire's role in stimulating germination of plants and trees that are useful to animals for food or cover; or making openings in the forest that favor wildlife. Fires create new opportunities and inefficiencies that can be exploited by market players.
- Influence on insect-suscptible trees. Fire apparently has a sanitizing effect by thinning stands or eliminating old stands or old trees before insects and disease have overtaken them. I think here of the role of crisis to get read of scams and market cancers (see for example Madoff or the dotcom situations of Enron and others).
- Influence on fuel and fire hazard. It is believed that the worst enemy of a fire-suppression agency in this regard may be its own efficiency because "the longer forests go without burning, the greater the fuel accumulation and the greater the hazard". Trying to avoid recessions and suppress fires may eventually lead to bigger problems for the ecosystem as a whole. Through fire-suppression programs, the cycle is slowed and it occurs a higher buildup of fire hazard. The 2008 crisis came after a long time where measures were taken to keep the economy going (may be unnaturally?). The crisis was so big that almost burned even the big giants so resistant to fire. Only the government help managed to avoid a profound reshaping of the ecosystem with the "too big to fail" considerations that were made (except for Lehman).
Many other questions could be asked, such as:
- What is the role of regulkators in managing prescribed fires?
- Even after a big fire, the forest grows again. It is just a different forest. With no sequoias. Is it good or bad?
I am quite skeptical that nowadays it is enough to be a good programmer to make money on Wall Street. A very famous trader recently said in this regard that what is and will always be important is understanding human nature. However, it seems that successful programmers want to strike deals that give them the possibility to share profits and retain the ownership of the code they write. The companies they work for make $100K a day when they may be paid $150K a year. It is an intellectual property problem. When competition increases in high frequency trading, margins will decrease and programmers might want to go back to the old "safe" way they were paid. Sometimes I have the doubt that it is enough to have a piece of spyware, which can monitor information from programs that use certain protocols to make big money. A hacker could monitor someone's trades dropping a sniffer and intercepting trading programs. It would be a sort of real-time insider trading. A modern version of an old, and "sure", way of making money.
Read more in this article.
James Lackey comments:
Stick a trading sheet with a programmer's name on it with a 500k daily loss and see if he wants to enlist in the traders training program or go back to his desk. Ha. It's easy to target shoot but it's harder when they are gunning for you.
But Tony C on here years ago thought he discovered Spyware on his quotes from Enron. Drag your mouse cursor over the quote and see if HFT lifts their 100 share penny offer.
Charles Sorkin writes:
I've often suspected that something like Tony C's situation happens in the options market. For instance, I can't tell you how often I've entered limit orders on an option with limited activity, and I get "pennied," so-to-speak.
For instance, consider a market for an equity call option that is quoted as $2.50 - $2.80, for a few hundred contracts on both sides. I enter a limit order to sell 10 contracts at $2.70, making the market $2.50 - $2.70, hundreds x 10. Hardly a second later, the market updates again, to something like $2.50 -$2.65, hundreds by 10. GRRR!!!!
Somebody/ something steps in front of me, on a contract that potentially has hardly any open interest, and very little activity in the whole series, perhaps with the expectation that I will lose patience and hit the original bid.
Very frustrating. Sometimes I pull my offer, and watch incredulously as the quote reverts to it's original level.
Of all the canards, snares, delusions, and misinformation about markets designed to put the investor on the wrong foot, to increase the flow and likelihood of resources from those at the bottom of the web to the top, surely one of the most destructive is the idea that sales are more important than earnings, an idea that seems to have the market in its grip. The reaction of IBM to an increase in earnings above estimate of 8% and sales below estimate by 6%, with the stock dropping 5% is just one horse from that dump heap.
Same thing happened to General Silo when it announced great earnings but sales declined. Must make all these proud CEO's shake their heads in disbelief when they tell their boards that they can't believe that the stock is down when they're doing so well, and their every sale is at a profit and they are only selling profitable products rather than just selling anything they can to get cash.
Indeed, the first item reported now from the traditional income statement announcement is the sales number versus the corresponding quarter, and the surprise factor of sales. Compilations of companies that beat the bogey for sales are now almost as numerous and useless as those for earnings.
Sales are the easiest thing in the world to manipulate. From economics, the buyers have a demand curve for a product, with alternate uses and utilities for it. The marginal utility of each additional unit decreases. At a low price, they will use it and buy it for many uses. For example, the traditional explanation in Heyne where water is used for plants and baths at low prices but only for drinking at a high price.
From a practical standpoint, every business person knows a million ways to increase sales at the expense of profits. you can sell to bad credit risks. You can dump inventory at close to cost. You can offer discounts for bulk orders or pre orders. You can reduce the price and ask your customers to store it for a rainy day or some other use. You can sell to a wholesaler or distributer instead of the ultimate customer, especially for a price. You can justs turn over your product to your customers with a "I'll take 5% on this. Just enough to keep me going". Or you can produce a higher quality product with better terms and tell the customers what a bargain they're getting by taking it out of your hide. Or you can buy a division or company to expand sales, or work off your inventory to change the number.
Indeed there's no item in the expense or revenue side of the income statement that can't be manipulated to increase sales. From a value standpoint, the stockholders desire an increase in wealth, not an increase in sales. What gives them wealth is earnings, not sales.
Okay, where do all these crazy reactions to sales come from? There must be some academic study, doubtless done with retrospective data that shows that sales provides information. And some earnings aggregator sellers must have shown that sales is a important signal with data from one of the retrospective data files that are so misleading and cause so much havoc. Or perhaps there was one period with a turning point where style investing based on sales had some information value.
Of course, companies are very smart, and it's so much easier to manipulate sales than earnings because you don't have to have the complicity of the accountants or move one item on the balance sheet to never never land to change sales. So even if sales were once of reasonable signaling value, now they will be changed in cycles in the typical Baconian way, and of course the public will be behind the form even more than usual.
But in the interim, what a fantastic opportunity to take advantage of this ridiculous malarkey and the reactions of stocks thereto.
The funny thing is what must go on before the release of the income statements these days. The insider and the outside flexions for the big companies must keep the earnings in the hip for a few weeks on a need to know basis only with smug satisfaction that they have beat the guidances they gave out to the analysts and the favored institutions and that they have pulled the wool over the eyes of the accountants to a reasonable degree to pull the earnings into the right territory. Then the horrible realization must come that they forgot to run a sale of buy that division before the quarter occurred and the sales numbers actually show something below the bogey must arise, and their smug satisfaction turns to the agonizing thought that even though business is great, they're going to have to do a lot of explaining to the board as to why the stock is down.
Paolo Pezzutti comments:
There are also other ways to try and increase sales and earnings at all costs. Apple is in my view the last example of a company which is struggling to keep up growth prospects at all costs. And the bigger the company becomes the more difficult it is. The problem of the antenna of the iPhone indicates that they did not give enough time to their engineers to test and make sure technically it was all fine…because of the hurry to come out with something new as soon as possible. Eventually, however, this approach to customers might painful. Hopefully they understood.
Ken Drees asks:
Do consumers get conditioned over time that products need fixes and patches and it's just the way it works in tech– so no problem–send me a carrying case and a patch and we love Apple just the same?
Plus, Apple prices their new stuff way high on debut and people can't get enough of it and then they lower prices to get sales goosed–which pisses off the early buyers yet they seem to forgive next time around.
Also, what is your general opinion on dividends? In my market lifetime, dividends were always poo-poohed and shunned as a way to lose capital. Friends in business always reinforced that concept the putting money back into the company was more prudent. However in my father's lifetime dividends were an important investment consideration and if the dividend was solid or not, or if it grew each year and thereby showed business health. High dividend taxation rates affect investor sentiment about holding div paying stocks. The repeal of tax cuts in Jan will hike div tax rates. I wonder how retired people structure their investments to throw off income these days–bonds don't pay much, energy patch only real div sector that comes to mind.
You can't fake a dividend.
Rocky Humbert comments:
Ken: You are correct in all of your statements about dividends. However, while you cannot "fake" a dividend, you can "cut" a dividend.
The interaction between dividends and taxes, dividends and management stock options, dividends and corporate cash balances/reinvestment are well understood. Also understood is that fact that a substantial portion of total market returns can be attributed to REINVESTED dividends.
Notwithstanding this, whether you cut a pizza into 8 slices or 7 slices doesn't change the size of the pizza. However, if you have eight friends over for dinner, serving 8 slices makes you look like a good host. Whereas serving 7 slices makes you look like a miser. This illustrates nicely the investor preference for dividends from time-to-time. If you don't ever have friends over for dinner, it shouldn't matter….
One thing that is poorly appreciated– and which I encourage you to consider– is the relationship between dividends and the "duration" (to use bond parlance) of an investors' stock portfolio. Here's an example: If you buy the 7-1/4% treasury bond of May 2016 at a price of 129, the duration is 4.9 and the convexity is 0.29. Whereas if you buy the 2.625% of April 2016 at a price of 103, the duration is 5.32 and the convexity is 0.32. So, the lower coupon bond has more duration and convexity even though it's a slightly shorter maturity date and has essentially the same Yield-to-Maturity. I'm sure the quants out there will find fault with this analogy, but I believe there's a similar effect in stock portfolios.
Jim Lackey comments:
No they are not Mr. Vic.. mid quarter updates– TXN or IBM or any of them– say all good, and why stocks gap so much is insider selling and we all know it. It's not all that bad as they raise the full year outlooks and TXN book TI bill ratios fall as a certain handset maker is on the ropes. But the joke is now vs 99 they can contract out manufacturing and ramp up and down production so fast all the old school book to bills or updates are well, perhaps useless. But a few still have their own factories, and if they buy new fabs from Klac LRCX or Nvls… I don't know how it's bearish in the time frame your looking at, but AMAT is all in Solar and that reminds me of used car sales, and one guy on the internet who went to a solar show and he said it reminded him of used car salesman and I thought good! Perhaps some sales will get done.
Stefan Jovanovich comments:
Samuel Butler scandalized his readers by suggesting that the banking system of Britain had replaced the C of E as the national church. I think he would have been bemused to find that the language of finance has now become completely theological, that wisdom takes expression in the form of discussions about "decent" returns on capital, etc. I know Butler would have laughed out loud at the discovery that in the 3rd millennium mankind had reached the point where money itself could only be discussed in terms of its moral meanings and the words "sinister" and "deflation" could seem perfectly compatible usage in a single sentence.
From Mr. Butler's pen:
"MANKIND has ever been ready to discuss matters in the inverse ratio of their importance, so that the more closely a question is felt to touch the hearts of all of us, the more incumbent it is considered upon prudent people to profess that it does not exist, to frown it down, to tell it to hold its tongue, to maintain that it has long been finally settled, so that there is now no question concerning it."
" I do not mind lying, but I hate inaccuracy."
"Life is the art of drawing sufficient conclusions from insufficient premises."
Those of us who do own companies - not just as thought experiments but as our accursed fate - truly envy Rocky his ability to find answers in the current MBA Book of Common Prayer; what we see on the street in California right now is that the only current action is being handled by the Lackeys and the few other over-traders who have never had the luxury of being able to ignore the current bid. Everything else is talk combined with (1) belief that the "cycle" will somehow continue as the Emperor peddles along on his imported energy-saving machine and (2) a desperate eagerness to get to the next meeting with the representatives of the official church.— keep looking »
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