Mar

16

 Very dramatic map: "The Global Extremes of Population Density"

Which made me think to look at this map, and remind myself that the Indus, Ganges, Brahmaputra, Irrawaddy, Mekong, Yangtze and Yellow rivers all originate on the Tibetan Plateau where the glaciers may or may not be retreating.

Feb

28

 When considering the fast food industry, I can't help but think of Japan, which (though I've never been) appears to run largely on vending machines, or at least to a much greater extent than we do.

I imagine a fast food joint where the customer orders via cell phone app, arrives at the location, walks up to the window, swipes the phone which confirms the order and executes payment, and then the food slides down various chutes into the delivery bag, and the glass doors open and the customer takes the bag. It makes me think of old-style self-serve cafeterias, whose configuration would be simpler now with cell phone.

Stefanie Harvey writes: 

To Al's comment, this is already in California: Eatsa

It's one of my favorite places when in SF to grab a quick bite. You can order onsite with a kiosk but most people use the phone app.

anonymous writes: 

Revenge of the automats

Feb

28

If it's tough to reproduce research in biology and medicine, what does that say about all the sweeping conclusions generated by research in the behavioral, social and economic realms?

Jan

19

One of the truest axioms of trading is that the thing you worry about least is the thing that will bite you in the rear. As others have noted, expectations are extremely positive now and few are worried about the downside. But whose expectations?

Something we have written about previously is the length of historical data being watched closely by professional traders, particularly when juxtaposed with that being watched by those who sit in the bleachers. The best bull moves occur when the pros are looking long term and the amateurs are nervous nellies. Right now we have the opposite. With tonight's close we see the amateurs being complacent; they are looking back at what has happened since Election Day. The pros meanwhile are monitoring prices in a 4-day window, a most tenuous stance.

Stefan Jovanovich writes: 

One of my dubious theories is that the internal correlations that we all see in "the market" are largely a product of the development of the New York Banks becoming the clearing house for the nation and their converting that dominance into the "need" for official central banking. The data from the 19th century, which is limited enough to be within my meager mathematical capacity, suggests strongly that the business cycle was much more a matter of the fluctuations of particular businesses than one of the movement of the "economy" as a whole. Weyerhauser's fortunes and Swift's were not on the same cycle. The movements of "Timber" and "Pork" were largely independent.

I wonder if that is becoming the case once again. Optimism may be the general news, but the prices of retail companies, particularly those in the clothing business, very much fit the opposite of Bill's description of the general mood. The general assumption is that everyone will lose their business to Amazon.

Russ Sears writes: 

"One of the truest axioms of trading is that the thing you worry about least is the thing that will bite you in the rear."

I call this the fundamental law of risk management: What risk you ignore or discount incorrectly are the risk you over-load your portfolio with, thinking you have found the "key to Rebecca"/free lunch or at least you have optimized your risk metric such as sharpe ratio. This is what happened to the modeler of RMBS, unknowingly overloading on model risk.

Alston Mabry writes: 

I have often thought (but been unable to effectively implement) that if you could determine what factors the market is not paying attention to, you could place some profitable bets or at least put on some good hedges.

Which leads to a non-quantifiable definition of a bubble as a big move up that continues even after a critical mass of players have become aware of the fatal risks - everybody knows they're playing musical chairs, but it's too profitable to stop.

Jan

12

Brett is always endlessly speaking of market cycles, I found this to be an interesting take and an analysis I had not thought about before:

"During the first quarter of 2000, the dotcom bubble famously peaked after setting a new record high for corporate equity valuations. Today, we haven't quite matched that record in terms of equities, though, by some measures, we are very close. And when you look at corporate valuations more comprehensively, including both debt and equity, we actually have now matched that prior period. The chart below shows the value of nonfinancial corporate debt and equity relative to nonfinancial gross value added (data provided by FRED), essentially a measure of enterprise value-to-sales. I'll let you come to your own conclusion about what this might mean going forward."

Dylan Distasio writes: 

This is interesting, thanks. However, shouldn't duration and average interest rates on the debt have some relevance to using it to calculate valuations? I'm asking the question, not necessarily drawing that conclusion. Just wondering if my betters have an opinion on the linked chart.

Larry Williams writes:

So what if we have matched the all-time high valuations of 2008? Provided that the all-time valuation high was in 1960 8C would've stopped investing in 1995?
 
I am convinced there is one and only one thing that really causes bear markets– recessions. That's the key, certainly not technical analysis.

Happy bullish trails to all.

Oct

31

 This is a paper by Victor Haghani of LTCM fame on bet sizing observing and analysing how people place bets on a coin flip that is biased to come up heads 60% of the time.

Ralph Vince writes:

It's a very interesting paper, and to many might be surprising. A couple of comments:
1. It assumes someone's criterion in wagering on this is to maximize what someone makes. This is certainly not the case in capital markets, where (the rather nebulous) risk-adjusted return is king, specfically: "Optimal F: Calculating the Expected Growth-Optimal Fraction for Discretely-Distributed Outcomes"

2. Even what the authors and Thorp himself claim are the amounts to wager so as to maximize expected gain, their answer is not quite aggressive enough! The amounts the refer to are asymptotic, as the number of trials ever-increases. The author himself points to a horizon of 300 plays in half an hour, and the actual optimal wager (which would, int hat time period, yield a greater return than the authors or Thorp point to) is slightly more aggressive, and can be determined from the above paper.

Not trying to toot my own horn (it needs no tooting, and besides, my horn will do a lot, but tooting it won't do) but the paper is inaccurate on these two points.

Jim Sogi writes:

Thank you for the interesting article. The other night at our band practice, the bass player's wife, who works at a public school, asked me if I was taking my money out of the market. She had heard a number of people were worried about the election and a market drop if either candidate was elected. I told her the market would probably go up, though it might jump around a bit. I thought that was interesting. Its an example of the public doing the wrong thing, for the wrong reasons. It reflects peoples fear about uncertainty about the election. It helps explain some of the market action recently. 

Rocky Humbert writes: 

Mr. Sogi's anecdote and conclusion is a textbook example of Confirmation Bias — which is the tendency to search for, interpret, favor and recall information in a way that confirms one's preexisting beliefs or hypotheses.

To wit: On what basis does Mr. Sogi conclude that the bass player's wife represents the "public" — as distinct from Mr. Sogi himself being the "public" ??!!

How the stock market will perform over the next 30 or 60 days has very little to do with the study of a coin that is heavily loaded to land on heads. At best, the stock market's performance over the next 30 days is only slightly better than 50:50. 

Alston Mabry writes: 

Just had to do a quick sim of their betting game.

Oct

20

Fairness, from anonymous

October 20, 2016 | 1 Comment

 My daughter Eddy used to be interested in the question of Fairness. Not any more. "Since it is not a question of whether but only one of where and when, why bother?"

But we do still talk about it with regard to taxes. We still laugh over her reaction to her first paycheck (issued for cleaning the animal cages at the local vet's office on the graveyard shift). "Who is this bitch FICA and why is she getting my money?"

The best that the two of us have come up with for a "fair" tax system is our own variation of the Major League Baseball "luxury tax" and revenue sharing model. Under the collective bargaining agreement that expires this year, each team in MLB puts roughly 1/3rd of its own revenues into a pool. The money in the pool is then divided up and distributed equally to each team. In 2016 the richest teams (those in the 15 largest markets) no longer received their share as a payout but instead received a credit against their revenue share to be paid the following year. (This was, IMHO, an artful way of assuring that the rich teams would agree to have revenue sharing as part of the next CBA.)

The Eddy and I conclude that FDR's unerring political instincts were wise policy. (When his Marxist academic advisers wanted Social Security to be means-tested, he told them to get real. The American people would only support a program that had a fundamental equality; if you paid into the system, you got something out of it.) We would like to see all government benefits to have the same recognition of the Constitution and its equal protection clause; if a benefit is paid to someone simply for breathing, then everyone gets it. If the government collects taxes, then everyone pays the same rate.

Eddy's final word: "Never going to happen, Dad. Too simple and too fair."

Alston Mabry writes: 

This reminds me to recommend an excellent recent EconTalk:

How are those in favor of bigger government and those who want smaller government like a couple stuck in a bad marriage? Economist John Cochraneof Stanford University's Hoover Institution talks with EconTalk host Russ Roberts about how to take a different approach to the standard policy arguments. Cochrane wants to get away from the stale big government/small government arguments which he likens to a couple who have gotten stuck in a rut making the same ineffective arguments over and over. Cochrane argues for a fresh approach to economic policy including applications to growth, taxes and financial regulation.

Aug

29

 "Why can’t we see that we’re living in a golden age?: If you look at all the data, it’s clear there’s never been a better time to be alive" by Johan Norberg

Jeff Watson writes: 

There's huge money in doom and gloom.

Ralph Vince muses: 

A person should live each day of his life with the same mindset, the very same attitude of savor and gratitude for every minor thing, as if he got out of jail that morning.

Or, as the Old Frenchman himself would say, "If you have the same address as a thousand other guys, you don't have a lot going on."

Alston Mabry writes: 

Pessimism is a strategy. People who have learned, usually from childhood, that they cannot act on their most important impulses use pessimism as a way to devalue what they deeply believe they are not allowed to want.

Bill Rafter adds: 

Just a minute…

As we all know from trading, if you want to increase your profitability over time the most effective strategy is to limit losses. Possibly related to this is the result of several studies attesting that fear is a greater motivator than greed, buy a factor of 3 to 1. Furthermore, we all look at prices and know both instinctively and historically that those prices will not be constant over time. They may be higher or lower, but not the same. Thus, pessimism is historically justified, profit-saving and possibly life-saving.

But to want to trade these markets for profit, one also has to be optimistic, often excessively so in light of bad experiences. You need both.

Jim Sogi writes: 

Jeff is right. Television causes pessimism. Don't watch TV. I haven't had TV for 47 years. It's not only the content. It does something to the brain. It's harmful. 

Stefanie Harvey writes:

Exactly. Television, especially US news television, is the poster child for confirmation bias. 

anonymous writes: 

Many good reasons for worry exist. If you're not worried, you're not paying attention. All of the worries stem from something completely nobody talks about in polite company: population explosion. In 1804, the world's population was 1 billion. In 2012, it topped 7 billion. It's projected to reach 9 billion in 2042 — within my son's lifetime.

True, Paul Erlich got it wrong when he said we'd all starve by the end of the 1970s– but go back read his book. Then reflect on how much different life is.

All those people are unsettling policymakers, with these results (and they are what's secretly worrying us):

Unspoken Fear #1: War. Today's empire builders are intent on grabbing resources; nuclear weapons are in too many hands.

– China: rich and populous; thanks to the free-trade break we gave them in the 1970s, they've created a war machine and ready to go for our jugular.

– Islam: implacable and populous; we have spent trillions trying to establish a decent government, and the area keeps morphing into an empire that despises us and all we stand for; they want their old empire back, be it from Baghdad or Istanbul.

– North Korea: Our strategy is, "Let's all ignore that man in the corner, and maybe he'll quiet down."

– Russia: ruthless, and intent on restoring the empire of Rus.

Unspoken Fear #2: Dystopia.

– When people don't have honest work, nothing good can come of it. In America alone, 94 million people are out of the work force. We're not being honest about the impact of robots and artificial intelligence. It's this fear that gave Trump the nomination, not that he knows what to do with it.

Unspoken Fear #3: Central government that keeps growing.

– Confronted by the population explosion, the elites have decided that the masses must be controlled and pacified. This political philosophy shows up in the fear of liability for anything fun, in subsidies, in central banking. We see sledgehammer policy-making, from FDR to Obamacare.

– And the educated love it! Calls for authoritarianism are the norm among socialist youth, aging hipsters, authors and "educators" at all levels.

These memes and unspoken but rational fears show up in pop music, with its ugly pounding overamplified brutalist mindlessness; in contemporary academic music, with its screams and jaggedness; in art, with its sneering cynicism; in architecture, with its boxy Stalinist aesthetics.

It shows up in the piggishness of the powerful, with Hillary Clinton the prime example. The rich expect multiple homes in idyllic spots, bodyguards, private jets; the poor suffer in overbuilt, crowded, noisy, polluted cities.

I happen to be an optimist, and always see the glass as half-full. Please note I am not prescribing anything; for one thing, it's gone too far. Nor do I think that going to Mars will help.

Russ Sears writes: 

First, human super-cooperation is built on trust. To evolve as a group, a high percentage of that group must be trustworthy for the compounding effect of the prisoners dilemma to work. As the group grows too big, it becomes too easy for a individual to feign cooperation. Hence the need for creative destruction and for power being placed in the smallest sized group necessary. It has always been easy to look at the big groups and see the corruption and assume that they are in control of the long term future. But the truth is they are dinosaurs and will lose out to the small but wise group/ businesses that still operates at the human individual trust one another level and are quite hidden from the spotlight, because of size. But these time and time again raise the tide for all.

Second, personally, it is too easy to dwell on the jerks that simply can ruin it for everyone but that fall into everyone's life. They can ruin many nights even if as a rule I try to avoid them. A single jerk can derail my perspective and keep me up at nights and easily crush my spirits if I let them. I found the best antidote for me is to turn the tables if I start thinking of the jerks and think instead of those in everyone's life that have blessed them with love, grace and patience. I think of my Dad's second wife, caring for a dementia patient at home for 13 years and weeping tears of love on his passing, the coach that helped me, the friend that's always there, etc. I try not to let the jerks own my mind rather than those loving, lovely (my spouse), good and virtuous people in my life. This also goes with those news makers, politicians and on the dole.

Aug

17

 Based on the timing indicated, he must be significantly underwater at this time. That assumes he has not thrown in the towel by now: "Soros Doubles His Bet Against S&P 500 Index"

John Bollinger writes: 

The interesting question for me is: Why is he advertising this now?

Peter Tep writes: 

Good point, John.

Sounds like he is releasing the hounds, so to speak.

Did the same for his short Aussie dollar trade some years back and also his long gold position–get long, get loud.

Jeff Watson writes: 

The more important thing is, who cares what the Palindrome says he does. Whenever anyone who's purportedly a big player discloses his supposed position, I look at his motives with a big grain of salt.. People bluff in the markets as much as they bluff at final table of the WSOP. It's all a mind game, and while one should take in what the opponent says, keep in mind that their disclosure is not for your benefit and it could be a bluff. A good lesson is to look at announcements like this and try to find tells….they exist. Nobody ever discloses their position(real or fake) to the media to be altruistic and benevolent. The sad thing is that many people(retail investors, CNBC watchers etc) believe in the good will of the Palindrome and the Oracle to the small investor. Those same unknowing investors are the pilchards that are eaten by the sharks.

anonymous writes: 

"keep in mind that their disclosure is not for your benefit"

That is a key. Even if it is true it is still not for our benefit. For example "they" cover while "we are riding a growing loss waiting for the idea to play out. Our entry was their exit. The flexions/greats/insiders see angles we can't, if we listen regularly our account balances will be eaten. 

Petr Pinkasov writes: 

I struggle to see how in 2016 it's even intellectually sound to present Q as another 'dagger on the steering wheel'. It's hard to quantify the intellectual capital that investors are willing to pay 50x earnings. 

Alex Castaldo writes: 

Exactly. What is the Q ratio for AAPL, how many factories do they own and how much are those factories worth in the marketplace? (Rhetorical question). The Q Ratio is a statistic from another era, when John D. Rockefeller built oil refineries bigger than anybody else's or when Mr. Ford bragged about his new River Rouge plant. It has limited value in many businesses today.

Another smaller point: the proposed tail hedging strategy is designed to break even if the S&P declines by 20% in a calendar month. In the last 30+ years (367 months) this has happened on only one occasion (October 1987). It is quite a rare event. Would you do this tail hedging all the time? I am not convinced that the numbers work when you consider that every month you are paying for put options.

 Alston Mabry writes: 

Doing some searching, I ran across this on FRED:

Nonfinancial Corporate Business; Corporate Equities; Liability, Level/Gross Domestic Product

Cheap-seat question: I know what GDP is, but I'm not sure about "Nonfinancial Corporate Business; Corporate Equities; Liability". Is that simply adding up the liabilities side of the ledger for public companies? Actually, it peaks Q1 2000, so it must involve market capitalization.

But it does peak Q1 2000 and Q3 2007. Of course, ex ante how do you know it has "peaked"?

Ralph Vince writes: 

All measures from an era when there was an ALTERNATIVE to assuming risk — that alternative now is to assume a certain loss, or, at best, a large rate markets exposure for the (slightly) positive rates at the longer durations.

This is an ocean of money that is coming through the breaking dam. It likely will go much farther and for much longer than anyone ever dreamed. Imagine the unwinding of the government-required-soviet-style Ponzi schemes like Social Security, which, at some point must start affording for self-direction to provide an orderly unwinding. Not only from the natural bookends of life expectancy, and pushing out the book ends to where too few could expect to ever collect from it, but the pressure from below in a runaway market for self-direction. This too will fuel the hell out of this run and make it last much longer than anyone dreams of.

Every equity that yields a dime has greater value than the certain loss; every wigwam that provides shelter too, from investing in the ingredients of pizza in Pulaski to Poontang in Pyongyang, all the wealth of the world must come out of the shadows and find a risk — and this creates a self-perpetuating feedback that is something we've never seen.

This is the move that comes along once in a century at best, and we're already starting into it. The measures of the world of positive rates (which may not be seen for a long time) I do not believe are germane to the world today.

Jul

28

Pollyvote still has Herself ahead, but the gap is narrowing.

538 had Trump moving ahead at the end of last week, but it has now reversed.

Stefan Jovanovich writes:

If one has to choose between Professor Armstrong and the one-hit wonder,
I have to vote for the academic, whom someone really does not like.

anonymous writes:

There are few thought leaders who have influenced my work as much as Scott Armstrong, but the election will be decided by state-level polls, not by the two-party popular vote.

Silver's model is a direct implementation of the work of Andrew Gelman on Bayesian Hierarchical models.

Jul

18

 I have found the book Superforecasting: the Art and Science of Prediction by Philip Tetlock to be interesting, provocative and useful. I strongly recommend it.

Philip Tetlock is on the faculty of Wharton in the Management Department, and Dan Gardner is a journalist and author.

The basic story is that Philip Tetlock and his colleagues formed the Good Judgment Project (or "GJP"), and joined a prediction competition sponsored by the Intelligence Advanced Research Project Activity, or IARPA, which is the intelligence community's version of DARPA. GJP recruited volunteer forecasters, gave them some basic training, and put them into teams. The GJP teams were so successful that eventually the competing groups, including Michigan and MIT, were shut down or merged with Tetlock's group. As they screened out their most successful participants, Tetlock called them "superforecasters".

There is an ever-growing corpus of popular books on some aspect of quantitative reasoning/decision science - "pop quant", if you will - and Gardner, who I assume took on the role of making the book accessible, includes refernces to Surowiceki's Wisdom of Crowds, Gleick's Chaos, Zero Dark Thirty, Daniel Kahneman, Michael Moubaisson, Taleb, Robert Rubin, Atul Gawande, and more. The references are never completely gratuitous and will be informative for people unfamiliar with this particular shelf of the bookstore.

Tetlock's previous high-profile work was Expert Political Judgmentn, a 19-year project where 284 experts made 28,000 predictions "bearing on a diverse array of geopolitical and economic outcomes. The results were sobering. One widely reported finding was that forecasters were often only slightly more accurate than chance, and usually lost to simple extrapolation algorithms. Also, forecasters with the biggest news media profiles tended to lose to their lower profile colleagues, suggesting a rather perverse inverse relationship between fame and accuracy."

Tetlock did the rounds promoting Superforecasting when it came out, and both Russ Roberts and Stephen Dubner did informative interviews with him:

A trade is a prediction, so the book's focus is clearly a relevant one for speculators. Here are some of what I found to be the more interesting ideas, observations and results from the book:

- Brier score: The GJP uses Glenn Brier's scoring function to assess the accuracy of forecasts. While the Brier score itself may be useful, I found myself motivated to improve by the book's general discussion of the importance of making measurable forecasts and then tracking their accuracy.

- Frequent updating: Bill Rafter's Cassandra Portfolio puts forward the hypothesis that the more specific one's predictions are, the more frequently they should be updated. Superforecasting fully supports that idea. The superforecasters updated their forecasts regularly and with decimal precision, and Tetlock shows that the forecasters' accuracy improved as a result.

- The best forecasting teams had a diversity of experience and opinion. Tetlock goes so far as to say that without diversity, forecasting teams find it difficult to improve their accuracy: "Diversity trumps ability".

- Extremizing: One of the algorithms they used for large-group forecasting was to take the average prediction of the group and then move it some distance away from 50%, e.g., if the group's prediction for an event's likelihood was 30%, the algorithm might "extremize" the forecast to 15%. The reason is that in large groups, individual forecasters did not know what other forecasters knew, and if they did, they would be more confident in their predictions which would push the values closer to 0% or 100%. And the algorithm was very successful in the IARPA forecasting competition.

- Scope insensitivity

- One technique for improving accuracy was for the forecaster to make a prediction, then assume that the first prediction was wrong, and then make a second prediction. This falls into the general category of techniques a forecaster might use to dislodge himself from cognitive attachments. Another technique is to invert the question, sometimes simply by inserting "not". The example Tetlock uses is a change from "What is the likelihood that South Africa will allow the Dalai Lama to visit the country?", to "What is the likelihood that South Africa will *not* allow the Dalai Lama to visit the country?" Superforecasting argues that forcing oneself to take different points of view on a prediction will improve results.

There's much more in the book, of course, and it is well written and accessible. Again, strong recommendation, especially for those in the "Counting 101" class.

Jul

14

 From the cheap seats, it appears that when you have (1) massive money printing, (2) a huge expansion in global productive & transportation capacity, and (3) probably the largest labor glut in history, then you have bubbles in assets where a demand/supply imbalance will not be brought to equilibrium by increased production (art masterworks, Vancouver/London/Sydney real estate, gold, equities, bonds), and you have disinflationary pressure on everything else.

Stefanie Harvey comments: 

I heard an interesting piece on Radio Times yesterday where Rana Foroohar was interviewed. She said one issue is that only 15% of the money in the market goes into the economy and 85% stays in the financial system itself, which is an inversion of what it was designed to do (later mentioning Adam Smith - refreshing.) She has a new book called "Makers and Takers"

From the blurb (bold/emphasis mine as an industrial scientist.):

· Thanks to 40 years of policy changes and bad decisions, only about 15 % of all the money in our market system actually ends up in the real economy – the rest stays within the closed loop of finance itself.

· The financial sector takes a quarter of all corporate profits in this country while creating only 4 % of American jobs.

· The tax code continues to favor debt over equity, making it easier for companies to hoard cash overseas rather than reinvest it on our shores.

· Our biggest and most profitable corporations are investing more money in stock buybacks than in research and innovation.

Not sure that I agree more policy is helpful. Smart people make money on churn so not too surprising.

Jun

27

An expanded Panama Canal opens for giant ships  

PANAMA CITY — A mammoth ship bearing 9,472 containers and the unwieldy name Cosco Shipping Panama on Sunday will become the first vessel to officially pass through the new expanded Panama Canal, a $5.25 billion project designed to modernize a 102-year-old landmark of human ambition, determination and engineering prowess.

The Chinese vessel, which set sail from the Greek port of Piraeus on June 11, will cross the isthmus from the northern Atlantic Ocean end of the 48-mile canal. On Sunday morning, it entered one of the new locks, and during the day, it will transit the man-made Gatun Lake, slip along the widened Culebra Cut through a verdant mountain ridge, then descend through another lock that will lower it into the Pacific Ocean.

Like the channel that opened in 1914, the enlarged Panama Canal is a feat of engineering, albeit one that ran over budget and two years behind schedule. The contractors dredged enough material to fill the Egyptian Great Pyramid at Giza, one of the seven wonders of the ancient world, 25 times over. The amount of steel used could have erected 29 new Eiffel Towers. The Empire State Building could lie down and fit into just one of the three chambers in each of the new channel's locks.

Although cargo tonnage through the canal has risen 60 percent since 2009, Panama needed to expand the canal to accommodate a new generation of container ships, known as neo-Panamax, which are too big for the old canal locks. The new locks are wider than the old ones, 180 feet versus 110 feet, and are deeper, too, at 60 feet versus 42 feet. Officials say the larger locks and new lane will double the waterway's cargo capacity. More than 170 neo-Panamax ships have already booked reservations in the expanded locks.

Jun

20

The thing about votes like Scotland and brexit is that after having their say and shaking their fists, many people get nervous and change averse when it comes time to actually mark the ballot.

Stefan Jovanovich writes: 

Big Al's comment needs a footnote. People do not actually change their minds at the polling place. If, as he notes, "they get nervous and change averse", that shows up in the turnout itself. The turnout for Scotland was below what was predicted. My completely ignorant hunch is that the turnout for Brexit will be slightly large than anticipated.

The 2012 Presidential election failure by Romney was the last example of people not voting in large numbers. If the "evangelicals" had, in fact, voted for him in the numbers that their own internal polls predicted, we would be seeing the end of the the first term of our first Mormon President. Romney thought he was going to do as well as Bush had in 2004 and win 78% of the evangelical vote but he only go 76% and there was no greater turnout than there had been in 2008. My back of the envelope calculation is that Romney "lost" 2.5 million potential votes from lack of turnout and a failure to match Bush's percentage. That would not have given him the popular majority; but he would have carried Florida, Ohio, Nevada and Virginia and gained 272 electoral votes. (President Tilden, anyone?) The interesting question is why Romney's campaign did so little to enliven the evangelical vote during the last few months of the campaign; his speech at Liberty University in May was the last time he specifically reached out for the God vote.

You can chalk these back of the envelope calculations to a fit of ecstatic lunacy, if you want. (Eddy just re-qualified for IFR this morning and officially finished her medical residency yesterday and the Giants have won 7 straight.) But, there is an inescapable fact about the 2012 results that does give at least some support for my hunches; President Obama was the first incumbent President to be re-elected with a lower electoral vote total and lower popular vote percentage since the end of WW II. (If you want evidence of how sick Americans get of incumbents by the 3rd year of a foreign war, consider this; the last President to match Obama's poor showing as a successful incumbent was Franklin D. Roosevelt in 1944.)

Happy Father's Day to all.

Jun

14

It is good to remember that a "yes to Brexit" vote doesn't mean next day the UK is out of the EU. But if the vote is "yes", there could be meaningful consequences, because it should shift a lot of political capital around within HM's govt and give the brexiteers some leverage. Then the question is whether the EU makes meaningless concessions while dispatching their bag men to pay off the brexit side, or whether they are forced to make real concessions, in which case the brexit/concessions process could become a blueprint for other EU states to follow.

May

2

 A broker in 1880 on floor said "seal". Others misheard him. Thought he said "sell". One person started selling, and others followed. A terrible panic occurred. Icahn said "apple". One person started selling. A rout ensued. Yes, the market moves every day for ephemeral reasons. It makes a regularity man "humble". Can you think of other stupid reasons for a market move? Late Thursday declines?

Alston Mabry writes: 

I think it's less ephemeral if you model it this way: (1) Many players were looking for en excuse to sell; (2) Icahn provides the excuse for selling AAPL; (3) falling AAPL provides the excuse for selling, say, INTC, which (4) provides the excuse for selling…and so on.

Jeff Watson writes: 

This reminds me of a drought back in the 80s where grains were moving much higher for weeks. It was an overcast day and someone noticed a few raindrops on the window, 10 minutes before the close. An astute local started selling and telling the pit to look at the window, "It's raining outside." Everyone started selling and the bean and corn markets went from bid limit up to offered limit down. Those few drops were the only rain that day and afterward, the markets resumed their summer weather drought pattern.

Gary Phillips writes: 

Back in the same day, I would often "break" brokers I stood next to (in the bond pit), so that they could use the bathroom.

On one occasion I was covering someone's business when an order was arbed into the absent broker's clerk. "Gary, buy me 200!" he barked. I looked over to Charlie D, hand-signaling 200, and took his offer. "You're filled– bought 200 at even!", I relayed back to the clerk.

It was then that the clerk frantically grabbed my arm and informed me he went backwards on the order, and that it should have been a sale and not a buy.

Before I even had a chance to react, the market violently sold off 45 tics. I was now long 200 bonds, 45 tics higher, and also owed the customer a sale for 200 bonds, 45 tics higher.

At the time nobody knew what had happened, but it turned out that there was a rumor that George Bush (Sr.) had been shot. I felt the color drain from my face, and my financial life flash before my eyes.

Not surprisingly, the market bounced back and completely retraced its move lower when the rumor proved false, allowing me to get off the 400 bonds I needed to sell.

Yet, I often wonder if there would have been a different resolution if the donkey had been in office instead of the elephant. A fitting lobogola indeed!

anonymous writes: 

One wonders if Icahn is talking the Trump book at this point given their mutual admiration and Trump's early desire for him as Tres Sec which Carl has repeatedly negated.

Mar

7



"When U.S. air force discovered the flaw of averages"

In the early 1950s, a young lieutenant realized the fatal flaw in the cockpit design of U.S. air force jets. Todd Rose explains in an excerpt from his book, The End of Average:

In the late 1940s, the United States air force had a serious problem: its pilots could not keep control of their planes. Although this was the dawn of jet-powered aviation and the planes were faster and more complicated to fly, the problems were so frequent and involved so many different aircraft that the air force had an alarming, life-or-death mystery on its hands. "It was a difficult time to be flying," one retired airman told me. "You never knew if you were going to end up in the dirt." At its worst point, 17 pilots crashed in a single day.

The two government designations for these noncombat mishaps were incidents and accidents, and they ranged from unintended dives and bungled landings to aircraft-obliterating fatalities. At first, the military brass pinned the blame on the men in the cockpits, citing "pilot error" as the most common reason in crash reports. This judgment certainly seemed reasonable, since the planes themselves seldom malfunctioned. Engineers confirmed this time and again, testing the mechanics and electronics of the planes and finding no defects. Pilots, too, were baffled. The only thing they knew for sure was that their piloting skills were not the cause of the problem. If it wasn't human or mechanical error, what was it?


After multiple inquiries ended with no answers, officials turned their attention to the design of the cockpit itself. Back in 1926, when the army was designing its first-ever cockpit, engineers had measured the physical dimensions of hundreds of male pilots (the possibility of female pilots was never a serious consideration), and used this data to standardize the dimensions of the cockpit. For the next three decades, the size and shape of the seat, the distance to the pedals and stick, the height of the windshield, even the shape of the flight helmets were all built to conform to the average dimensions of a 1926 pilot.


Now military engineers began to wonder if the pilots had gotten bigger since 1926. To obtain an updated assessment of pilot dimensions, the air force authorized the largest study of pilots that had ever been undertaken. In 1950, researchers at Wright Air Force Base in Ohio measured more than 4,000 pilots on 140 dimensions of size, including thumb length, crotch height, and the distance from a pilot's eye to his ear, and then calculated the average for each of these dimensions. Everyone believed this improved calculation of the average pilot would lead to a better-fitting cockpit and reduce the number of crashes — or almost everyone. One newly hired 23-year-old scientist had doubts.


Lt. Gilbert S. Daniels was not the kind of person you would normally associate with the testosterone-drenched culture of aerial combat. He was slender and wore glasses. He liked flowers and landscaping and in high school was president of the Botanical Garden Club. When he joined the Aero Medical Laboratory at Wright Air Force Base straight out of college, he had never even been in a plane before. But it didn't matter. As a junior researcher, his job was to measure pilots' limbs with a tape measure.


It was not the first time Daniels had measured the human body. The Aero Medical Laboratory hired Daniels because he had majored in physical anthropology, a field that specialized in the anatomy of humans, as an undergraduate at Harvard. During the first half of the 20th century, this field focused heavily on trying to classify the personalities of groups of people according to their average body shapes — a practice known as "typing." For example, many physical anthropologists believed a short and heavy body was indicative of a merry and fun-loving personality, while receding hairlines and fleshy lips reflected a "criminal type."


Daniels was not interested in typing, however. Instead, his undergraduate thesis consisted of a rather plodding comparison of the shape of 250 male Harvard students' hands. The students Daniels examined were from very similar ethnic and socio-cultural backgrounds (namely, white and wealthy), but, unexpectedly, their hands were not similar at all. Even more surprising, when Daniels averaged all his data, the average hand did not resemble any individual's measurements. There was no such thing as an average hand size. "When I left Harvard, it was clear to me that if you wanted to design something for an individual human being, the average was completely useless," Daniels told me.


So when the air force put him to work measuring pilots, Daniels harboured a private conviction about averages that rejected almost a century of military design philosophy. As he sat in the Aero Medical Laboratory measuring hands, legs, waists and foreheads, he kept asking himself the same question in his head: How many pilots really were average?


He decided to find out. Using the size data he had gathered from 4,063 pilots, Daniels calculated the average of the 10 physical dimensions believed to be most relevant for design, including height, chest circumference and sleeve length. These formed the dimensions of the "average pilot," which Daniels generously defined as someone whose measurements were within the middle 30 per cent of the range of values for each dimension. So, for example, even though the precise average height from the data was five foot nine, he defined the height of the "average pilot" as ranging from five-seven to five-11. Next, Daniels compared each individual pilot, one by one, to the average pilot.


Before he crunched his numbers, the consensus among his fellow air force researchers was that the vast majority of pilots would be within the average range on most dimensions. After all, these pilots had already been pre-selected because they appeared to be average sized. (If you were, say, six foot seven, you would never have been recruited in the first place.) The scientists also expected that a sizable number of pilots would be within the average range on all 10 dimensions. But even Daniels was stunned when he tabulated the actual number.


Zero.


Out of 4,063 pilots, not a single airman fit within the average range on all 10 dimensions. One pilot might have a longer-than-average arm length, but a shorter-than-average leg length. Another pilot might have a big chest but small hips. Even more astonishing, Daniels discovered that if you picked out just three of the ten dimensions of size — say, neck circumference, thigh circumference and wrist circumference — less than 3.5 per cent of pilots would be average sized on all three dimensions. Daniels's findings were clear and incontrovertible. There was no such thing as an average pilot. If you've designed a cockpit to fit the average pilot, you've actually designed it to fit no one.

Feb

1

Question: Does January serve as a predictor of volatility over the next 11 months?

For fun, I dug up an old measure of volatility I used to use, where I calculate the "minimal path" that a price would have to traverse through the normal Open-High-Low-Close data, i.e., either C-O-H-L-C or C-O-L-H-C. This can be over any given time period. (For many calculations, the High-Low range gives similar results. Note at bottom on calculation.)

Using SPY, calculate the minimal path for January, as a % of the December Close, along with the minimal path for February-December, as a % of the January Close. The results:

Date / Jan minpath / Feb-Dec minpath
Jan-15   5.1%   29.9%
Jan-14   6.0%   28.7%
Jan-13   7.4%   25.9%
Jan-12   10.1%   25.0%
Jan-11   6.6%   43.8%
Jan-10   10.6%   31.0%
Jan-09   23.7%   76.4%
Jan-08   22.7%   67.5%
Jan-07   4.9%   27.7%
Jan-06   6.8%   22.2%
Jan-05   6.7%   19.4%
Jan-04   9.2%   20.4%
Jan-03   19.6%   45.6%
Jan-02   15.8%   50.3%
Jan-01   13.8%   47.9%
Jan-00   13.1%   37.3%
Jan-99   9.8%   27.7%
Jan-98   17.1%   44.0%
Jan-97   14.1%   42.5%
Jan-96   9.6%   35.3%
Jan-95   4.0%   36.8%
Jan-94   4.7%   15.2%

Correlation between the two series:  +0.843
R square:  +0.711

Given the strong R square, I ran a regression with "Jan minpath" as the independent variable, and got the equation:

Feb-Dec minpath = 0.123062 + 2.197213779 * Jan minpath

The minimal path for January 2016 is 18.8%.  Plugging that into the equation:

Feb-Dec minpath = 0.123062 + 2.197213779 * 0.188208

= 53.7%

Multiply that by SPY December Close of 193.72

= 103.95
 

Or approximately 1040 points on the S&P, i.e., the equation predicts that the minimal path for the S&P for Feb-Dec 2016 will be 1040 points.

Even assuming this estimate is accurate, it doesn't tell you what
*shape* the market will have over the next 11 months. You can, however, model some scenarios.

For example, I saw a recent collection of big-bank predictions for where the S&P (cash) would end 2016, the highest of which was 2350. If you plug 2350 in as the Close and also assume it is the High, then the minimal path for the next 11 months looks like this:

Jan Close:  1940
2016 High:  2350
2016 Low:  1623
2016 Close:  2350

In that scenario you get a predicted Low of 1623.

Assume that the Close is 2350, and raise the High to 2450, and you
also raise the low by 100 points, but still have to get down to 1723:

Jan Close:  1940
2016 High:  2450
2016 Low:  1723
2016 Close:  2350

Assume a Close of 2100 and a High of 2200:

Jan Close:  1940
2016 High:  2200
2016 Low:  1598
2016 Close:  2100

Et cetera…

For me, this analysis works as a mental exercise to help me with a severe shortcoming: My idea of what is possible is always much narrower than the market's version. For example, if from here we drop to 1600, it will be hard for me to think, "We could easily pop back up to 2200 and then finish at 2100".

_____

The minimal path calculation looks like this:

abs(Open - prevClose)
+ (High - Low)
+ min(
[ (H-O)+(C-L) ],
[ (O-L)+(H-C) ]
)

Divide the result by the previous Close to get the %.

Feb

1

 We've been enjoying an excellent BBC series, Men of Rock, about the Scottish geologists who moved that science forward: "Geologist Iain Stewart retraces the steps of a band of maverick pioneers who made ground-breaking discoveries in the landscape of Scotland about how our planet works."

The series has terrific photography that highlights the beauty of Scotland. For me, the science is fascinating because while I have read the general outline, the series does a nice job of presenting the actual observations that these men were making, as well as the conclusions that were the result.

Three parts:

Part 1: Deep Time

Part 2: Moving Mountains

Part 3: The Big Freeze

We use Chromecast to put it to the telly, and the BBC science shows alone make the investment well worth it.

Feb

1

People are afraid. They watch too much TV. TV shows many bad things. They access net info aggregating and confirming their fears in confirmation bias. A friend of my wife appears unreasonably afraid of Dengue fever, but the chances of getting it are very very low. Seems there is a lot of fear in the market shaking out weak hands. People vote from unreasonable fears. People fear crime, but crime is lower. The fears are mostly unreasonable, and should create opportunities.

Alston Mabry writes: 

Check out this article.

Fear and Loathing in Las Vegas: Evidence from Blackjack Tables

 

Abstract:

Psychologists study regret primarily by measuring subjects' attitudes in laboratory experiments. This does not shed light on how expected regret affects economic actions in market settings. To address this, we use proprietary data from a blackjack table in Las Vegas to analyze how expected regret affects peoples''decisions during gambles. Even among a group of people who choose to participate in a risk-taking activity, we find strong evidence of an economically significant omission bias: players incur substantial losses by playing too conservatively. This behavior is prevalent even among large stakes gamblers, and becomes more severe following previous aggressive play, suggesting a rebound effect after aggressive play.

from the paper:

Panel A also illustrates the first-order result: approximately 80% of all deviations from the Basic Strategy involve passive mistakes; ones in which the player should have taken an extra card and did not, ones in which the player should have split or doubled down but did not. Only one mistake in five involves players behaving overly aggressively. In panel B we no longer restrict attention to single-hand deals, but also include deals in which the player (rightly or wrongly) split. In a handful of cases, the player splits more than twice, but in general the basic fact that passive errors are much more common than aggressive errors holds regardless of the number of hands played (or won).

[ … ]

This paper uses novel field data obtained from actual play at a Las Vegas Blackjack table to show that errors of omission are four times more likely than errors of commission. This profound omission bias occurs in spite of the fact that real economic agents are making real decisions with their own money, reaping the rewards of skill and good luck, suffering the costs of bad luck and mistakes. The bias we observe grows more common in the wake of past aggressive play, and is robust to controls for memory and skill. Perhaps few decisions of economic consequence are made at a Blackjack table. Nevertheless, the underlying mechanism here—choosing between acting or not acting in an economic environment with uncertain payoffs—is present in many economic problems, such as planning for retirement, searching for a job, or starting a business. Indeed, the findings from our field study are striking when one considers that Blackjack players are not a random sample of economic agents: they have self-selected into the game of Blackjack based on their willingness—indeed, desire—to bear risk. The conservatism that we identify at a Blackjack table is all the more severe when we consider this self-selection issue.

Jan

26

Many/most analyses of buy & hold use a model where a set amount is invested in the market at a specific time and then tracked over X years, which doesn't seem very realistic and certainly isn't the only viable model. So here is a different model:

The results below are for the following: Invest $1000 every month in the S&P 500 and collect the dividends at the end of each year [1]. For each year, calculate the total value of shares and dividends for the 5 years ending with that year, e.g., 1960-1964. Also calculate the 5-year total's % over/under the $60,000 investment during the 5 years. Negative years highlighted, and mean and sd shown at the end.

Version 2, corrected for overstating dividend, which adds 2009 as a
negative (slightly) year:

date   5yr Total   % over investment
Dec-15   $80,943   +34.9%
Dec-14   $91,399   +52.3%
Dec-13   $94,956   +58.3%
Dec-12   $77,990   +30.0%
Dec-11   $68,060   +13.4%
Dec-10   $67,534   +12.6%
—Dec-09   $59,566   -0.7%
—Dec-08   $47,067   -21.6%
Dec-07   $77,666   +29.4%
Dec-06   $80,894   +34.8%
Dec-05   $72,530   +20.9%
Dec-04   $68,208   +13.7%
Dec-03   $60,778   +1.3%
—Dec-02   $47,322   -21.1%
Dec-01   $63,044   +5.1%
Dec-00   $82,804   +38.0%
Dec-99   $112,527   +87.5%
Dec-98   $116,433   +94.1%
Dec-97   $108,250   +80.4%
Dec-96   $95,239   +58.7%
Dec-95   $88,800   +48.0%
Dec-94   $74,533   +24.2%
Dec-93   $81,002   +35.0%
Dec-92   $84,726   +41.2%
Dec-91   $87,246   +45.4%
Dec-90   $76,904   +28.2%
Dec-89   $91,919   +53.2%
Dec-88   $84,916   +41.5%
Dec-87   $84,079   +40.1%
Dec-86   $97,688   +62.8%
Dec-85   $96,159   +60.3%
Dec-84   $84,680   +41.1%
Dec-83   $90,854   +51.4%
Dec-82   $86,713   +44.5%
Dec-81   $79,628   +32.7%
Dec-80   $89,410   +49.0%
Dec-79   $76,722   +27.9%
Dec-78   $72,193   +20.3%
Dec-77   $69,175   +15.3%
Dec-76   $74,530   +24.2%
Dec-75   $63,669   +6.1%
—Dec-74   $50,482   -15.9%
Dec-73   $66,026   +10.0%
Dec-72   $79,389   +32.3%
Dec-71   $71,656   +19.4%
Dec-70   $67,302   +12.2%
Dec-69   $66,362   +10.6%
Dec-68   $76,575   +27.6%
Dec-67   $76,567   +27.6%
Dec-66   $70,349   +17.2%
Dec-65   $83,286   +38.8%
Dec-64   $83,760   +39.6%

mean:   $78,856   +31.4%
sd:   $14,535   24.2%

max:   $116,433   +94.1%
min:   $47,067   -21.6%

Jan

18

Where is SPY 10 tdays later, after >7% drop over 10 tdays, using only first occurrences to eliminate overlap:

count: 27 mean 10d move: +0.2%

Ref: For entire SPY period, 1993-present, including overlapping periods, mean 10-day move is +0.32%.

date / 10d fwd
24-Aug-15  +4.18%
3-Oct-11  +9.37%
4-Aug-11  -4.78%
30-Jun-10  +6.26%
24-May-10  -1.01%
7-May-10  -1.93%
20-Feb-09  -10.98%
16-Jan-09  -2.92%
12-Nov-08  +3.67%
3-Oct-08  -15.52%
17-Sep-08  -0.47%
17-Jan-08  +4.61%
27-Jan-03  -1.40%
23-Sep-02  -5.41%
3-Sep-02  -0.51%
12-Jul-02  -6.80%
2-Jul-02  -4.45%
10-Sep-01  -5.10%
12-Mar-01  -1.81%
21-Feb-01  +1.08%
12-Oct-00  +2.68%
14-Apr-00  +8.13%
7-Oct-98  +9.78%
31-Aug-98  +8.40%
4-Aug-98  +3.15%
27-Oct-97  +5.95%
16-Jul-96  +1.29%

It was easier in the 90s.

Jan

18

Listening to fin-tv, one hears over and over, "But low oil prices are good for the economy, so why is the market going lower?" And then a friend posed the same question. I said, well, there's a lag…

On the negative side are the oil producers and their ecosystem, who are no longer receiving that $2.5T in revenues. On the positive side are the consumers who are no longer paying that $2.5T.

On the positive side, the effects of, say, lower gasoline prices are generally subtle. Andy Average fills up the tank and notices that it's under $2 a gallon - cool. But he doesn't project forward the effects on his checking account for the next six months and then decide that now he can afford to buy that nice leather jacket. Instead, six months from now, a few hundred extra dollars have accumulated in the checking account, so he has to decide on the jacket, or paying down credit card debt.

A small business running a fleet of pickups doesn't see the lower prices as a game-changer or anything. Maybe budget for a few extra replacement tools.

But on the negative side, for the people no longer getting the $2.5T, it's a *crisis*. Debt restructuring, default or bankruptcy. Political instability - including the possibility of death - and civil unrest. Job losses, budget cuts, bonuses gone - major impact on individuals and families. Even Norway is having an oil-price crisis.

The negative consequences are immediate and vivid, while many of the positive consequences may go unnoticed for a while.

Oct

26

 Yes, I think the following is relevant to trading, counting, regime changes, confirmation bias, the lizard brain, and the struggle to understand whatever we can define as objective reality.

"Placebo Effect Grows in U.S., Thwarting Development of Painkillers":

Drug companies have a problem: they are finding it ever harder to get painkillers through clinical trials. But this isn't necessarily because the drugs are getting worse. An extensive analysis of trial data has found that responses to sham treatments have become stronger over time, making it harder to prove a drug's advantage over placebo.

The change in reponse to placebo treatments for pain, discovered by researchers in Canada, holds true only for US clinical trials. "We were absolutely floored when we found out," says Jeffrey Mogil, who directs the pain-genetics lab at McGill University in Montreal and led the analysis. Simply being in a US trial and receiving sham treatment now seems to relieve pain almost as effectively as many promising new drugs. Mogil thinks that as US trials get longer, larger and more expensive, they may be enhancing participants' expectations of their effectiveness.

Stronger placebo responses have already been reported for trials of antidepressants and antipsychotics, triggering debate over whether growing placebo effects are seen in pain trials too. To find out, Mogil and his colleagues examined 84 clinical trials of drugs for the treatment of chronic neuropathic pain (pain which affects the nervous system) published between 1990 and 2013.

anonymous writes: 

The placebo effect is evidence of susceptibility of the population to influence. Past research shows that the more people are stressed, the more they are susceptible to influence. The original research was done by Pavlov (the dog guy) and the results had a major impact on brainwashing techniques in the last century. Stress people enough and you can convince them of just about anything. Brave New World Revisited.

Who does this benefit?

Russ Sears writes:

This of course is why an investor should not listen to the news in a down market. Once under the stress of losses, people look for "influencer" and all the perma-bears, con-men and fear mongers are lined up to offer their snake oil pain relief through the news media. 

Sep

22

 Scott Sumner, of Bentley University talks with EconTalk host Russ Roberts about interest rates. Sumner suggests that professional economists sometimes confuse cause and effect with respect to prices and quantities. Low interest rates need not encourage investment for example, if interest rates are low because of a decrease in demand. Sumner also talks about possible explanations for the historically low real rates of interest in today's economy along with other aspects of monetary policy, interest rates, and investment.

Jim Sogi writes: 

If real interest rates are in fact negative, then the FED rate is still high and offers the best return. Rates at banks are in fact negative when you subtract bank fees the return is negative. Its not real clear what negative interest rates are to me. I suspect it has something to do with international currencies and the strengthening of the US dollar, and the FEDs warning on the global situation. Maybe the US doesn't want a flood of foreign (Chinese) money.

Martin Armstrong writes: 

The Fed is really caught between a rock and a very dark place. Yes, they have the IMF and the world pleading with them not to raise rates for it will hurt other debtors who borrowed excessively using dollars to save money. The Fed is also caught between domestic policy objectives that dictate that they MUST raise rates or they will bankrupt countless pension funds internationally and emerging markets will go into default because commodities have collapsed and they have no way of paying off this debt that has risen to about 50% of the U.S. national debt. 

Gordon Haave writes: 

Perhaps I am not understanding something. Is this saying:

A. We can't raise rates or emerging market economies will be hurt due to their dollar debt, and; B. We must raise rates because if not emerging markets will go into default?

This makes no sense to me but perhaps I am misunderstanding what he is saying.

Stefan Jovanovich writes:

The presumption of central banking in the late 19th century was this: through adjusting the discount rate on its own good as gold credit, the Bank of England could literally regulate how much net foreign exchange (specie) flowed into or out of Britain. The presumption was believable, provided that no one questioned that the Bank of England would redeem all its own paper in gold. After 1914 there were nothing but questions.

Central banks now have two presumptions: by talking about adjusting the discount rate and by actually writing checks to their national treasury they can control not only foreign exchange flows but also how much credit its citizens and domestic companies will use in the immediate future.

Montagu Norman went to an early grave precisely because he knew there was now way for Britain to have its cake and eat it, too. If the Bank of England's own paper was going to continue to be priced based on private demand and not ability to pay out specie, on demand, then either the Empire would have to restrict trade to its own colonies or counter-parties would be the ones who determined the discounts at which foreign exchange could balance (translation: the Americans would have to let their gold go overseas by running a persistent deficit).

3 Trillion in U.S. IOUs is supposed to give the Chinese "power" but that pile of another central bank's money only has use if it is spent abroad. Like the Americans' gold in the 1920s, it is worth nothing if it is not allowed to be drained away. There is no reason to think that anyone with a higher education will allow that to happen in China or, if that miracle occurs, that the politicians in this country will not respond with the same imperial preference mercantilism that guaranteed Britain would win the war and lose its empire.

Larry Williams writes: 

So you really think we at Dailyspec are smarter and have more information on our fingers than the people at the Fed? I don't. In retrospect over many many years the Fed has done a remarkable job. I know, you people dis them at every turn, claim you know the answer, we know the answer, but the truth is year in and year out compared to what could've happened they have not done a terrible job. Probably I should explain something called upward drift for those who are not aware of it. It seems to be pretty important.

Aug

7

 Entries are now numbered below. We ask for your votes in the comments of this post.

Daily Speculations offer at 2,500 prize for the best lyrics for a song that captures the spirit of the endless and ephemeral movements of markets to Greek news over the past 6 months.

Here are past examples. Entries to be submitted by July 31.

Winner to be determined by popular vote.

I kept hearing this song overnight which inspired it: "It's Greece".

Thank you. Also, we'll have Kino and Jon Burr sing and play the song at the spec party September 5th.

1.

(sung to the tune of "The Major-General's Song")

I am the very model of a modern Brussels bureaucrat,
I've information technical, political and Eurostat.
When lunching with reporters I can sound just like a democrat
And dismiss any notions of a Continental coup d'etat.
I keep my Strasbourg mistress in a cozy little Neudorf flat,
(My wife could find it in the bills - I hope she doesn't think of that!)
I'm very well acquainted with the back seat of a limousine,
I never fail to have my way with any offered haute cuisine.

I'm veteran at promulgating regulations Byzantine,
Discretely lift my nose up to the mass of bourgeois philistine,
In short, in matters technical, political and Eurostat,
I am the very model of a modern Brussels bureaucrat.

Precisely I can calculate the solid waste municipal
Per capita for Capua, Montpellier and Dinkelsbühl.
So comprehensive was my last report on herb medicinals
That several of my colleagues thought my brilliance unforgiveable.
I'm called upon to explicate the latest fruit juice label scheme,
Then lecture on the trade gap between Luxembourg and Liechtenstein.
And then I'll do a scatterplot of Swedish satisfa-action,
Against the recent increase in French farmers' tractors' tra-action.

They wonder why I spend all day in study of parabolas,
Then I predict the future size of bathing suits in Malaga!
In short, in matters technical, political and Eurostat,
I am the very model of a modern Brussels bureaucrat.

When I can add my sister's husband's cousin and his son-in-law
To every second item on my monthly cash expense report,
When I can down my seventh glass of '08 Chateau Haut Brion
And still expound on Maastricht until half the room is comatose,
When I can differentiate a "bailout" from "austerity",
I'll also know the spread between employment and hilarity,
And when I know what's truly meant by "income inequality",
I'll know my income's getting close to where it really oughta be.

With all this Euro-knowledge in my brain where it's supposed to be,
I hope I don't get catatonic Euro-neuro-entropy,
But still in matters technical, political and Eurostat,
I am the very model of a modern Brussels Eurocrat.

from Alston Mabry

2.

I Dreamed a Dream (Fantine's song)

From Les Miserables (almost)
There was a time the EU was kind
When their voices were soft
And their words inviting
There was a time the Germans were blind
And Greece was a song
And the song was exciting
There was a time
Then it all went wrong
I dreamed a dream in time gone by
When the Euro was high
And life worth living
That Greece's dream would never die
I dreamed that the Germans would be forgiving
Then I was young and unafraid
And dreams were made and used and wasted
No margin call was to be paid
No song unsung
No wine untasted
But then the Greeks rebelled at night
With their voices loud as thunder
As the EU tore their hopes apart
As the markets turned my dreams to shame
They talked for days, they talked at night
They filled my days with endless wonder
They took the lying Greeks in stride
But all was gone when summer came
But I still dreamed they'd talk again
And we could trade for months together
But there are dreams that cannot be
And there are storms we cannot weather!
I had a dream my life would be
So different from this hell I'm living
So different now, from what it seemed
And Greece killed the dream I dreamed

from Gary Rogan

3.

Trade This Way
by Aerosmith (almost)

High risk lover never ready to cover
'Till I talked to my broker he say
He said, "You ain't seen noting
'Till you're out of margin
Then you're sure to be a-changin' your ways"
I met a cheerleader, was a real news reader
All the times I can reminisce
Ah the best shorts lovin'
With her sister and her cousin
Started with a little miss, like this
Markets swingin' with the news out of Greece
With the futures flyin' up in the air
Singin' hey diddle-diddle with the kitty in the middle
You be swingin' like you just didn't care
So I took a big chance that the Greeks will dance
With a frau who was ready to pay
Wasn't me that they were foolin'?
'Cause I knew what they were doin'
When they taught me how to trade this way
They told me to
"Trade this way, Trade this wayTrade this way, Trade this way
Trade this way, Trade this way
Trade this way, Trade this way"
Ah, just give me a kiss
Late night hustles they were meeting in Brussels
I remember I was betting on Greece
There was three young brokers at the airport locker
When I noticed they was lookin' at me
I was a market loser
Never once made a profit
Till the boys told me something I missed
That Greece had neighbour
Who also needed a favour
And the Germans will give'em a kiss, like this
Markets swingin' with the news out of Greece
With the futures flyin' up in the air
Singin' hey diddle-diddle with the kitty in the middle
You be swingin' like you just didn't care
So I took a big chance that the Greeks will dance
With a frau who was ready to pay
Wasn't me that they were foolin'?
'Cause I knew what they were doin'
When they taught me how to trade this way
They told me to
"Trade this way, Trade this wayTrade this way, Trade this way
Trade this way, Trade this way
Trade this way, Trade this way"
Ah, just give me a kiss

from Gary Rogan

4.

"Ain't Misbehavin'"

(In the style of Louis Armstrong)

No one to talk with, all by myself
No one to shop with, cause I'm happier to sell
Ain't misbehavin', Savin' my cash for you

I know for certain, the top is in
I'm through flirtin' with down side predictin’
Ain't misbehavin', Savin' my cash for you
Like Old Hussman in a corner
Not “perma-bear”, but I don't care
Low valuations, worth waitin' for, believe me

 Don't be TOO long here, don't stop to buy
Know I’m alone dear, me and my bearish pride
Ain't misbehavin', Savin' my cash for you.

Scoobededa doot diddlee doot doot

from Franklynn Phan

5.

(to the tune of Supercalifragilisticexpialidocious): 

"uberallymerkelisticgrexieurodoughshush"

It's uberallymerkelisticgrexieurodoughshush
Even though the thought of it is nothing like ferocious
If you trade it long enough, drool sideways bound neurosis
Uberallymerkelisticgrexieurodoughshush
 
Numb fiddle, fiddle fiddle, glum fiddle lie
Numb fiddle, fiddle fiddle, glum fiddle lie
Numb fiddle, fiddle fiddle, glum fiddle lie
Numb fiddle, fiddle fiddle, glum fiddle lie
 
Abuzz I was to trade the greek
Then just a simple fad
Thy market sent me up a creek
and sold me out twas sad
 
But when come May I burned a third
That graved forsaken close
The glibbest bird I never jeered
And hiss is how it blows, go
 
It's uberallymerkelisticgrexieurodoughshush
Even though the thought of it is nothing like ferocious
If you trade it long enough, drool sideways bound neurosis
Uberallymerkelisticgrexieurodoughshush
 
Numb fiddle, fiddle fiddle, glum fiddle lie
Numb fiddle, fiddle fiddle, glum fiddle lie
Numb fiddle, fiddle fiddle, glum fiddle lie
Numb fiddle, fiddle fiddle, glum fiddle lie
 
Greek raveled all abound and whirled
And derriere he spent
Greek 'buse his herd and all could bray
Share does a rarer cent
 
Then hoops and ouzoquaffage
alas the chime to pay writhe fee
Eye sway the speshill slurred
And then play mask-wee 'bout to pee
 
So uberallymerkelisticgrexieurodoughshush
Even though the thought of it is nothing like ferocious
If you trade it long enough, drool sideways bound neurosis
Uberallymerkelisticgrexieurodoughshush
 
Numb fiddle, fiddle fiddle, glum fiddle lie
Numb fiddle, fiddle fiddle, glum fiddle lie
 
So you can play it awkwards, which is doughshusheurogrexlisticmerkeallyrebu
But that's growing a wit too far, won't you wink?
 
So then the rat has shot your bung
There's no heed for delay
Dust coming up its blurred
And then move not a dot to play
 
But bettor ruse it warily
Or it could derange for strife
For example, jest, one night I fed it to a bar-girl
And now the bar-girl's my wife, oh, and a homely thing she's too
 
But
 
She's, uberallymerkelisticgrexieurodoughshush
Uberallymerkelisticgrexieurodoughshush
Uberallymerkelisticgrexieurodoughshush
Uberallymerkelisticgrexieurodoughshush

from Ken Drees

6.

Sung to the tune of "Rolling in the Deep" by Adele:

There's a crisis starting in my hinterland
Reaching a fever pitch, it's bringing me out the dark
Finally I can see you crystal clear
[Clean version:] Go 'head and sell me out and I'll lay your ship bare
[Explicit version:] Go 'head and sell me out and I'll lay your shit bare
See how I leave with every piece of you
Don't underestimate the things that I will do

There's a crisis starting in my hinterland
Reaching a fever pitch
And it's bringing me out the dark

The scars of your own failed loan remind me of us
They keep me thinking that we almost had it all
The scars of your own failed loan, they leave me breathless
I can't help feeling
We could have had it all
(You're gonna wish you never had lent me)
Rolling in the deep
(Ratings are gonna fall, rolling in the deep)
You had my mint inside of your hand
(You're gonna wish you never had lent me)
And you wagered it, to the limit
(Ratings are gonna fall, rolling in the deep)

Baby, I have no story to be told
But I've heard one on you
And I'm gonna make your cash burn
Think of me in the depths of your despair
Make a bank down there
As mine sure won't be repaired

(You're gonna wish you never had lent me)
The scars of your own failed loan remind me of us
(Stocks are gonna fall, rolling in the deep)
They keep me thinking that we almost had it all
(You're gonna wish you never had lent me)
The scars of your own failed loan, they leave me breathless
(Stocks are gonna fall, rolling in the deep)
I can't help feeling
We could have had it all
(You're gonna wish you never had lent me)
Rolling in the deep
(Bonds are gonna fall, rolling in the deep)
You had my mint inside of your hand
(You're gonna wish you never had lent me)
And you wagered it, to the limit
(Bonds are gonna fall, rolling in the deep)
We could have had it all
Rolling in the deep
You had my mint inside of your hand
But you wagered it, with no limiting

Throw your Euro through every open door (woah)
Count your Shillings to find what you look for (woah)
Turn my borrow into treasured gold (woah)
You've paid me back in kind and reaped just what you sowed (woah)
(You're gonna wish you never had lent me)
We could have had it all
(Metals are gonna fall, rolling in the deep)
We could have had it all
(You're gonna wish you never had lent me)
It all, it all, it all
(Metals are gonna fall, rolling in the deep)

We could have had it all
(You're gonna wish you never had lent me)
Rolling in the deep
(Currencies are gonna fall, rolling in the deep)
You had my mint inside of your hand
(You're gonna wish you never had lent me)
And you wagered it to the limit
(Currencies are gonna fall, rolling in the deep)

We could have had it all
(You're gonna wish you never had lent me)
Rolling in the deep
(Assets are gonna fall, rolling in the deep)
You had my mint inside of your hand
(You're gonna wish you never had lent me)

But you wagered it
You wagered it
You wagered it
You wagered it to the limit.

from anonymous

7.

(From Paint Your Wagon, "They Call the Wind Mariah"

Through unrest, we gave a name

To Pain and Hun and Liar,

The Pain is Debt, the Liar's Greece,

and we call the Hun Pariah.

Pariah throws the loans around

Then sends Hellene a-crying

Pariah makes accountin' sounds

Like mokes down here weren't trying.

Pariah, Pariah,

We call the Hun Pariah

Before I knew Pariah's name

And took to wealth enshrinin'

I took on debt and debt had me

And the Hun commenced his whinin'.

But then one day I left the whirl

And let it not define me

And now I’m lost, I’m oh so lost

No Gallic bawd can find me.

Pariah, Pariah,

They call the Hun Pariah

I hear they got a name for Pain

And Hun and Liar only

But when you’re broke and all alone

There ain’t no "yes" to "loan, please?"

Pariah, Pariah,

We call the Hun Pariah

Pariah, Pariah, - send a loan to me.

Now I’m a lost and lonely state

Without a fool to front me.

Pariah, float a loan to me

I need Bear-Stearns behind me

Pariah, Pariah

I’m loanless can’t you see

Pariah, O, Pariah

Please float a loan to me

Pariah, O, Pariah,

Please send a jubilee.

from anonymous

8.

To the tune "Baby Got Back" a.k.a "I like big butts"

The world: Oh my gosh, look at that plan.

That is the biggest plan I have ever seen. Like, who thinks that works?

Greece: I like the Euro and I cannot lie

All you other countries can't deny.

When you got a slim paycheck and a round figure in your face, you get sprung

Gonna show up all tough

Because you noticed everyone was gonna get stuffed

Deep pocket they be wearing

I'm hooked and I can't stop staring

Oh, baby I wanna get with ya

And take your selfie picture

Other countries tried to warn me

But that money you got

Make Me so over the top horney

Got my jacket of leather skin

You say you wanna have your money

Well you can't because we ain't that average groupy

I'm tired of all the liens

Landlords saying they want their things

Take the average Greek man and ask him that

He ain't gonna give that money back

Greece: So Fellas Other Euro countries:(yeah)

Greece: Fellas

Other euro countries:(yeah)

Greece:Has your country got the Euro?

Other Euro countries: (hell yeah!!)

Greece: Well spend it, spend it, spend it, spend it, spend that can do no wrong Euro.

Euro got my back.

from Hope Sears

9.

To the Tune of The Doobie Brothers’ Toulouse Street:

I’m running thru price levels like they couldn’t believe
Faces, they smile when I fall or flee
Poking my price just below the low, your stop was too tight again
I just might pass this way again
I just might pass this way again
I just might pass this way
I just might pass this way again

Overnight debates are hot, the markets whip and fly
2050 my oscillating center point, the prices trade on by
Lets start trading at the low then we’ll wrap up at the high again
I just might pass this way again
I just might pass this way again
I just might pass this way
I just might pass this way again

Locked in a room at the EuroSummit
Outside, Money’s flowing fast
Locked in a room over-at the EuroSummit
Outside, Money’s flowing fast

Overnight debates are hot, the markets whip and fly
2050 my oscillating center point, the prices trade on by
Locked in a room over-at the EuroSummit
Outside, Money’s flowing fast

(With the right imagination, lyrics needn’t be changed at all to hold relevance)

from Sam

10.

“Turn! Turn! Turn! (To Everything There Is a
Season)” written by Pete Seeger (or King Solomon if you will) and best
performed by the Byrds. As with Greece, as with so much in the world
and markets in general, there really is nothing new under the sun.

Ecclesiastes 1:15
What is crooked cannot be straightened;
what is lacking cannot be counted.

from Nick Pribus

11.

“Help!” By The Beatles

Help, I need somebody
Help, not just anybody
Help, you know I need someone, help

When I was younger (So much younger than) so much younger than today
(I never needed) I never needed anybody’s help in any way
(Now) But now these days are gone (These days are gone), I’m not so self assured
(I know I’ve found) Now I find I’ve changed my mind and opened up the doors

Help me if you can, I’m feeling down
And I do appreciate you being ’round
Help me get my feet back on the ground
Won’t you please, please help me

(Now) And now my life has changed in oh so many ways
(My independence) My independence seems to vanish in the haze
(But) But every now (Every now and then) and then I feel so insecure
(I know that I) I know that I just need you like I’ve never done before

Help me if you can, I’m feeling down
And I do appreciate you being ’round
Help me get my feet back on the ground
Won’t you please, please help me

When I was younger so much younger than today
I never needed anybody’s help in any way
(But) But now these days are gone (These days are gone), I’m not so self assured
(I know I’ve found) Now I find I’ve changed my mind and opened up the doors

Help me if you can, I’m feeling down
And I do appreciate you being round
Help me, get my feet back on the ground
Won’t you please, please help me, help me, help me, ooh

from Eric Wing

12.

Go Your Own Way - Fleetwood Mac

Loving you
Isn’t the right thing to do
How can I
ever go back to GRD?

If I could
Maybe I’d give you my vault
How can I
When there is nothing left to give

I can go my own way
go my own way
I can call it
grexit or graccident
I can go my own way
go my own way

Tell me why
Draghi won’t give me a dime
packing up
shacking up is all I wanna do

If I could
Schauble I’d give you my world
Line up
Everything’s waiting for you

I can go my own way
go my own way
I can call it
grexit or graccident
I can go my own way
go my own way

from George Papageorgakopoulos

13.

Go Your Own Way - Fleetwood Mac

Grease[Greece] is the word
By Barry Gibb (almost)

They solve their problems and they see the light
They gotta a trading thing, we gotta trade it right
There ain't no danger we can go too far
We know the score, the kind of traders we are
Greece is the word
We think their problems are a passing pain
Why don't they understand it's just a crying shame?
Their lips are lying, only real is real
We start believing that they we know what they feel
Greece is the word
Greece is the word, is the word that you heard
It's got groove, it's got meaning
Greece is the time, is the place, is the motion
Greece is the way we are feeling
We take the pressure and we throw away
Conventionality belongs to yesterdayThere is a chance that we can take it too far
But we believe it now the kind of traders we are
Greece is the word
Greece is the word, is the word that you heard
It's got groove, it's got meaning
Greece is the time, is the place, is the motion
Now, Greece is the way we are feeling
This is the life of collusion
Wrapped up in trouble, laced with confusion
What are we doing here?
We take pressure and we throw away
Conventionality belongs to yesterday
We're making money on the Bund, yes we are,
And Euro futures won't get too far

Greece is the word
Greece is the word, is the word that you heard
It's got groove, it's got meaning
Greece is the time, is the place, is the motion
Now, Greece is the way we are feelingGreece is the word, is the word that you
heard
It's got groove, it's got meaning
Greece is the time, is the place, is the motion
Now, Greece is the way we are feelingGreece is the word
Is the word
Is the word
Is the word

 
from Gary Rogan

Aug

3

I was having a discussion of survivorship bias the other day which seems worth sharing in case others could expand:

An example of survivorship bias is when you look at an index composition today,
at this point in time. The stocks you see today are "survivors" and if
you then go and do some analysis on those stocks as, say, representing
the small-cap or mid-cap universe, you're ignoring the stocks that
crashed, i.e., you are showing a bias towards survivors.

An example would be: You want to study smaller-cap stocks over time,
so you get a list of the current components of the Russell 2000 and then
look up their individual price histories for the last ten years to
study volatility or return characteristics - you would be getting a
heavy dose of survivorship bias. To avoid the bias, you would have to
get a list of the Russell 2000 components from 2005 and work forward
from there.

I think you can generalize survivorship bias, for a study over some
particular time period, as using a selector or filter from the end of
the time period. Indices are selectors/filters over time, so you have to
use the version that existed at the beginning of the time period. In
that case the study can become a test of the selector/filter as a
predictor.

Steve Ellison explains his solution:

I have maintained a database of what the 2000 or so stocks included in Value Line were since 2005, including the dates each stock was added or dropped. My effort has flagged a bit recently because I seldom trade individual stocks.

Stefan Martinek writes:

I think indexes are the best to avoid this bias if you trade indexes directly. If you research individual stocks you have to deal with this bias and use some good DBs not indexes.

Jul

29

 I am searching for a musical song that illustrates the constructal law.

The constructal law teaches us that anything that flows, which is just about everything, is 'alive' because it evolves as it flows. Life is the persistent movement, struggle, contortion, and mechanism by which animate and inanimate flow systems morph to generate better access for what flows. When the flow stops the configurations becomes a flow fossil (dry riverbeds, snowflakes, animal skeletons, abandoned technology, and the Pyramids of Egypt).

From Design in Nature

Victor writes to Rorianne Schrade: 

One wonders if there are any musical pieces that illustrate this idea.

Rorianne Schrade responds:

 Dear Victor,

I hope this finds you and all of your beautiful family doing well. My apologies for not getting to this sooner–you are always delving into such interesting topics. While I'm probably unqualified to comment in any depth on constructal law, I think music relates to ideas of flow in more ways than one could ever count. The first thing that pops to mind is the need to keep a single tone itself "alive" — something that in early music gave rise to all sorts of trills and embellishments for the prolongation of tones, the continuation of the melodic momentum, and the development of musical life in a composition or improvisation. Whole sets of variations could be used to illustrate this as well, the starting with a simple theme, the gradual building and elaborating all as a way of keeping the theme alive as well as creating new music. The "flow" may be interrupted with what seems like musical "death" (a "flow fossil" or "dry riverbed" as you mention– these are beautiful too, in their own ways) in the middle of a piece of music– but the flow somehow returns or survives until the end of the piece (and longer in one's mind) if I've got the right idea of what is meant here. Another illustration might be jazz improvisation on standard tunes … keeping it flowing in a single performance as well as keeping it "flowing" through the decades through variation and new interpretations… I must be oversimplifying, but thank you always for the food for though! love to you all, r.

Alston Mabry writes: 

Here are some musical pieces that I find illustrate constructal flow/order/disorder.

Starting off with the more challenging stuff:

Iannis Xenakis: Metastasis

Edgard Varese: Ionisation

Richard Carrick: Dark Flow - Double Quartet

And the more accessible:

Claude Debussy: Dialogue du vent et de la mer

Stravinsky: Le sacre du printemps

John Luther Adams: Dark Waves

Oregon: Yellow Bell

Cliff Martinez: Is That What Everybody Wants

Scott Brooks:

Here are two metaphorical songs about the flow of life's progressions

"Wasted on the Way
" by Crosby, Stills and Nash

"Nether Lands" by Dan Fogelberg

Both of these songs are two of my all time favorite.

I am especially fond of two sets of lyrics in Nether Lands where Fogelberg sings…

Anthem's to glory and anthems to love

And hymns filled with earthly delight

Like the songs that the darkness composes to worship the light

and

Once in a vision, I came on some woods

And stood at a fork in the road

My choices were clear, yet I froze with the fear, of not knowing which way to go

One road was simple acceptance of life

The other road offered sweet peace

When I made my decision my vision became my release

As I think about those lyrics, my mind wanders to the progression of life and how we end up where we are today. I think of many of the decisions, good, bad (and non-decisions that I wished I had had the courage to make) that I've made. I don't focus on how I would be happier or my life would have been different had I made other choices in my progression. For if I let me self start the "second guessing game", it will consume like a cancer.

Instead, I focus on what I've learned from all those decisions and how I can apply them to my progression going forward and, hopefully, improve my life, the life of my family, my clients and my friends.

I think that's what progression is all about.

Gary Rogan comments: 

Couldn't think of anything totally appropriate but this may come close (and it's The Surfer's favorite band)

"Natural Science"

By Rush

When the ebbing tide retreats
Along the rocky shoreline
It leaves a trail of tidal pools
In a short-lived galaxy
Each microcosmic planet
A complete society

A simple kind mirror
To reflect upon our own
All the busy little creatures
Chasing out their destinies
Living in their pools
They soon forget about the sea…

Wheels within wheels in a spiral array
A pattern so grand and complex
Time after time we lose sight of the way
Our causes can't see their effects

A quantum leap forward
In time and in space
The universe learned to expand

The mess and the magic
Triumphant and tragic
A mechanized world out of hand

Computerized clinic
For superior cynics
Who dance to a synthetic band

In their own image
Their world is fashioned
No wonder they don't understand

Science, like nature
Must also be tamed
With a view towards its preservation
Given the same
State of integrity
It will surely serve us well

Art as expression
Not as market campaigns
Will still capture our imaginations
Given the same
State of integrity
It will surely help us along

The most endangered species
The honest man
Will still survive annihilation
Forming a world
State of integrity
Sensitive, open and strong

Wave after wave will flow with the tide
And bury the world as it does
Tide after tide will flow and recede
Leaving life to go on as it was…

Jul

22

 This page on youtube has narrators talking about the best book they ever narrated. It has some very interesting vids!

anonymous writes: 

Two high-quality long time favorite podcasts of mine are:

1. New Yorker fiction podcasts: one famous author reads another's work aloud and discusses it, eg George Saunders, Roddy Doyle, Harold Brodkey.

2. In Our Time podcast: interviews with 3 professors at once on a subject of intellectual history, eg the Cavendishes, Francis Bacon, The Enclosures. Rarely or never found either programme to be a waste of time.

Jul

17

Are the entry and exit points determined by algorithm or by eyeball? If by algorithm, then one imagines changing volatility regimes, but also knows that a sharp trader would have that factored in.

If by eyeball, then of course that leads to interesting speculation about psychological regime changes.

Zooming out, there is the issue of ex post chart scanning, and seeing the "ideal" entry and exit points, and how the Mistress can take even a good trade and make you feel like you screwed it up.

Jul

6

Econ 101: price discovery has a cost.

Buy Low, Sell Prime

Sam Cohen's business works like this: He walks into a big retail store and buys a bunch of stuff. Then he sells it on Amazon for more.

This is a multimillion-dollar business for Sam — and for lots of other people who do the same thing.

How is this even a job, much less an industry?

anonymous writes: 

Pricegrabber and other broad product aggregators make price comparisons a near effortless task.

Jun

25

 Will someone explain to me why news of Greece no deal is bullish for bonds, i.e what it has to do with the long term rate of inflation? And why news of a deal is bearish for bonds? Also while at it, why no deal is bearish for stocks and deal is bullish?

John Floyd writes: 

A market pundit might say (not a personal explanation): "if there is no deal in Greece that is bad for Europe and the ECB will have to do more QE and buy European bonds to get confidence up, growth up, and inflation up, that would be bearish for the Euro, the uncertainty around no deal is bad for stocks in the short term." On the next contradictory headline you can expect the mirror image response.

Alston Mabry writes: 

From the cheap seats: no deal for Greece, or even Grexit, means a mini-catastrophe, where lots of players will be looking to get out of certain positions and move to safety until the smoke clears and we find out if a Greek exit actually raises the possibility of Portugal or Spain leaving, too. So in this case, Treasuries = safety.

John Floyd writes: 

As I sit and watch the headlines on Greece I can't help but recall similar headlines and market reactions prior to the Russian default on August 17, 1998. Hopefully I have learned at least one thing since then. While not financially ruinous, and actually profitable in many ways, it was amongst other things a tiresome and loathsome experience getting up at 1 a.m. NY time to watch the latest headlines and developments.

The first lesson would be to attempt to recognize an untenable position from a macro economic and geopolitical standpoint in the medium to long term. A corollary is to not position investments with the thesis that an untenable position will be resolved in the short term and provide profits.

The wolf of the markets will at some point overpower such a short term view. The PIGS in the periphery perhaps might have their houses and building materials tested further. The wolf will have to be careful though as the cauldron waits in a house and may try and stymy speculative avenues.

Jeff Rollert writes: 

In a "normal" world, a large debtor defaulting forces participants via systematic transmission to add Treasuries/AAA bonds to portfolios to return to the prior risk/reward or VAR state for a window of time until asset recovery levels become apparent.

Jun

22

 I like the part of The Boys in the Boat where the freshman coach pretends that Cal can beat them handily. The necks of Cal swell even further making it even for Washington to cut them off. I followed the same principle in squash, and never admitted that I had a chance to win. I also never admit to a profit in the market for the same reason. It will be interesting to hear what Mr. Rafter has to say about The Boys in the Boat because he has won many national rowing championships. In particular the wisdom and ability of George Peacock, the world's best boat builder, whose materials in wood have now gone with the wind.

David Lillienfeld writes: 

The beauty and terror of baseball is that there is no clock; and the second you stop thinking about the next pitch, you are on the way to losing no matter how big a lead you have.  What made last year's 7th game so good is that neither team ever once lost that focus; the game score was as close as one can be, but neither team ever for a moment got "tight" thinking about the end result before play was over.

Alston Mabry writes: 

Yes, in games like basketball or football or soccer, you can work the clock. But baseball and tennis have that exciting element of the game not being over until it's over.

anonymous writes: 

I have had the pleasure of seeing some true greats in action over extended periods of time in the markets. The only time these guys really lost any money was when they ignored time.

A fixed clock on any speculation in the organized macro markets is vital in my opinion and experience.

Unlike most things we discuss, the addition of fixed clocks (or predetermined holding periods for individual speculations) is actually countable and its efficacy is testable.

Jun

16

Looking at JNJ daily Closes from January, 2014 though 12 June, 2015
(arbitrary dates): JNJ went from a 46 handle up to a 109 handle,
crossing 63 whole number prices. If we look at Close-to-Close moves
where the price crossed one or more whole numbers, we find that out of
2880 tdays, there were 1337 whole number crosses (if a Close-to-Close
crosses two whole numbers, then it counts as two crosses, etc.).

One simple analysis:

63 whole numbers crossed with 1337 total crosses = 21.2 crosses per
whole number.

Pull out the tens "rounds": 50, 60, 70, 80, 90, 100 - 6 of them with a
total of 110 crosses, or 18.3 crosses per round.

The rounds:

100 - 36 crosses
90 - 11
80 - 1
70 - 9
60 - 49
50 - 4

Apr

2

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

anonymous writes: 

They must think their problems are organizational.

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

Mar

6

The value of commods varies so much with the attention the sector gets, and especially when there is so much money sloshing around, looking for an "investment", or players stocking warehouses full of copper as collateral against shadow-banking-system commitments, etc. The situation introduces so many orthogonal drivers of price beyond mere end-user demand.

Mar

5

Rocky Humbert says: "Commodities belong in your portfolio when they are cheap and/or rising in price"

I agree. The question is are they cheap now? A very naive approach looking at Oil as a proxy for the group and compare it on a long term basis with stocks or bonds, you can say commodities are as cheap (relatively) as they have been in the last 20 years (bottom 10% of the range).

What other ways of assessing the 'value' of commodities are out there?

Alston Mabry adds:

The value of commods varies so much with the attention the sector gets, and especially when there is so much money sloshing around, looking for an "investment", or players stocking warehouses full of copper as collateral against shadow-banking-system commitments, etc. The situation introduces so many orthogonal drivers of price beyond mere end-user demand.

Alex Castaldo adds:

Here is a quote: "For commodities, we define value as the log of the spot price 5 years ago (actually, the average spot price from 4.5 to 5.5 years ago), divided by the most recent spot price, which is essentially the negative of the spot return over the last 5 years." (Asness, Moskowitz & Pedersen). So that is one possible definition, but I am not sure it is a satisfactory one since it relies only on price. To me value involves the comparison of price to something else.

Jan

22

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

anonymous writes: 

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

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

Switzerland broke the cartel.

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

anonymous writes: 

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

Look at OPEC post 1974.

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

anonymous replies: 

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

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

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

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

Alston Mabry writes: 

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

anonymous replies: 

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

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

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

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

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

Alston Mabry responds: 

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

Jan

15

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

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

Jan

12

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

Boris writes: 

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

Laurel Kenner writes: 

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

Alston Mabry writes: 

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

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

anonymous writes: 

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

Jan

5

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

Alston Mabry writes: 

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

Jan

1

 This book was recommended to me:

Sleights of Mind: What the Neuroscience of Magic Reveals About Our Everyday Deceptions

Stephen Macknik and Susana Martinez-Conde, the founders of the exciting new discipline of neuromagic, have convinced some of the world's greatest magicians to allow scientists to study their techniques for tricking the brain. The implications of neuromagic go beyond illuminating our behavior; early research points to new approaches for everything from the diagnosis of autism to marketing techniques and education. Fun and accessible, Sleights of Mind is "a tour through consciousness, attention, and deception via the marriage of professional magic and cognitive neuroscience" (Vanessa Schipani, The Scientist).

Nov

24

 The money printing has driven up prices, the prices of paper assets, including the prices of Treasuries, which has to be the largest paper asset class globally. But the money that winds up at the banks has largely then been put back to the Fed for the interest it pays. Banks haven't been lending like crazy, so that mechanism isn't pushing inflation. Meanwhile, cheap money has allowed corporations to manage their PE ratios by buying back stock, again pushing up assets prices. And for broad inflation, you need upward pressure on wages, but globally for the last decade plus there has been profound downward pressure on wages caused by China dumping tens of millions of smart, motivated workers into the global labor market every year, not to mention the other emerging Asian countries. And speaking of China, that country has served as an inflation sink for years now, via there currency/import/capital controls policies - there is inflation, and a lot of it, in China.

Stefan Jovanovich writes: 

Big Al's analysis is perfect. But he is describing the short-term credits issued by central banks to float their national Treasuries' deficits. Money itself - cash and customer's bank balances - has not been increased dramatically. I realize this can be seen as a distinction without a difference in a world of fiat money, but it does highlight the difference between the present and the 1970s. Then central banks and rich people worried about whether or not U.S. currency would keep its exchange value, whether the dollar would continue to decline to oblivion as the franc, lira and mark had after WW 1. Now there is no reason for such outright fear because currency positions can be hedged fully and there is, in effect, a monetary Treaty of Vienna assuring a balance of financial power among the largest trading nations that allows them all to quantify credit as needed. As Big Al notes, that balance does not answer the question of how a commercial truce can be sustained under a 19th century combination of steadily declining prices for metals, fuels and grains and increasing prices for land and financial assets supported by public/private finance.

Oct

31

This CIA pub makes some great points: Psychology of Intelligence Analysis by Richards J. Heuer, Jr.

My favorite quote from Chapter 8:

Analysis of competing hypotheses involves seeking evidence to refute hypotheses. The most probable hypothesis is usually the one with the least evidence against it, not the one with the most evidence for it. Conventional analysis generally entails looking for evidence to confirm a favored hypothesis.

Sep

30

A study by Kora Reddy showed that for a sample of SPY days:

"4th trading day from the last trading day of the month (i.e 25th September 2014 in this month's case) is down and it is quarter ending (in the months of Mar, Jun, Sep, Dec)"

There were 45 instances, and all 45 had a higher close during the following 5 trading days.

For analysis, starting with all SPY days since 1993, we want to avoid overlap, so we pick every 6th SPY close and determine whether or not it had a higher close over the next 5 days.

Original study:

count: 45
with higher close next 5 tdays: 45
success rate: 100%

Non-overlapping SPY closes (every 6th):
count: 908
with higher close next 5 tdays: 863
success rate: 95%

To get a measure of the significance of the original results, we take our "every 6th SPY close" data set and assign a value of "1" for instances that have a higher high over the next 5 trading days, and "0" for instances that don't. Then we take that series of 1's and 0's and randomly pull 45 observations at a time (with replacement) for 1000 iterations.

Random runs: 1000
Mean sum (of the 45 values pulled): 42.77
SD: 1.437
z of original results (45): +1.55

So if we randomly pull sets of 45 non-overlapping SPY days, we would expect about 43 of them to be successes, i.e., have a higher high over the next 5 trading days. The original results have a z of +1.55 against our randomized runs, so they fall under the common +2 level of significance but are still positive.

To take the analysis one step further, we look at the size of the move from each SPY close:

Original study:
count: 45
mean move to 5-day High: 1.83%
SD: 1.15%

Non-overlapping SPY closes (every 6th):
count: 908
mean move to 5-day High: 1.65%
SD: 1.52%

z of original results (45): +0.81

So, analyzing the size of the Close-High moves shows that, while still positive, the z of the original results is much lower than that obtained by looking at the results as binary, hit/miss observations.

Sep

10

 The book The Power of Habit by Charles Duhigg, a journalist, is about the formation and the neurophysiological basis for habits and how to change them. I've been interested in this since I was younger. My essay to get into Reed College was about the neurophysiological changes in the brain of the Buddhist monks who meditate for hours everyday. It would take another 25 years before experiments shed any light on this subject. I've also followed behavioral psychology and thought there must be more to it than behaviorists documented.

Apparently the Basal ganglia, a primitive organ in the brain responsible for reflexes is changed when habits form. Habits form on a behavioral feedback loop where there is a cue, a routine and a reward. The habits are subconscious. There is no simple solution because habits are created in a complex environment. It's not always clear what the cue, the routine, or rewards are, and often they're not what first appears.

The author talks about simple habits, experiments with brain damaged patients, about alcoholism and AA, and habits of organizations. Everyone who reads the book wants a simple answer and cure to change their bad habits. It's not that simple. One has to look to see what the cues are and what the true rewards are. The book was a good read, and well documented with notes and sources.

Alston Mabry writes: 

The Power of Habit is a very interesting book. I would recommend, along with it:

Willpower by Roy Baumeister and John Tierney and The Brain That Changes Itself: Stories of Personal Triumph from the Frontiers of Brain Science by Norman Doidge M.D.

Jul

24

"You do not buy photographs from Otto Leipzip and you don't buy Degas from Signor Bonati."

Jul

13

I enjoyed this article: "Lionel Messi Is Impossible".

Jul

1

 "We thought trees and fungi were socialist, but they're actually capitalist"

The coexistence between trees and fungi is supposed to be very peaceful. Fungi grow on the roots of a plant, providing nitrogen to it in exchange for carbon, in a nearly perfect symbiotic exchange. Each individual fungus, traditional wisdom holds, works in tune with the root it grows in tandem with. But a new study presents a different model: The supposed buddies are actually acting like buyers and sellers in a capitalist market.

Led by IIASA Ecosystems Services and Management researcher Oskar Franklin, theSwedish study (paywall) started with a surprising observation. Root fungi were actually working to maintain nitrogen scarcity in the forest. When less nitrogen was available in the soil, fungi gave up less nitrogen to the trees. But when nitrogen was abundant, they built up their stores like speculators cornering the market in a commodity, effectively forcing the trees to get their nitrogen from the fungi no matter what.

"The new theory pictures a more business-like relationship among multiple buyers and sellers connected in a network," Franklin said in a press release. Instead of being a cooperative trade of carbon and nitrogen between organisms, trees are forced to export large amounts of carbon in order to unlock nitrogen stores from the fungi.

What's more, fungi can play clients off against one another. When different plants get their nitrogen from one fungal partner, the study states, the allocation of nitrogen to each of those plants isn't dictated by need or fairness. Instead, the fungus seeks the best possible return on investment. "Having multiple symbiotic trading-partners generates competition among both the fungi and the plants," Franklin said, "where each individual trades carbon for nutrients or vice versa to maximize profits, not unlike a capitalistic market economy."

This gives trees an incentive to offer up more carbon than their neighbors. The trade isn't always beneficial for both parties. In fact, plants and fungi could get locked-in to a mutual trade agreement that isn't optimal for either party. The authors compare this to carbon lock-in, where industries are stuck in a fossil fuel-based system, even when other energy options are superior.

And while trees may thrive from this exchange, the fact that the fungi hoard nitrogen "traps the whole forest in nutrient limitation," Franklin said. In general, the authors stated, how fungi collect and distribute resources is largely unexplored.But this should change. If we don't understand the market structure of the fungi and trees, Franklin said, won't really know how forests will react to the changes in carbon availability that climate change could bring about.

Jun

6

 Each bar is a day where that S&P Close was never breached afterward (to date) (i.e. S&P never fell below that level up to now).

Kora Reddy writes:

Adding to the fun, I looked at whether and when a newly crossed round number is revisited again.  All except the crossing of 200 and 500 were revisited at some point in the future ranging from 1 to 812 calendar days.

May

12

 I read and loved this excerpt from A Jewish Peddler's Diary, (1842-1843).

Last week in the vicinity of Plymouth I met two peddlers, Lehman and Marx. Marx knew me from Fürth, and that night we stayed together at a farmer's house. After supper we started singing, and I sat at the fireplace, thinking of all my past and of my family….

Today, Sunday, October 16th, we are here in North Bridgewater, and I am not so downcast as I was two weeks ago. The devil has settled 20,000 shoemakers here, who do not have a cent of money.

Suppose, after all, I were a soldier in Bavaria; that would have been a bad lot. I will accept three years in America instead. But I could not stand it any longer.

As far as the language is concerned, I am getting along pretty well. But I don't like to be alone. The Americans are funny people. Although they sit together by the dozen in taverns, they turn their backs to each other, and no one talks to anybody else. Is this supposed to be the custom of a republic? I don't like it. Is this supposed to be the fashion of the nineteenth century? I don't like it either.

"Wait a little! There will be more things you won't like." Thus I can hear my brother talking.

The week from the 16th to the 22nd of October found me feeling pretty cheerful, for I expected to meet my brother. Ah, it is wonderful to have a brother in this land of hypocrisy, guile, and fraud! How glad I was to meet my two brothers in Boston on Saturday, the 22nd! Now I was not alone in this strange country.

How much more could I write about this queer land! It likes comfort extremely. The German, by comparison, hardly knows the meaning of the word. The wife of an American farmer can consider herself more important than the wife of a Bavarian judge. For hours she can sit in her rocking chair shaking back and forth as she thinks of nothing but beautiful clothes and fine hairdo. The farmer, himself, unlike the German farmer who works every minute, is able to sit down for a few hours every day, reading his paper and smoking his cigar.

Here is a little about the Peddler, Kohn, from the introduction.

In 1842 Kohn was twenty-three years of age when he left the Bavarian village of Mönchsroth and sailed to seek his fortune in the new world. Less than two years later he was already located in Chicago as the proprietor of a store.

Kohn had a strong sense of Jewish loyalty which caused him to be one of the fourteen men who in 1847 were founders of Chicago's first congregation, the Kehilath Anshe Ma'ariv, now popularly known as K.A.M. Kohn became president in 1853, and, in the words of Hyman L. Meites, the historian of Chicago Jewry, he "placed the congregation on a firm foundation."

Kohn took his American citizenship as seriously as his Jewish ties. Because he refused to accept a second-class status for the Jews. He was prominently identified in the campaign to obtain for Jewish American citizens the right to reside in Switzerland. He was elected city clerk of Chicago in 1860, and showed himself an enthusiastic Republican and ardent advocate of that party's presidential candidate, Abraham Lincoln of Springfield.

Kohn's admiration for the new president resulted in a gift that brought him some national attention. He sent Lincoln an American flag on whose red stripes he inscribed six of the verses from Joshua 1, including the stirring words: "I will not fail thee nor forsake thee. Be strong and of good courage." This was indeed a fit message for the leader embarking on a desperate war to preserve the Union.

Apr

21

 I have been very much enjoying this lecture series on Ancient Greek history.

CLCV 205: Introduction to Ancient Greek History:

This is an introductory course in Greek history tracing the development of Greek civilization as manifested in political, intellectual, and creative achievements from the Bronze Age to the end of the classical period. Students read original sources in translation as well as the works of modern scholars.

Donald Kagan is Sterling Professor of Classics and History at Yale University. A former dean of Yale College, he received his Ph.D. in 1958 from The Ohio State University. His publications include The Archidamian War, The Peace of Nicias and the Sicilian Expedition, Pericles and the Birth of the Athenian Empire, On the Origins of War and the Preservation of Peace, and The Peloponnesian War. In 2002 he was the recipient of the National Humanities Medal and in 2005 was named the National Endowment for the Humanities Jefferson Lecturer.

(It's also available on iTunes.)

Apr

17

 Cicero made some of his speeches as prosecutor in the extortion court of Rome. In Verrem is a set of speeches made against Verres, a man accused of many crimes committed during his governorship of Sicily. Cicero's initial oratory was not about the facts of the case itself, but rather about the state of the judicial system in Rome:

That he [Verres] was not taking money for himself alone, but had his three-year governorship of Sicily parcelled out in such a way that, he said, he would be doing very nicely if he kept his gains from the first year for his own use, handed over those of the second to his advocates and supporters, and reserved those of the third year - the richest and most lucrative of the three - entirely for his jurors.

This prompts me to tell you of a remark which I recently made before Manius Glabrio when the rejection of jurors was being held, and which I noticed made a profound impression on the people of Rome. I said that I thought there would come a time when foreign peoples would send delegations to Rome to request that the extortion law and this court be abolished. For if there were no courts, they believe that each governor would only carry off enough for himself and his children. With the courts as they are now, on the other hand, they reckon that each governor carries away enough for himself, his advocates, his supporters, the president of the court, and the jurors - in other words, an infinite amount. Their conclusion is that they are capable of satisfying the avarice of one greedy individual, but incapable of subsidizing a guilty man's acquittal.

Cicero, Political Speeches, pp 25-26 trans D. H. Berry Oxford's World Classics

Mar

12

I would like to share some thoughts regarding present and past market correlations. One of my mother's sisters, aunt Franca, spent her life with my grand father, taking care of his many vices. She used to tell me that to have an edge on events they used to check share activity in Textiles and Heavy Industry in order to anticipate probable war declarations, or military activity. The rationale is clear.

The government ordered uniforms and mechanical spare parts before undertaking belligerent efforts. The same went for paper and other similar indicators that showed some kind of economic activity. For this reason I have given a look, first at the long term graph of copper, then added the S&P index.

The resulting picture gives an idea of a total and sudden decorrelation of the stock market and price of copper since mid 2011. I'm sure that better statisticians will be able to justify such a strange phenomenon: economic prosperity and declining raw material prices.

And mind you, not any raw material, but copper, the dear metal, the center of the electronic and electric universe. The S&P has risen roughly 49 percent since September 2011, while Copper (COPA LN bbg ticker, etf quoted in $ in London) has lost 22 percent in the same period.

The visual shock is, of course, much stronger than the raw numbers. Is this predictive of a market correction?

Not sure about it, although the crowding effect of larger and larger troops of SPU bulls give me a chilling feeling down the spine and the uncomfortable "dejà vu" state of mind.

Alston Mabry writes: 

If one were to search the interweb for the "copper, china, collateral", one would find several stories claiming that copper is used as collateral in the "shadow banking system" in China and that sharp moves in price are due to such stores being liquidated.

Mar

11

 The market today is like a pretty girl. It is very attractive from the long side in many markets, but it gives you no opportunities to buy on the cheap. Where is Anatoly with his bargains outside of Hawaii and Disney today?

Larry Williams writes: 

One of our members has not had a losing trade in many years now; not a one in, I'm not sure, maybe 10 years. Ironically one of his clients, a large bank, closed out a few years back thinking something was wrong because of the excellent performance. Such is the life of a trader.

Alston Mabry writes: 

"The Holy Grail Of Trading Has Been Found: HFT Firm Reveals 1 Losing Trading Day In 1238 Days Of Trading"

You could argue that you don't need a transaction tax when it has already been levied by HFT firms.

Ed Stewart writes: 

Virtu's dividend paying history seems very aggressive to me relative to what looks like its operating earnings and net assets. Last year $250m of the $430m dividend payment was financed. $250 being very close to the firms book value equity while earnings were 180m.

2011 and 2012 had earnings near 90M and dividend payments of 120M and 130M. Around 1.5B total paid since 2006.

Is this the magic of steady returns + finance + limited liability?

Mar

5

 Just as a morning exercise to the the brain going…

Looking at SPY monthly 1993-2013, calculating Open-to-Low and then Low-to-next-High, sorting them all by O-L and getting means for the deciles, with the sd and z for the L-H column:

and here:

Now there is good criticism, especially for the z's, I think, but that's left as an exercise for the reader.

Oh, and Re the "should hit?" estimation…

the Feb high for SPY was 187.15. 

Feb

28

 The purpose of this post is to stimulate discussion about an important market development. It's not a prediction.

I believe that one of the most widely accepted memes in the financial markets over the past several years has been that the Chinese Currency was/is undervalued, manipulated and would not go down and must eventually go much higher. The fundamental arguments for this were the persistent balance of payments surplus, purchasing power parity, competitive advantage/cost, political pressure, the history of currency movements in places like Japan, relative growth rates and growth potential; monetary base; and the list goes on and on and on. In fact, I can't find any credible opinion to the contrary. (A couple of summers ago, Bill Ackman made a big PR splash buying "cheap" calls on the HK dollar predicting an inevitable and massive revaluation.)

Over the past few weeks, the Yuan has reversed course and started to decline. It has had a violent and 3 sigma decline in the past 3 days. The story is that the Chinese authorities are encouraging a "wider trading band."

I am not offering any predictions here. But it is striking that the impulse move is in the down direction, not the up direction … all the more so, when the universally accepted truth is that the Yuan can only rise.

Is this just a counter trend move? Or is something bigger going on? If the Yuan starts declining instead of rising, what are the second order effects on other markets? If this is more than a counter trend move in a secular bull market for the Yuan, then I believe there are some very important implications. Unfortunately, I'm not smart enough to know whether the supposition is true and/or what the second order effects may be.

A good place to start thinking about this might be historical analogs. What are the historical analogs? And when does the perma bull Yuan story get stopped out?

Alston Mabry writes: 

I agree. With all the issues out there on shadow banking, credit bubble, CBOC actions, ghost cities and shopping malls…who actually knows what's going on? If anybody "knows', it's the market itself. Once China frees up capital controls, import controls and currency controls and becomes relatively transparent accounting-wise…then the RMB will move on economics…mostly. But right now there are so many "shadow issues" in play that it's hard to assess the situation other than on a short-term trading basis.

Richard Owen writes: 

Disregarding the background 'China story' which is the key determinant of the secular factors (eg, do you believe China is massively insolvent or not, does it matter), when currencies are 'newly' brought to market (in the sense of being a new regime, if not a new currency), they often trade off initially. Domestic holders want to diversify and foreign buyers have no structural reason to accumulate inventory, thus have a 'show me' attitude on price. And since fx is a short duration asset, nobody is holding for the carry and a trend begets itself. Or to put it another way, as yuan trading is liberalised, does the marginal holder likely want to diversify out of existing stock more than a foreign holder wants to get into? Comparables are perhaps the euro introduction, where despite a hugely profitable convergence carry on long bonds, even underwritten by the ECB discount window, it initially sold off. Perhaps more analogously, when South Africa empowered its blacks, the Afrikaans community thought the end was nigh (as some chinese entrepreneurs do now) and began liquidating everything and selling into offshore currencies. They misread the situation, however, and the sandtown community provided a bid to the Afrikaans. My friend's uncle bootstrapped a working mans savings into a billion by buying the real estate liquidation, putting in newly arriving AAA multinationals as tenants and riding the yield curve down from teens to single digits.

anonymous writes: 

In the face of 2008 downturn, the Chinese government created more money than was done by the ECB or the Fed. The shadow banking system carried on making new loans to reestablish the housing bubble. Based on that slice of data, the RMB should not be rising against other foreign currencies, but falling.

Yes, trade surpluses are supportive to a currency, but China's big trade surplus with the US is balanced by some trade deficits with sources of raw materials, and production machinery, so that their trade surplus overall is not as big as with the US. The foreign direct investment into China has been very high as has the Carry Trade where borrowing in low interest rate countries like Japan and buying higher rate Chinese Treasuries, was profitable and gained even more as the RMB rose. This looks to be reversing and is thus a negative for the RMB and is big at maybe a half trillion dollars of hot money.

The image is of the Chinese government suppressing the currency to keep its exports growing and doing so by buying US Treasuries, and that was also pushing the image higher. But Chinese people are buying gold for safety, indicating that they have seen government spending and do not have confidence in the RMB. I think a downward spike in RMB could be followed by more selling if Carry Trade unwind becomes big. But PPP and Trade surplus will limit the move eventually, IMO.

anonymous writes: 

I also agree, (Chinese financial reporting is awful) but the assertion that we can know many outside variables from the US$ of the equation is very important. (Current account surpluses and deficits bear many similarities to double-entry accounting, in that aggregate balances in one direction or another should balance each other out.)

I submit that the current state of Chinese property and credit markets bear many similarities to what Hyman Minsky termed a "deviation amplifying" mechanism in his Financial Instability Hypothesis.

However, if asked how it will play out, my tendency is to say that at some point over the next few years, they are at substantial risk for a debt deflation. Personally, I'd have a tough time convincing myself to be short a deflating currency.

Charles Pennington writes: 

OK, here's an "N=1" kind of study…

Back in mid/late 2011 the Swiss franc ("CHF") was strengthening violently against the Euro, with the Euro almost going down to parity with CHF. Then the Swiss stepped in to weaken the CHF and forced the Euro back up to 1.2 CHFs. The Euro sat there, pegged at 1.2, but everyone feared that the risk was that the Euro would fall below 1.2. Instead the Euro ended up moving higher against the CHF in mid-late 2012 and 2013. Very similar to Rocky's China story.

Since mid 2012, EWL (the Swiss market etf) is up about 55% and FEU (the EuroStoxx etf) is up about 40%. EWL is probably a bit less volatile than FEU (though I didn't check), so EWL's gain is yet more impressive.

So the N=1 conclusion is that you should buy Chinese stocks.

Jan

27

SP500 index daily return series 1950-present was checked for close-close declines of more than 2+%. For each 2+% drop day, counted trading days into the past until the prior 2+% drop (wait time between 2% drops). For each drop, also counted trading days into the future to the next 2+% drop.

The attached scatter plot shows each 2+% drop, according to wait from prior drop (X axis) and wait until subsequent drop (Y).

Alston Mabry writes: 

The thing about using an absolute value like -2% is that you have to also look at contemporaneous volatility. Here's a plot of the "days since last 2% drop" value for the S&P (since 1950), against the SD of the % changes for the previous 60 trading days:

And here's a closeup of the area nearer the x axis.

What's not surprising is that long waits occur when volatility is low, and short waits occur when it is high.

Jan

17

 Since you're talking about PEs, I will crosspost this bit:

Listening to Ed Hyman on Wealthtrack. Hyman says he thinks 2013 was like 1996 and that the next few years may turn out to be like the late 90s, as in: +20%, then +30%, +27%, +20% - he specified those percentages - which would mean for the S&P:

year close
2013: 1848
2014: 2218
2015: 2883
2016: 3661
2017: 4394

If you also plug in the earnings growth %'s from the 1998-2000, you get these stats for the S&P:

year: earnings, pe
2013: 107.45, 17.2
2014: 116.60, 19.0
2015: 117.08, 24.6
2016: 136.67, 26.8
2017: 148.44, 29.6

Considering Ed Hyman's comparison to 1996, one can't help but think, "yes, but"…back then we were looking ahead at the interweb and all its spinoffs, and investors thought tech companies would post astonishing future earnings, resulting in the fact that in early 2000, the top 20 firms in the QQQ had a combined PE ratio of 83. The future looked bright.

In the current world, what big factors could drive up the market PE to something like 30, as in the previous post? Two things come to mind in the macro sense:

1. "Developing" countries, especially India and SE Asia, really loosen up the regs and start to take off at an even steeper rate of ascent. Global GDP follows and grows at twice its "normal" rate.

2. A period of serious inflation.

What else?

Gary Rogan writes: 

Being able to map this year on some other years for the purposes of predicting the next few years sounds like wishful thinking. Multi-decade returns from this point on are likely to be subdued because this is somewhere between a "fairly valued" and relatively expensive market. This means little in the next few years, which are relatively "short term" for this purpose, and nobody really knows whether trend following or trend reversals will predominate. And since a number of surprises that will affect the treasury rates are in store, some of which will depend on the actions of a few men and one women, these short-term guesses are likely to remain nothing but guesses. 

Dec

11

 As of December 4, 2013, US banks had $2.493 trillion on deposit at the Fed. (Source: FRB H.4.1 Report). This amount includes required and excess reserves. The amount has increased by 63% over the past 12 months and approximately 300% since the Fed started paying interest on the balances. Bernanke started paying IOER during the financial crisis, but banks had wanted this for years. Some fraction of this reserve growth is due to QE and some fraction is due to the above-market rates that the Fed is paying. (This is the so-called IOER "Interest on excess reserves.") Right now, the Fed is paying about 0.25% on IOER and the t-bill rate is 0.02%. So the Fed is paying more than 0.23% above the market. On a balance of $2.5 trillion, this is a direct subsidy to FRB member banks of roughly $5.75 Billion per year and with each QE day, the amount grows.

This subsidy is theoretically being financed by the Fed's holdings of longer-dated securities so it's positive carry for the Fed. However, from the perspective of a risk-averse banker, and ignoring capital haircuts and the risks/spreads etc., a banker would need to buy treasury securities with a maturity of greater than 2 years to get the same yield as parking overnight money at the fed. So banks are behaving quite rationally.

The elephant in the room is the rate that the Fed pays on IOER. Talk is brewing that along with the announcement of a taper, the Fed will reduce the IOER rate. I submit that this is a highly unstable equilibrium and a change in IOER will have unintended (and unpredictable) consequences. Let's imagine that the Fed cuts IOER to zero. You will suddenly have $2.5 trillion looking for a new home. Where will it go? T-bills are already at 0 yield. So if banks just buy T-bills (even outside the fed) then that is a classic liquidity trap. Or, it's possible (but improbable ) that it will suddenly go into the real loan market. If that happens, the economy would go gangbusters with possibly little upward pressure on rates since $2.5 trillion in supply is a lot of money. Or, this gusher of ?dumb? money will listen carefully to the fed's forward guidance and collapse all rates towards zero out to the 2-year etc. I think this helps explains why Bill Gross is bullish on the front end of the curve because the curve is highly arbitraged between 2 years and 5 years. So it's possible that a taper announcement combined with a drop in IOER could turn out to be very bullish for the bond market. And this would persist until the Fed actually raises the funds rate.

Additionally, dropping the IOER might appease some critics about the size of the fed's balance sheet (ignoring the sheer quantity of bonds that remain). The IOER has been a subsidy to re-capitalize the banks. And now that this process is largely complete, the subsidy of $5.75 Billion/year should end and watching the gusher of $2.5 trillion leave the reserve account will be interesting, to say the least.

Bottom line: The IOER is a bigger deal than the taper announcement. The pundits will figure this out in due course.

Alston Mabry writes: 

"Remember that money we gave you, so you could give it back to us, and then we'd pay you for keeping it with us?"

"Yeah…."

"You can't have it back."

Bud Conrad writes: 

Rocky, Thanks.

The Fed has to buy up the new debt issuance from the government to keep rates low. It is also buying the MBS to keep mortgage rates low and to allow the banks to keep on their books holdings that might otherwise be declared toxic waste from being written off. So they can't stop QE purchases.

They have to fund the purchases some how. At present the Fed has been paying over market rate to keep the deposits of Excess Reserves to obtain the money to buy the Treasuries and MBS/Agencies. I don't see how the Fed balances its books if the banks withdraw $2.5 trillion. Then the Fed would look like a commercial bank that has a run from depositors and is quickly iliquid. The equity account is only $65 billion. The Fed is like a very leveraged hedge fund. If the depositors want to withdraw their money, the Fed would have to sell off assets or EXIT, which would cause panic in the markets.That seems even less likely. So Al is right: "You can't have your money" has to be the response.

So the Fed is trapped into continuing the payments on the deposits (IOER) as long as they have income from the Treasuries and MBS to pay for it. The idea that the Fed prints up currency is a little misleading because the actual physical demand for paper is decided by the public's conventions, and there is less use for the dollar bills with more transactions being done with credit cards. So as rates rise they will be raising the IOER rate, and at some point that gets so big that it uses all the asset income, and then the Fed has to go to the government for a bailout, which means the tax payer supports the banks getting their huge interest payments.

As an aside, does anyone know if the big banks can go to the Fed and add money to their deposits to earn the above market rate? Banks are supposedly free to with draw the accounts created out of thin air to pay for QE purchases, but can they add to those deposits? It would seem not because the amounts would rise even more dramatically.

Rocky Humbert replies: 

Bud: If your head is spinning, I suggest you sit down. If you look at the situation as I articulated it, then don't you agree with my analysis….? (This is a macro-economics conversation. No conspiracy theories allowed. ; ) Namely, the Fed could theoretically exist with only $1 of equity. Their equity is irrelevant because of their ability to print currency. And so long as the currency is accepted and relatively stable, everything works. For the Fed, currency is the same thing as a paper check. So if Citibank and the other big banks say "we want to withdraw $X trillion in excess reserves" the fed can hand them a check for $X trillion. And Citibank can take that check and spend it however they want. Whether the check has a picture of Ben Franklin or looks yellow or purple or is electronic is not material. It's credit creation… (This is when the S-Man chimes in.) I believe that before the Fed existed, this was how all banks operated — namely, there was essentially no difference between XYZ Bank's check/draft, their self-issued currency, etc etc.

Rudolf Hauser writes:

There is a bit of misunderstanding here. A reserve balance at the Fed is a bank's checking account at which it holds bankers money. That is the only money, other than currency, that another bank will accept in payment unless it is willing to keep a deposit in the bank that is in the negative position of the transaction. When a bank wants to reduce its balance at the Fed, it does so by buying other assets, such a T bills, or making loans. The seller or borrower now either deposits that money in their own bank or makes loans. This process continues if no other bank receiving deposits or proceeds of sales of assets to these spenders decides to hold excess deposits. Eventually enough ends up in checking accounts so that all the excess reserves reduced by the first bank have either become required reserves or held by other banks that have increased their excess reserve balances. The Fed does not have to sell any assets or pay out anything. The reserve balances just get moved around and converted from excess to required reserves. This of course increases M1 and M2 balances and is inflationary. If the Fed wants to avoid this it either has to make holding excess reserves more attractive by raising the rate it pays, selling assets it holds, borrowing cash via reverse repos or by converting excess reserves into required reserves by raising required reserves that have to be held against any checking or other accounts.

The risks are that eventually the banks might want to reduce excess reserves, resulting in a expansion in M1 and M2 that will be inflationary. Real growth is being held back by factors other than lack of liquidity. While faster M1 and M2 growth might push some demand forward in time resulting in some temporary faster real growth, the type of growth that would clearly have to lead to higher prices for either assets and/or goods and services. Alternatively, the Fed could take the measures noted above. It's ability to pay more on excess reserves is at some point limited by what the Fed earns on its assets and the amount of equity it has. But do not forget the first hit is on the U.S. Treasury which is currently getting large contributions from the Fed, which pays most of its profits to the Treasury. This is currently a large cushion. Selling assets will cause interest rates on those assets to rise, potentially considerably depending on how much the Fed sells among other factors. Even if the Fed does not try to upset the situation, rates might rise because of actual and expected inflation. This might create problems for some holders of long term debt and securities. The least destructive way might be to raise reserve requirements, but this might create problem to the extent that excess reserves are not evenly distributed among the banks. All these moves would be politically unpopular. This is why I am somewhat skeptical of the Fed to get us out of this situation. They could do it, but it will require a FOMC with a lot of wisdom, determination and courage to do so and a Congress that does not take away the Fed's nominal independence to pull off.

anonymous writes: 

Zerohedge quotes Bridgewater on the process of QE noting that not just the amount spent, but what it is buying dictates what the economic effects are. If the assets are more risky and less like cash, the effect is supposed to be more. Seems to me the creation of new money is the big cause of the effect. and then how that money is used is the other half of the equation. It's my view that the new money sits on the Fed balance sheet and impairs its inflationary effect. The reason it sits as excess reserves is that the Fed pays above market rate on the deposits. The $ 2.5 trillion times a reasonable interest rate in normal times of 4% would cost the Fed $100 B, and that is close to it current earnings for its assets of Treasuries and MBS Rising rates is not good for the Fed either.

Bridegwater and commentary:

In the past we have explained how QE continues to "fail upward" because instead of injecting credit that makes its way into the economy, what Bernanke is doing, is sequestering money-equivalent, high-quality collateral (not to mention market liquidity)- at last check the Fed owned 33% of all 10 Year equivalents - and by injecting reserves that end up on bank balance sheets, allows banks to chase risk higher in lieu of expanding loan creation. Alas it took a few thousands words, and tens of charts, to show this. Since we always enjoy simplification of complex concepts, we were happy to read the following 104-word blurb from Bridgewater's Co-CEO and Co-CIO Greg Jensen, on how QE should work… and why it doesn't.


The effectiveness of quantitative easing is a function of the dollars spent and what those people do with that money. If the dollars get spent on an asset that is very interchangeable with cash, then you don't get much of an impact. You don't get a multiplier from that.

If the dollar is spent on an asset that's risky and very different from cash, then that money goes into other assets and into the real economy. That's really how you see the impact of quantitative easing. What do they buy? Who do they buy it from? What do those people do with that money?

Of course, this is why sooner or later the Fed will proceed to "monetize" increasingly more risky, and more non-cash equivalents assets, until "this time becomes different." Which it never is, but the Fed will still try, and try and try.

Nov

25

 One thing I notice in unsophisticated investor-traders such as myself is that the positions one takes are usually supported by an unspoken prediction: "I will know when it is a good time to sell this and I will be able to do so."

Gary Rogan writes: 

The beauty of really long-term investing is that you don't have to have this unspoken prediction.

Victor Niederhoffer writes: 

And to add to Mr. Rogan's "beauty", you take full advantage of the most marvelous aspect of arithmetic, the power of compounding. And furthermore, you reduce to a minimum the vig from flexionic and top feeder activity.

Anatoly Veltman writes: 

Can't dispute all of the beauty. The problem is that only a narrow group is willing to commit: those who set aside slow money. Most suffer from the "hot money" bug: how to make money work its hardest. Willing for the money to die trying.

Gary Rogan writes: 

Very poetically put. It also illustrates the following point: in any kind of investing or trading the problems and solutions come in two flavors, namely those of competence and those of psychology. Even in long-term investing you still have to decide what to buy and when to buy it, so it's not immune from either category.

S. Humbert writes: 

Buy and Hold (for the medium term) is not, in my view, enough to earn a living from. Please let me explain before you fry my IP address.

In the past 30 odd years alone, even the unleveraged long only holder of US stocks has had many barren years (and multi year) periods when he lost or didn't make.

In my usual, inelegant fashion, what I am saying is that if you trade for a living — for yourself (i.e. at the sharp end of the game) then buy and hold alone doesn't cut it. (Unless you start in 1982 or 2009 or some other retrospectively chosen low). This does not dilute the effectiveness of the strategy, I'm just saying an individual's perspective and starting point dictate what weight one should give to the passive, low vigorish strategies.

Frankly, a low single digit return with a very poor Sharpe Ratio over the lady two decades LESS retail friction, well… I certainly couldn't have lived off that taking into account my extremely modest circumstances when I started my speculative business in 1990. Anyway — it's at all time highs now right!

Ralph Vince writes: 

Worse–you're still going to touch that money. You're going to take a morsel, or add a morsel, you can't sit there and forget about it.

Now you're on the curve.

Now, if you are 100% invested, you are completely doomed, and it isn't a matter of if.

Oct

2

 From the front page of The Arizona Republican, Phoenix, Arizona, May 19th, 1890:

WORK OF CONGRESS. Silver Legislation Has the Right of Way. Discussion of the Tariff to be Livelier. The River and Harbor Bill. Washington, May 18. - Silver will be the principal topic discussed in the senate again this week. The addresses in memorium of the late Representative Kelly, of Pennsylvania, will be delivered on Tuesday afternoon and Saturday will be devoted to the calendar. These are the only probably interruptions of the silver debate. The fist three days of the week in the House will witness the closing scenes of the tariff debate, which promises to become much more animated than heretofore. The river and harbor people are anxiously waiting for the first opportunity to call up their bill.

A TALK BY BISMARCK. Significant Remarks by the Old Soldier. Germany Will Never Attack France Unprovoked. The Empire Understands That The Czar Would Interfere In Behalf of France. PARIS, May 18. - Le Matin publishes an interview had with the French journalist, Des Soux, who was recently entertained by Bismarck. Bismarck referred to his resignation as a first class funeral, but added he was quite alive still. He declared, among other things, that Germany would never attack France or provoke France to attack her. Germany well understands that Russia would intervene to protect France, if attacked, just as Germany would aid Austria if Russia attacked her.

CUNNING SECRETAN. How the Frenchman bulled the Copper Market. Paris, May 18. - At the trial of the copper syndicate men it has been proved that Secretan, as director of the Societe des Metaux, distributed fictitious profits for 1887, and used improper means to bull copper, raising the price from 1000 francs per ton to over 2000 francs, and clearing within two months 10,000,000 francs. The defence is that the article of the penal code on the which the charge is based does not apply to this particular case. Hentsch, on being examined, admitted that while he was chairman of the Comptair Escompte he knew nothing of the dealings of that institution with the Societe des Metaux. He also testified that the board rarely listened to the manager's reports, simply letting things slide.

CHINAMAN BAPTIZED. He Sacrifices His Queue and Adopts the Christian Faith. Traver, Cal., May 18. - Yuen Lung, a Chinaman of more than ordinary intelligence, had his queue shaved off some time since, and to-day was baptized in the Christian faith by Rev. Mr. Hawkins. He has adopted the name of Charley Delzante. He conducts the dining room of the Delzante Hotel at this place.

WARLIKE ATTITUDE. The Czar Talks Business to the Porte. Constantinople, May 18. - The Porte has not yet replied to Russia's claim for the payment of the arrears of the war indemnity. The Russian Ambassador, in an urgent note to the Porte, demands the payment of arrears from the loan, otherwise, he adds, Russia will reserve the right to take further measures.

AN OCEAN RACE. Three Great Atlantic Steamers Struggling For Supremacy. London, May 18. - The Anchor Line steamer City of Rome sailed from Queenstown at 12:30 to-day. The Guion Line steamer Alaska sailed at 12:30 and the the Cunard steamer Aurania at 2 p.m. All went ahead on full steam directly after they cleared Queenstown harbor. There is heavy betting on the result of the race.

Sep

2

The dreaded September effect reminded me of "Sell in August and Go Away?" but certainly bears rechecking.

Ralph Vince writes: 

I think Dr Z's study focuses on 2000-2013.

Curious and needing to do some counting, however simple, I looked at SPY monthly moves 1993-present, and got these stats.

May

29

ES up overnight, as if many anticipating another up Tuesday…but then ES down Open-Close (ditto oil)…and for the real twist of the knife, T10yrs down almost a point, too…and not to mention gold trying to bullwhip the weak hands…ouch! 

May

2

 It is rumored that AAPL placed their 10-year paper at 10yrTbond+75bps, which means about a 2.4% rate, if I'm reading the screen correctly. Given that the yield on AAPL's equity is about2.9%, that's a nice positive-cash-flow way to conduct a buyback and still keep your overseas cash hoard protected from taxation. Not that it matters (or has any magical power), but for the equity to get to a2.4% yield, with a divvie payout of $12.20, it would need to hit about $508.

One wonders how many other firms are doing, or considering doing, this type of buyback financing.

Rocky Humbert writes: 

For the period January 2008 to June 2012, Apple stock rose at a compounded IRR of 40% for a price change of 331%. For the same period, the Nikkei declined at -1% …. for a price change of -12%.

For the period June 2012 to present, Apple stock declined at a compounded IRR of -27% for a price change of -25%. For the same period, the Nikkei rose at a compounded IRR of 34.5% for a price change of 26%.

Who in "their right mind" would argue that the Japanese aversion to iPADS does not fully account for this statistically significant negative correlation?

Furthermore, with respect to your comment about my trade in Apple stock (which I ka-chinged yesterday as it finally valued the arbitrage accretive value of the buyback with no regard for growth prospects about which I have no opinion): I would note that Warren Buffet argued cogently that Apple should use its cash pile to buy back stock when it's below intrinsic value and create wealth when Mr. Market is irrational. As Apple followers know, there was much speculation about Apple's cash deployment plans — and that the behemoth actually traded down on the morning following this announcement shows that it took some time for Mr. Market (as distinct from the HFT bots) to correctly assess the significance. If Hewlett-Packard had followed the same path, instead of literally throwing out billions on (what turned out to be) a fraud acquisition in England, I might still own that stock and it would likely be trading in the 40's today. Instead I sold it "horribly" at 27 on the news of the acquisition and incurred a loss and the ridicule of many on this site.

Apr

17

 There are some traders who make money based on news events. Please tell me how an analysis of the recent news could have been beneficial to traders who analyze news. The first reaction was a drop of 1 % in the last hour in S&P and a rise of a corresponding amount in gold. The reaction overnight was the opposite. Why was this news so bullish overnight? Is all news just an opportunity to do the opposite of the initial reaction? What do you think? Is there a systematic way to profit from news announcements? The 9-11 was not a temporary thing. Was that the clue?

Steve Ellison writes: 

I would hypothesize that any market reaction to a news event that triggers strong emotions should be faded because of the availability heuristic (people tend to give too much weight to dramatic but rare events).

I would also hypothesize that any market reaction to government statistics should be faded, since they have margins of error and are often significantly revised later. However, when I tested this proposition using the government report that routinely provokes strong market reactions, the monthly US unemployment report, it was not clear there was any edge to trading in the opposite direction of the S&P 500's move on the report day.

Jeff Watson writes: 

I generally don't fade USDA crop reports after they come out and grains are offered limit down. However, I've been known to buy wheat right at the top just before the report and have it go limit down on me. I hate that feeling as the noose tightens when the trapdoor opens. In fact that just happened to me on the last go-around.

Alston Mabry writes:

How do you test news events? First, you have to immediately and accurately evaluate what effect the event "should" have, ex ante. And then at some future point in time, compare the predicted to the actual effect the event "did" have, ex post. As there is no objective measure to use for the first step, you wind up simply testing whether or not you're any good at predicting the effects ex ante.

Steve Ellison writes: 

I tested using the following logic. If the absolute value of the change from Thursday's close to Friday's close on an unemployment reporting day was greater than the median of the absolute value of the daily change in the previous month, I assumed the market was reacting to the unemployment report and selected that day. For all the selected days, I backtested a one day trade entering at Friday's close and exiting at the next trading day's close, positioned in the opposite direction as Friday's net change. That is, if the net change on Friday was positive, the hypothetical trade was a short. The results were consistent with randomness.

Sushil Kedia writes: 

News is a rare commodity in today's world. We are inundated with broadcasts today. Any media missives that bring by a communication of fact and those amongst the fact-set that are beyond the expected may still have some market moving value. The durability of that fact or how out of line of anticipations it was may perhaps have some effect on how much and for how long the prevailing state of prices will be affected. Those broadcasts that provoke emotion are likely that are worth inspecting a fading trade. Whether news of war, crop-failures or any such genre' of information flows that produce an instant or moment of endocrinal rush.

The fine art of speculations rests on anticipations. Broadcasting media would never report what is coming to happen tomorrow, but only what may have (no guarantee that the broadcast is totally factual, since we have more "viewspapers" today than newspapers) already happened. Those who rely more on figuring out what they ought to anticipate on such resources are often the food for those who would rely on these broadcasts to figure out where the likely dead bodies will be buried. Price may not have all the information of what keeps happening every moment, but does have more information than any other resources of what is expected to happen.

Event Study Method may be a decent tool to evaluate the statistical behaviour of specific kind of events that occur repetitively with varying outcomes and of studying the repetitive actions of specific mouth-pieces than of studying erratic and randomly occurring news.

In a highly inter-connected markets' world and where the risk-free rate itself has a volatility the comforts of isolating non-random abnormal returns' evidence too is fraught with risks of playing on a frail advantage that keeps fluctuating in its expected value with ever-changing cycles if not fading away. Thus, it seems fair to me rather than an over-simplification that the most important factor for the next price is the price at this instant or any distant instant is the price at this moment and in the prior moments.

Rocky Humbert writes: 

I have one secret on this subject that I will share. Well, actually it was explained by Soros and Druck as the "Busted Thesis Rule." I think I've written about this previously on the Dailyspec.

If there is a news event that SHOULD BE unequivocal in it's meaning (i.e. bullish or bearish), and the market after a bit of time starts going in the opposite direction to the consensus meaning, then it's a wonderful opportunity to throw your beliefs out the window and go with the short-term direction. Many important big moves start this way. For example, XYZ is bullish news, yet the market after a little pop starts going down, down, down, …. don't fight it. Rather, "Sell Mortimer Sell!" P.S. I learned this lesson the hard way when Bell Atlantic made its ultimately ill-fated bid for TCOMA and Bell Atlantic's stock when straight up instead of what it "should" have done … which was go straight down. I won't describe the censure I received by my legendary boss at the time. Amusingly, neither of these companies still exist. Bell Atlantic became Nynex which became Verizon. And if memory serves me, TCOMA was bought by AT&T when they got into the cable tv business…

Gary Rogan writes: 

In a similar type of episode, when 3Com spun off 5% of Palm thus giving it a market valuation, and the resultant value of Palm significantly exceeded the value of 3Com that still owned 95% of Palm, this marked the end of the dotcom era.

Mar

12

One of the most valuable things I learned from the Chair is how not to do a study.

Let us summarize how to do a study. First define a pattern or event of some type. Then calculate the expected return subsequent to that event when the event happened. Then compare that return to the returns for all other non-event time periods. Do a t-test to establish significance at the 95% level.

That said the real problem is how can we insure ourselves against the possibility of biasing our study or otherwise completely messing up. the first thing that comes to mind is to never include data in your decision process that was not known at the time. For example Enron went bankrupt and then several years later after an audit the financial results were released showing that the original releases had been fraudulent. You cannot use the adjusted data based on the argument that it is the best data. Only the original data was known at the time so you must use that.

The same thing goes for price data. You have to use the prices that were known at the close if you are doing a buy at the close study. You cannot use retrospectively adjusted prices when the data is adjusted later than the supposed decision was made.

Always use tradeables. For example the S&P 500 index does not trade as an index. The S&P futures do and SPY does as well so one would use either of them as data for your study. The reason is that individual stocks can have stale quotes. Some of the smaller stocks in an index do not trade nearly as often as the larger caps. Thus the index can be behind the true position of the market. The tradeables trade and thus are subject to arbitrage that tends to keep them in line with the real market level.

This is a short list of things not to do. However it is representative of the fact that it is harder to learn what not to do than what to do. Other contributions would be welcome.

Victor Niederhoffer adds:

Always simulate what the chances were that your observed results were due to pure luck and take into account the path that your results would take and what that would have required of money management.

Consider the impact of retrospection on your results. The human mind is capable of ascertaining many regularities that occurred in the past, and is good at uncovering them in a study after the events occurred, but not very good at uncovering predictions based on new data that they are not already privy too. Never use range forecasts as they don't tell you whether you would have made or lost. Be aware of the difference between description and prediction, and statistical significance versus predictive distributions.

Never be overconfident. Do take account of the drift in your data, and the shape of the distributions you are drawing from. Mr. T, is not very good if only 2 or 3 observations removed from your sample would change the results.

To what extent are the regularities you believe you have uncovered been extant in the literature or the knowledge of shrewd fast moving traders. That changes things. What is the extent of regression bias in your results? 

Alston Mabry comments:

Something else, basically another riff on the Chair's comments: I find that statistics like means and correlations are, of course, useful, but they almost always hide important, idiosyncratic structure in the underlying data. In a sense, summary statistics are "intended" to do that, but I find it useful to unpack them and examine the structure in the data series, how the summary stats change over time, etc.

Anton Johnson writes: 

A couple of important things to consider.

Large changes in outcome resulting from small adjustments of a parameter is a sign of over-fitting and usually bodes badly for real-time results. Sometimes eliminating or finding a suitable replacement for the sensitive parameter will result in a more robust and usable model.

As a general rule, the number of parameters used in a study should be FAR fewer than the number of resulting trade signals.

Ken Drees adds:

Coach Bob Knight's new book The Power of Negative Thinking mentions "NO" being safer than yes. You can always more easily change a "no" into a "yes" versus the opposite–deciding to change your mind from positive to negative.

The gist of the book is to tamp down the uber positive thinking crowd–no, you can't do anything you want, no, you can't magically power your way to a fine end. PONT, Power of Negative Thinking is how Knight coached. He explains it that you must limit faults, limit mistakes–if we don't do these things then we have a chance to win. He keys on dealing with negatives to achieve a positive. He must have come across a lot of less disciplined approaches to coaching in order to come up with an against the grain type philosophy (PONT).

A lot of his points are probably already in the quiver of the sharpened spec. His hyper worried routines, careful study of the opponent, downplaying of good fortune and constant moving of yesterday's win into the rearview mirror broadens out into that persona you conjure when you think of him–that brooding face, those searching eyes–never smiling. The idea of "can't do it" was probably the most different from what we hear today–most are afraid to say "can't–that it means "I won't". Knight loves the honesty of a player saying I can't understand that assignment, or I can't push myself any farther. I would not recommend the book to cross over into speculation, but it's a quick read and there are more than some items to enjoy.

During it, I thought about player health in relation to speculating. I am my own coach. It's a luxury to have someone call your number and sit you down for a breather, to know you may need rest over more drill. How do I know that I am playing/ trading fatigued—only after a poor result? Knight seems to have the keen memory still in gear. There are some interesting stories about his games and Big 10 accomplishments.

Coach Knight will definitely tell you "No".  

Leo Jia writes: 

Very interesting, Ken. Thank you for sharing.

There seems to be some rationale in being positive. As I understand it, when one says "yes, I can do it" and envisions the actual doing, he actually plants a seed in his subconscious brain. The subconscious brain can be more powerful in many ways than the conscious. So planting a seed there is to use the additional powers of the brain, which are not accessible by the conscious mind normally, and thus increase one's chance of achieving a goal.

Feb

11

 While most of you don't play racketball, I believe the hobo's history of racketball on site was very educational for those with kids who wish to play it or anyone who plays any racket sport. The torque and the backswings on the backhand and the bends in the pictures are most enlightening. One notes that there have been 4 champions who ruled the racketball world for about 5 years each, winning almost every tournament. I noted the same thing in squash, and tennis isn't too far away in that area also.

One wonders if a similar phenomenon relates to markets. e.g. is there one stock that can outclass all the others in performance for a certain number of years, like Hogan, Swan, and Kane. Eventually those champions receded due to age, competition, or injury. Is there a predictable turning point?

Alston Mabry writes: 

Obviously, AAPL is the current version of this. And looking at AAPL, one sees an example of a company that stumbles as it fails to effectively deploy the very capital it accumulates due to its success. 

A commenter writes: 

This is the measure of how good a CEO Jobs was. He may have been a great innovator and manager, but he may not have been that strong of a CEO. A good CEO assures succession, and it isn't clear that Jobs was successful in this regard. The same was true of RCA and David Sarnoff, By comparison, Alfred P. Sloan accomplished this task for GM, Adolph Ochs for the NY Times, Hershey with Hershey Foods, and the Mars family with the Mars candy business. That hasn't been the case with Apple, at least not yet. Any guesses on how long the Board waits until Cook is replaced?

David Lillienfeld writes: 

There will always be outliers.

There are also companies at the other tail with managements performing more for "enjoyment" (like me athletically–I suck at racketball but I very much enjoy playing it and when I've had access to a court, done so for 3+ hours a week). Are there stocks in which management is in it for fun rather than shareholder value "enhancement"? Sure. It isn't hard to identify underperforming companies.

As for a predictable turning point, there should to be tells in each industry, but that doesn't address your question about one sentinel stock. I don't think there is a sentinel today the way GM was in the 1950s and 1960s. (Some might argue that Johns-Manville was a better sentinel. Either way, there was a single stock.) You've got a globalized market and no one company occupies a dominant position in a sentinel industry (such as autos in the 1950s and 1960s). Of course, implicit in this uninformed comment is that a connection exists between stock performance and corporate performance.

Or have I misunderstood your question?

Alston Mabry writes: 

Just to do a little bit of counting, here are the 48 non-financial US-based cos with cash of $5B or more, with LT investments added in. The amounts are in billions of dollars, and the list is sorted by the Total column.

total cash: 729.4
total LT inv: 337.7
cash + LTinv: 1067.1

Ticker/TotalCash/LTinv/Total

AAPL   39.8  97.3  137.1
MSFT   68.1  9.8  77.9
GOOG   48.1  1.5  49.6
CSCO   45.0  3.7  48.7

XOM   13.1  35.1  48.2
CVX   21.6  26.5  48.1

GM   31.9  14.4  46.3
WLP   20.6  22.1  42.7
PFE   23.0  13.4  36.4
ORCL   33.7  0.0  33.7
QCOM   13.3  15.1  28.4
KO   18.1  10.2  28.2
IBM   11.1  15.8  26.9
F   24.1  2.7  26.8
AMGN   24.1  0.0  24.1
MRK   18.1  5.6  23.7
INTC   18.2  4.4  22.6
HPQ   11.3  10.6  21.9
JNJ   19.8  0.0  19.8
BA   13.6  5.2  18.8
CMCSA   10.3  6.0  16.3
DELL   11.3  4.3  15.5
UNH   11.4  2.6  14.1
NWSA   7.8  5.2  13.0
EBAY   9.4  3.0  12.5
LLY   6.9  5.2  12.1
ABT   11.5  0.4  11.9
AMZN   11.4  0.0  11.4

GLW   6.1  5.2  11.3
EMC   6.2  5.1  11.3

HUM   9.3  1.0  10.3
FB   9.6  0.0  9.6
UPS   9.0  0.3  9.3
WMT   8.6  0.0  8.6
SLB   6.3  1.7  8.0
DVN   7.5  0.0  7.5
S   6.3  1.1  7.5
PEP   5.7  1.6  7.3

PG   7.0  0.0  7.0
UAL   6.7  0.0  6.7

HON   5.3  1.3  6.5
DISH   6.4  0.1  6.5
RIG   6.0  0.0  6.0
ACN   5.7  0.0  5.7

COST   5.6  0.0  5.6
NTAP   5.6  0.0  5.6

DE   5.0  0.2  5.2

Richard Owen adds: 

This is a brilliant list with many lessons.

- 80/20 rule: $2tr of surplus cash is bandied about as the figure for US corporations. Here are 50 covering over half of that sum.

- The 1% have an internal dissonance. Here is their accumulated share of National Product, all stored up and failed to be reinvested. The 1% neither wish to reinvest their cash, to reduce their share of Product, nor to have GDP decline, nor to run deficits. This is in aggregate impossible.

- By giving you will receive. By being cowardly, you will realise your fear. Tim Cook is hoarding his cash out of fear. Nobody has EVER put that kind of cash to work successfully. Not even Warren Buffett could do it on his best day. If Apple attempts to do so, they will end up hanging themselves. David Einhorn is so on the point with his analysis. And for once an activist is helping make management's jobs more secure, not less. They just need to listen. Take some options, recap the stock, make yourself heroes. Don't think you can use that cash to buy another magic wand. You will end up buying a pup. The most recent example of what might happen to Tim Cook if he doesn't see the light is the CEO of Man Group. They totally feared that AHL would stop working. They grasped at their cash looking for any credible diversification. They bought GLG at totally the wrong multiple. And then it all fell apart. All totally well intended, all well thought through. But if they had just recapped the stock - "coulda been heroes". Get out of your own way.

Steve Ellison writes: 

A couple of theories:

The crossover point from innovator to mature company occurs when revenue from continuing product lines becomes large enough that it dwarfs revenue that could realistically be expected from starting up a new product line in a new niche, was the theory in the innovation class I took in business school. Let's say that a company might develop a completely new line of business. If it were successful, it would be doing very well to get to $1 billion per year of sales of the new line within 5 years. If the company already had $20 billion per year in revenue, management would probably devote more attention to nurturing and further developing the cash cows that bring in the $20 billion than to a risky venture that might, if all goes well, add 5% to existing revenue. One might test this proposition by setting an arbitrary sales per year threshold and checking stock price movements of companies after they move past this level.

Adoption of new technologies follows an S curve pattern, driven by a small number of early adopters followed by more cautious but herdlike technology managers at large businesses, was the theory advanced by Geoffrey Moore in Crossing the Chasm. One might test this theory by looking for companies whose sales growth decelerated to less than 20% of the maximum growth rate of the past 5 years.

Jan

22

Not all right wing radicals are forecasting inflation. Many of us are of the other side of that coin. The conservatives are back to the old argument that money supply creates inflation.that argument was destroyed since the Big O took office. M1,2,3,4 increases did not produce inflation. Gee whillikers, what does that mean?

They should go back to the drawing boards, but instead beat the same old drums, preach the same old mantras.

Alston Mabry writes: 

In the present regime, the Fed is increasing the money supply only by the amount of interest they are paying the banks to park at the Fed the very money the Fed shovels at them.

Mr. Allen writes:

The mistake is to think the inflation must show up in rates like in the 1970s. in the 1940s, the last time we had a significantly managed economy rates averaged 2.5% but inflation average 5.5% for the decade. That can occur when there is anchoring or when people think the inflation is transitory in nature. Under a gold standard, which is what inflation targeting is - short rates were volatile but long rates flat as a board because there was no systemmic inflation. Also, you can get stagflation which are higher prices and lower output which is more of what we have experienced as taxes, insurance costs, etc. are up but unit output for many industries flat. Also, do not fail to realize how empty the bucket was in 2008 v. now, Continentals did not immediately loose their value but there were $350 mil of those which in today's dollars is $3.5 trillion, so the Fed may in fact just now be crosses the Rubicon.

A commenter writes:

And 30-100% increases y-o-y in health insurance premiums for independent contractors and other small biz types. why? because they can under the guise of obamacare. really putting the squeeze on some average joes I know.

Jan

14

 One concept common in turf handicapping is the speed rating. It's not so much whether the horse wins the race, but what its fastest time was for a given quarter or some such. One wonders what the ideal predictive speed ratings for markets are. If we come up with the answers, we may be able to contribute to the ecology of the system and possibly prevent our losses from being as great as the public.

Gary Rogan asks: 

At first glance, I'm wondering is the history of speed ratings for any markets likely to be as predictive of the future as it is at the track?

Russ Sears writes: 

When someone is starting training for distance running, it is important to understand the maximum heart rate. Then training is geared around this number. The pace you should run to achieve different objectives is a range of percentage of this number. For example a speed workout, you might want to hit 90-95% of this rate. For a recovery run, maybe 60%. As you learn the pace to achieve these objectives you can stop measuring your heart rate and then go off feel.

However, as you get fitter, it becomes more about the recovery time to a base rate. The time it takes for your heart to get close to pre-workout rate will get shorter as your fitness increases. Then as this get shorter, you can increase the pace or shorten the recovery time between faster intervals.

It would be interesting to carry this over to individual stocks with volatility analogous to heart rate. Shocks such as earning numbers analogous to workouts. I hypothesis "fit" companies are ready to take more risk and have higher expected earnings. Whereas those whose long vols are increasing may be more likely to fall apart if they take more risk.

Anatoly Veltman writes: 

I think that Chair is often faced with an exit problem. Statistics prompt justifiable entry– but then one is prone to take profit too quick, or not be sure what to do about a loser, which only looks statistically better and better the more it's losing.

Therein lies the huge difference between binary outcome in most sports/games, and the investment field. I recall one Palindrome saying: "it's not whether you've picked a loser or a winner; it's more important how much you have ON when you're having a real winner".

An avid observer of track and field legends since watching my first Mexico Olympics live on Soviet TV in 1968 (the black power pedestal protest contributed to airing of that broadcast!), I always attempted to grade medal performance against the world records. I can name dozens of great Olympians, who peaked out during certain Games (sometimes 4 years apart, and even 8 years apart!) — and never held a world record in their event; and vise versa…phenomenal record holders, who've failed to taste Olympic success. But most of them did achieve both — which, again, makes statistical sense.

Alston Mabry adds:

A core "speed rating" question is around the effect of news events such as earnings surprises. The nature of earnings surprises has changed over time, as companies have learned to manage earnings more precisely: "Rich Bernstein Explains Why Missing Earnings Estimates These Days Is Such A Disaster". And then there is an assumption that market efficiency means any true surprise will be reflected in the market within minutes. But is this true?

Dec

26

Where the interests of signaler and signal receiver diverge, there exist both incentives and opportunity for manipulation by sending misleading information. Deception is the major obstacle to information sharing. And the living world is rife with deception. From the lure that an anglerfish uses to attract prey, to the false alarm that a flycatcher raises to dissuade competitors, from bluegill sunfish males that sneak matings by masquerading as females, to the mimic octopus that can imitate a wide range of poisonous creatures and other underwater objects, from the false mating signals of carnivorous fireflies, to the shame regenerated claw of a fiddler crab, from the chemical mimicry that caterpillars use to invade the nest chamber of ants, to the bluffing threats of a molting stomatopod, organisms deceive one another in every imaginable way in order to attain every conceivable advantage ".

From Carl Bergstrom's Dealing with Deception in Biology

What is needed is a model and practical means for dealing with deception in markets.

Gary Rogan writes: 

Perhaps whats needed first is classifying the different classes of market deception. At the very least there are two very distinct classes: deliberate and evolved. "Deliberate" comes in many flavors, like "flexionic"/insider where some privileged few act on advance information as in the recent "fiscal cliff" related flash crash or "accounting fraud" when a company (or a government agency) puts out deliberately distorted information. It seems like various market patterns that evolve/appear for some internal and often not clearly understood reasons are often not related or only peripherally related to the deliberate types, but still act to draw in the unsuspecting/unduly exposed and provide an energy source to the markets as opposed to benefiting some specific perpetrators.

a commenter writes: 

Good idea, Mr. Rogan. Other categories might be subdivided:

1) company specific deception which affects only a company stock price (HLF)

2) macro-economic deception which affects entire indices (fiscal cliff).

So, in order to beat deception, it is critical for one to fully understand the mentality of the targets (oneself at times when one is the primary target) as well as that of the deceiver.

When we come to model deceptions in markets, modeling the mentality of the crowds is perhaps much less of a challenge than objectively modeling the subjective nature of one's own mentality.

Alston Mabry writes: 

The biggest deception is self-deception: We are much more likely to believe a lie that we *want* to be true. Make a promise, charge a fee. The bigger the promise, the bigger the fee.

Self-deception can apply powerfully to things like chart patterns, or tempting but shadowy cause-and-effect relationships that you can almost tease out of the data. The market displays a pattern. Then displays it a second time. The third time you put a little money on it and score. So the fourth time you go in large, but unfortunately….

Dec

10

 There is something idempotent with the Knicks performance against Chicago and the 75 page paper by Hou, Xue, and Zhang.

They both start out so hopefully, and end up to me with a wimper. They suffer from look back effects, regression biases, part whole biases, multicomparison problems, and most of all basing a prediction on past results which contain many random factors.

The regression biases are overwhelming. How do the Knicks expect to win relying on a man like Smith whose shooting percentage is south of 30%? Why he did well the previous game, when the three percentage was almost 50%. Don't they realize that when they score that kind of % in a previous game, luck was involved to a large effect, and it is random, or negative serially correlated because the other team tries harder to defend against the threes and the Gallinari types like Smith are over confident.

Similarly in the Zhang studies, don't they realize that of course their results will appear significant if they base it upon already published results showing effects for the periods included in their study. Don't they realize that within a month, all the results of companies with different balance sheet characteristics are highly correlated and clustered, and that by the time they sort by dozens of variables with split after split they are left with few independent observations—certainly not enough to make meaningful significance. The companies in their various sorts don't change much from month to month, so they are measuring the performance of a small number of companies similar in style for say six months in the future…the tests, are certainly not enough to make any sort of meaningful predictions.

There is something to be said for their independent finding of change in assets divided by assets as a measure of past success and similarly for returns on equity. As far as I can see, however, they use a retrospective compustat file rather than the as is file and that makes all their results meaningless as companies with seemingly high returns on equity like Rimm often go from the black to the red and they appear to eliminate such companies from their comparison. Debt is not considered and with a retrospective file like Compustat, the value stocks will look great until they are delisted and not covered because of problems.

The study should have been performed with a given universe of large stocks with prospective data and data covering only the future years for their anomalies that were not already shown to have significant effects in past studies. Watching the Knicks hapless performance so typical of the Antoni led team of the past and reviewing this heroic but flawed study by Hou, Xue, and Zhang leaves relatively contemporaneousy leaves one with a certain sense of displeasure if not revulsion.

Alston Mabry writes:

Are papers like these read and digested and used by finance professionals? Who are these guys? This quote makes me think they are taking their own work quite seriously:

"Our work has important implications for academic research in finance and accounting. The qfactor model can be used as a new workhorse model of expected returns. Any new anomaly variable should be benchmarked against the q-factor model to see if the variable provides any incremental information above and beyond investment and ROE. More important, the vast anomalies literature in empirical finance and capital markets research in accounting should be reevaluated with the new expected-return benchmark provided by the q-factor model. Much work remains to be done."

Nov

27

A post purporting to show that buy and hold investing does not work has appeared on our list. It is reprehensible propaganda and total mumbo. They do not take account of the distribution of returns to investing over long periods that have been enumerated by the Dimson group and Fisher and Lorie. It is sad to see this on our site. The arguments against buy and hold seem to be that the professors found that short term investing didn't work so they erroneously concluded that long term investing must be the alternative. Shiller is mentioned and cited with approval.

Alston Mabry writes: 

To explore this issue numerically, I took the monthly data for SPY (1993-present) and compared some simple fixed systems. In each system the investor is getting $1000 per month to invest. If during that month, the SPY falls a set % below the highest price set during a specific lookback period (the 3, 6, 12, 18, 24 or 36 months previous to the current month), then the investor buys SPY with all his current cash (fractional shares allowed). If the SPY does not hit the target buy point this month, then the $1000 is added to cash. Once the investor buys SPY shares, he holds them until the present.

For example, let's say the drop % is 10%, and the lookback period is 12 months. In May of year X, we look at the high for SPY from May, year X-1, thru April, year X, and find that it is 70. We're looking for a 10% drop, so our target price would be 63. If we hit it, then spend all available cash to buy SPY @ 63. Otherwise we add $1000 to cash.

Each combination of % drop and lookback period is a separate fixed system.

Over the time period studied, if the investor just socks away the cash and never buys a share (and earns no interest), he winds up with $239,000. On the other hand, if he never keeps cash but instead buys as much SPY each month as he can for $1000, then he winds up with over $446,000, which amount I use as the buy-and-hold benchmark.

If the investor uses the fixed system described, he winds up with some other amount. The table of results shows how each combination of % drop and lookback period compared to the benchmark $446,000, expressed as a decimal, e.g., 0.78 would that particular combination produced (0.78 * 446000 ) dollars.

Results in this table
.

The best system was { 57% drop, 18+ month lookback }, or just to wait from 1993 until March 2009 to buy in. Of course, it's hard to know that 57% ex ante. The next best system was { 7% drop, 3 month lookback } coming in at 0.99.

This study is just food for thought. It leaves out options for investing cash while not in the market. And it sticks with fixed %'s without exploring using standard deviation of realized volatility as a measure. So, there are other ways to play with it.

Charles Pennington comments: 

Thank you — that is a remarkable "nail-in-the-coffin" result.

Nothing beat buy-and-hold except for the ones with the freakish 57% threshold, and it won by a tiny margin, and it must have been dominated by a few rare events–57% declines–and therefore must have a lot of statistical uncertainty..

That's very surprising and very convincing.

(Now some wise-guy is going to ask what happens if you wait until the market is UP x% over the past N months rather than down!)

Kim Zussman writes: 

Here are the mean monthly returns of SPY (93-present) for all months, months after last month was down, and months after last month was up (compared to mean of zero):

 One-Sample T: ALL mo, aft DN mo, aft UP mo

Test of mu = 0 vs not = 0

Variable      N      Mean     StDev   SE Mean  95% CI            T
ALL mo     237  0.0073  0.0437  0.0028  ( 0.0017, 0.0129)  2.58
aft DN mo   90   0.0050  0.0515  0.0054  (-0.0057, 0.0158)  0.92
aft UP mo  146  0.0083  0.0380  0.0031  ( 0.0021, 0.0145)  2.65

 The means of all months and months after up months were significantly different from zero; months after down months were not.

Comparing months after down vs months after up, the difference is N.S.:

Two-sample T for aft DN mo vs aft UP mo

                  N    Mean   StDev  SE Mean
aft DN mo   90  0.0050  0.0515   0.0054   T=-0.53
aft UP mo  146  0.0084  0.0381   0.0032

Bill Rafter writes: 

A few years ago I published a short piece illustrating research on Buy & Hold. It contrasted a perfect knowledge B&H with a variation using less-than-perfect knowledge using more frequent turnover. Here's the method, which can easily be replicated:

Pick a period (say a year) and give yourself perfect look-ahead bias, akin to having the newspaper one year in the future. Identify those stocks (say 100) that perform best over that period, and simulate buying them. Over that year you cannot do better. That's your benchmark.

Then over that same period do the following: Buy those same 100 stocks, but sell them half-way thru the period. Replace them at the 6-month mark with the 100 stocks perfectly forecast over the next 12 months. Again sell them after holding them for just half the period. Thus the return from the stocks that you have owned and rotated are the result of less-than-perfect knowledge. Compare that return to the benchmark.

Do this every day to eliminate start-date bias, and then average all returns. The less-than-perfect knowledge results far exceeded the perfect-knowledge B&H. Actually they blew them away in every time frame. It's really obvious when you do this with monthly and quarterly periods as you have so many of them.

The funny thing about this is the barrage of hate mail that I received from dedicated B&H investment advisors, who somehow felt their future livelihoods were threatened.

If anyone wants that old article, send me a message off the list. We called it "Cassandra" after someone with perfect knowledge that was scorned.

Anton Johnson writes in: 

Here is a link to BR's excellent study "Cassandra", as it lives on in cyberspace.

Nov

4

 I have recently read several biographies of Caesar including Caesar by Colleen McCullough. I found this brief review on Wikipedia illuminating. While I am not very knowledgeable about military strategy or Roman History, I saw many examples of Caesar's genius that were applicable to trading. I thought it might be helpful to list 10 things that helped him rise to the top and win battles that extended Roman territory to the Rhine and English Channel, and conquered 3 million of enemies, killed or captured more than a million of them, and brought back vast wealth to Rome.

1. High Frequency Execution.

He used high frequency weapons. The soldier's weapons were much shorter and lighter than the enemies. His used the Javelin and a short sword called the Gladus. The enemies used two foot spears. The Romans got to wound the enemy much faster and were able to fight much longer and fresher because they carried lighter weapons.

2. The Roman Logistics.

Legionaires had much better logistics than their enemy. Caesar always paid greater attention to food and living arrangements than his enemy. His men were healthier and stronger for battle and were able to escape quicker when defeat was imminent. The importance of a proper foundation for trading is emphasized. Make sure you have proper equipment, capital, and infrastructure before you start trading.

3. Alliances.

He was a master of making alliances, no matter the virtues of his allies. He formed an alliance with Pompei when it was in his interest, married his daughter to him, established peace with hostile Germanic tribes to defeat the Helvetias and the Gauls.

4. Training in the trenches.

He fought as a common soldier from the age of 20. He lived with the soldiers, ate their food, and battled with them. He was captured by pirates and was able to talk his way out of capture with a ransom and then caught the pirate ship and executed them. He had down to earth habits in his food and living. A trader who wants to succeed can't rise to the top withouot trading himslef, and developing economical habits.

5. Engineering.

Caesar loved nothing more than a complicated engineering problem. When he coudn't pursue the Germans by land he built a bridge over the Rhine. He left enough space on the other side so that he couldn't be captured again. He was able to move his army over the Alps in two days to defeat Pompei in Spain. He was trained as a scientist before becoming a soldier and applied the disparate disciplines of engineering, medicine, and architecture to better prepare for battle. The best training for a trader comes from fields other than finance,— physics, ecology, biology, music.

6. Celerity.

He moved his Legionnaires faster than his enemies. They frequently marched 60 miles in a day. He made decisions quickly and brought his legionnaires into the fray quickly when it was time to rout the enemy.

7. Speculation.

Time and time again he gambled and took bold strokes. If you are going to be a speculator you have to speculate you can't grind like Pompei, a much more experienced commander, did.

8. Incentives.

The legionnaires and he were entitled to a % of captured lands, jewelry and slaves. Each hand had a share of the spoils and this made them fight harder. At the end of their stay in the legionnaires they were promised land for retirement and many remains of their homes and belongings show that they lived relatively as well then as retired military today.

Alston Mabry notes: 

Twenty or 25 miles a day would be a substantial march, especially carrying all the gear they had.

In broad terms, the key to Roman battlefield success was their tactic of fighting in very close formations, even with overlapping shields. Essentially, they had more "swords per yard" at the front of a unit. This was very effective against enemies who fought in loose mobs, like the Gauls.

As for Caesar, an interesting topic of study is the battle of Alesia.

Phil McDonnell writes:

When I attended high school in NJ I had the pleasure of reading some of Caesar's writings in Latin. In particular I was struck by how he opened his account of the Gallic Wars. the opening three sentences were:

Veni. Vidi. Vici.
They translate as: I came. I saw. I conquered.

In many ways it is the height of confidence, even arrogance. Undoubtedly his confidence was one of his greatest aspects but it also lead to his hubris. One imagines that he was truly shocked when they assassinated him in the Senate chambers.

Oct

1

 What are the common errors, the improprieties, the lack of attention to proper mores, the p's and q of trading that cause so much havoc and could be rectified with a proper formal approach? Here are a few that cost one fortunes over time.

1. Placing a limit order in and then leaving the screen and not canceling the limit when you wouldn't want it to be filled later or some news might come out and get you elected when the real prices is a fortune worse for you

2. Not getting up or being in front of screen at the time when you're supposed to trade.

3. Taking a phone call from an agitating personage, be it romantic or the service or whatever that gets you so discombobulated that you go on tilt.

4. Talking to people during the trading day when you need to watch the ticks to put your order in.

5. Not having in front of you what the market did on the corresponding day of the week or month or hour so that you're trading for a repeat of some hopeful exuberant event which never happens twice when you want it to happen.

6. Any thoughts or actual romance during the trading day. It will make you too enervated or too ready to pull the trigger depending on what the outcome was.

7. Leaving for lunch during the day or having a heavy lunch.

8. Kibbitsing from people in the office who have noticed something that should be brought to your attention.

9. Any procedures that violate the rules of the British Navy where only a 6 inch plank separated you from disaster like in our field.

10. Trying to get even when you have a loss by increasing your size and risk.

11. Not having adequate capital to meet any margin calls that mite occur during the day, thereby allowing your broker to close out your position at a stop while he takes the opposite side. What others do you come up with?

Jeff Watson writes: 

I don't know if it is an error or a character flaw, but freezing will create mayhem with your bottom line.

Alston Mabry comments:

"Do Individual Investors Learn from Their Mistakes?"

Steffen Meyer, Goethe University Frankfurt– Department of Finance Maximilian Koestner, Goethe University Frankfurt - Department of Finance Andreas Hackethal, Goethe University Frankfurt - Department of Finance

August 2, 2012

Abstract:

Based on recent empirical evidence which suggests that as investors gain experience, their investment performance improves, we hypothesize that the specific mechanism through which experience translates to better investment returns is closely related to learning from investment mistakes. To test our hypotheses, we use an administrative dataset which covers the trading history of 19,487 individual investors. Our results show that underdiversification and the disposition effect do not decline as investors gain experience. However, we find that experience correlates with less portfolio turnover, suggesting that investors learn from overconfidence. We conclude that compared to other investment mistakes, it is relatively easy for individuals to identify and avoid costs related to excessive trading activity. When correlating experience with portfolio returns, we find that as investors gain experience, their portfolio returns improve. A comparison of returns before and after accounting for transaction costs reveals that this effect is indeed related to learning from overconfidence.

Kim Zussman writes: 

Trading a market, vehicle, or timescale that is a poor fit for your personality, temperament, and utility, exacerbated by self-deceptive difficulties in determining this.

George Coyle writes: 

Speculation by definition requires some amount of loss otherwise the game is fixed. However, I believe loss can be broken down into avoidable loss and unavoidable loss. Unavoidable loss is, well, unavoidable. But in my personal experience (and based on pretty much all speculative loss I have seen or read about) all avoidable speculative loss is traced back to some core elements/violations: not being disciplined (many interpretations), getting emotional and all of the associated errors and mistakes that brings, sizing positions too big so that regardless of odds you eventually have to reach ruin, not being consistent in your approach (the switches), not managing your risk adequately either via position sizing or stop losses, finally you have to be patient for the right pitch whatever that may be for you. 

Jason Ruspini writes: 

A similar distraction comes from making public market calls.

Jim Sogi writes: 

The Sumo wrestlers' trainers in Japan are conscientious about avoiding mental strife in their fighters since it affects their performance. Sometimes when other life issues intrude, like getting up on the wrong side of the bed, it is better to refrain from entering a large position. You're off balance. How many times have I thought to myself, "I wished I had just stayed in bed this morning"?

William Weaver writes:

Mistakes I'm working on:

-execution error
-having too much size too early — the first entry is usually the worst
-not being able to add size when appropriate — need to add to winners; understanding when to retrade and why — why did the trade fail, was it me or the trade?
-not taking every trade
-need to adjust orders when stale
-not touching orders when not stale
-not getting excited about trades
-not holding until appropriate exits, especially winners — disposition
-not accepting the risk. Must accept the risk.

When we fear, we fail. But we cannot be courageous without risking overconfidence because it leads to recklessness (at least I cannot). So how to not fear and not be courageous at the same time? One of the best traders I know is indifferent to any trade, yet he is excited by his job. He also has (and shoots for) only 40% winners but simultaneously is profitable on a daily basis (and expects to be). These were contraditions to me 8 months ago, now they are just fuzzy in my mind and I understand them but cannot explain them.

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