November 17, 2016 | Leave a Comment
So, in effect, the markets have tightened monetary conditions without the Fed acting. If the Fed raises rates in December, this will place some additional downward pressure on both M and V, and hence on nominal GDP. Thus, the markets have reduced the timeliness and potential success of the coming tax reductions.
Another negative initial condition is that the dollar has risen this year, currently trading close to the 13 year high. The highly relevant Chinese yuan has slumped to a seven year low. These events will force disinflationary, if not deflationary forces into the US economy. Corporate profits, which had already fallen back to 2011 levels will be reduced due to several considerations. Pricing power will be reduced, domestic and international market share will be lost and profits of overseas subs will be reduced by currency conversion.
Similarly, the unveiling of QE1 raised expectations of a runaway inflation. Yet, neither happened. The economics are not different. Under present conditions, it is our judgment that the declining secular trend in Treasury bond yields remains intact.
John Floyd writes:
The conclusion they draw demands some merit in my view while we await further info. But, apart from recent media coverage the US$ is basically unchanged for the year, see attached chart of the TWI. While the Fed clearly considers the US$ by their own models the impact is not exceedingly large.
On the US I would ask this question. If corporations have not been confident to hire full time employees, expand in R and D, capital spending, etc. over the past several years is something going to change over the next few? Even with a HIA, tax cuts, etc.?
Outside of new info it is likely that the floor of rates has risen across the curve in the US but the secular trend not changed.
I think the more interesting and potentially profitable question is what does Brexit, the US election, upcoming geopolitical events, and macro imbalances outside the US imply for asset prices?
In a rather simplistic and limited analysis this is the first time after a debate or "election news/event" that was deemed to favor the Dems that the Mexican Peso is lower on the day.
On the way to the office today I was blasted by Bloomberg from so many angles and reporters about Trumps "I will keep you in suspense".
A little context to remember is that during the Republican primary debate, all of Trump's opponents solemnly raised their right arm to pledge to support the Republican nominee, whoever it might be. Trump was the lone holdout, and he took heat for it.
Then more than half of them reneged on their pledges, including Jeb! Bush and St. John Kasich.
The truth is that if any candidate seriously suspected fraud, or a miscount, or whatever, they would field an army of litigatin' lawyers, as did Al Gore. Trump's the only one honest enough to acknowledge that.
Rudolf Hauser writes:
You may recall that Nixon did not do that in 1960 despite the likelihood that the Chicago vote was rigged and that winning Illinois would have given him the presidency. He did not want to put the nation through such a crisis.
Stefan Jovanovich writes:
It is a nice story, which Nixon did his best to promote; but the numbers do not support RH's assertion. Nixon only got 219 votes; adding Illinois and its 27 would have left him 24 short. Subtracting those votes from Kennedy's total of 303 would have left him with 276, 6 more than he needed. What few people mention about the election is that it was the last time a 3rd candidate won electoral votes. Harry Byrd won 15.
Like the German fairy tale Hansel and Gretel, the financial markets often have clues you can follow to safety and profits.
Sometimes though the clues that you intended to use, or thought would be there, are not. The question with DB is not if there will be a Lehman moment because there surely will not be. Rather, the consideration should be of the vicious cycle of bad politics leading to bad economics.
The key questions that should be asked include some of the following: First, to what extent does this weaken Chancellor Merkel's position in front of next year's German elections? Second, what does this mean for ECB chief Draghi and easy money which is wildly unpopular in Germany already? Third, what does this mean for Italian banks?
Surely, if Germany bails out DB, which is a given, how can the Germans ask Italians to play by different rules? Fourth, what does this mean for European banking union? Fifth, how might this influence German growth which has been the locomotive for Europe? Sixth, if Europe can't grow with a weaker Euro, low energy prices, and record low rates what does it take?
September 12, 2016 | Leave a Comment
This is one of many ways to get capital out of the country, Ken Rogoff highlighted others in an article awhile back.
I am not in full agreement with the sanguine view on NZ, China, etc. for a variety of lengthy reasons but I thought this piece interesting.
Vince Fulco writes:
As an aside, my sample set is small since I am growing my network with Chinese who are in Toastmasters or employed by foreign firms, but I have rarely met a harder working group of young people. Most are required to work ridiculous amounts of overtime and still find time to go to English language schools, Meetups, Toastmasters like professional organizations and the gym/yoga/run once in a while. And from what I have been told by a few western employers, hiring people with advanced degrees and strong professional/personal motivations costs peanuts. That having been said, they are no fools and will jump ship for a small increase in salary. Loyalty means nothing if the employer is going to underpay for any length of time.
Maybe I forgot what it means to be young and give everything to an employer/cause/dream. The bottom line is underlying the grossly inefficient state-owned enterprise system are some stars in the making benchmarked on a world scale who can be hired for a relative pittance.
I would note that 3 independent events in currencies over the past few days have raised my antennae. First, comments from the Reserve Bank of New Zealand caused a 1% or so spike higher in the NZD. Second, the potential question of the South African FM has caused a 3% plus move weaker in the Rand. Third, the downgrade of a rating's agency outlook of Mexico caused a 1% or spike weaker in the MXN. The same was true of Korea and the KRW a week ago. Granted these currencies are not the most liquid but I think the reactions in both prices and market commentary following them are above normal. Given the compression in volatility cross markets, lack of general fund performance, market participant risk aversion, and upcoming geopolitical and economic events these moves may be a foreshadowing. I recognize that much of this is qualitative and to be tested a bit further.
Jim Sogi writes:
Here is some anecdotal info on John's NZD post. New Zealand is booming, thriving and growing fast. It's peak ski season and I hear Japanese, Chinese, Italian, French, American, spoken in crowded restaurants and stores. Prices are very high, much higher than exchange rate justifies. Compare the high prices to low prices in Italy and Japan. Real Estate is booming in part due to Chinese purchases. Chinese tourists outnumber all others 10-1 at parks and heli tours. I wonder if now China is exporting inflation after years of exporting deflation with cheap manufacturing. Money seems to be flooding out of China.
When thinking about Italy and the EU, consider some of following:
What has been the economic growth of Italy while in the Euro?
What has been the economic growth of Italy since the the peak of the financial crisis in 2008?
How much productivity has Italy lost since being in the Euro?
How large is the Italian debt?
Can the ECB bailout Italian debt even if they tried?
What is the size of Italian NPL's?
What is the current trend in Italian politics and what events are upcoming?
Is the German/European electorate willing/able to bailout Italy?
Is the straight jacket of the Euro too much given both fiscal and monetary limitations?
by Lawrence Summers
On June 23, the UK will vote on whether to remain in the EU. On November 8, the US will vote on whether to elect Donald Trump as president. These elections have much in common. Both could lead to outcomes that would have seemed inconceivable not long ago. Both pit angry populists against the political establishment. And in both cases, polling suggests that the outcome is in doubt, with prediction markets suggesting a probability of between one in four and one in three of the radical outcome occurring. It is interesting to contrast the way that financial markets are reacting to these uncertainties. The markets are highly sensitive to Brexit news: the pound and the British stock market move with every new opinion poll. Analysis of option pricing suggests that if Britain votes to leave the EU, sterling could easily fall by more than 10 per cent and the British stock market by almost as much. It is widely believed that the uncertainties associated with Brexit are consequential enough to affect the policies of the US Federal Reserve and other major central banks.
It would in all likelihood be economically very costly for Britain to leave the EU and would raise questions about the future cohesion of the UK. It would also threaten London's role as a financial centre and curtail British exports to Europe.
What I find surprising is that US and global markets and financial policymakers seem much less sensitive to "Trump risk" than they are to "Brexit risk". Options markets suggest only modestly elevated volatility in the period leading up to the presidential election. While every Fed watcher comments on the implications of Brexit for the central bank, few, if any, comment on the possible consequences of a victory for Mr Trump in November.
Yet, as great as the risks of Brexit are to the British economy, I believe the risks to the US and global economies of Mr Trump's election as president are far greater. If he is elected, I would expect a protracted recession to begin within 18 months. The damage would be felt far beyond the United States. First, there is a substantial risk of highly erratic policy. Mr Trump has raised the possibility of more than $10tn in tax cuts, which would threaten US fiscal stability. He has also raised the possibility of the US restructuring its debt in the manner of a failed real estate developer. Perhaps this is just campaign rhetoric. But historical research suggests that presidents tend to carry out their major campaign promises. The shadow boxing over raising the debt limit in 2011 (where all participants recognised the danger of default) was central to the stock market falling by 17 per cent.
Ralph Vince writes:
What is not addressed is the question of what would be the economic consequences (and contrary to Dr. Summers musings, let;s keep it something measurable, like GDP growth) of another negative 100-500bln/yr in further deteriorated balance of trade over the next several years?
Are we willing to suffer another 2.5-3% drag on YoY GDP growth?
John Floyd writes:
Yes, as with another winner of the John Bates Clark award in the year prior the reasoning leaves much out and is ingrained in a certain hue. Nonetheless I find the tack interesting as we approach UK referendum, FOMC, US elections, Italian referendum, etc. in the coming months and the potential impact and opportunities in markets. Not quite up to Patton's statement to Rommel, but along the same battle lines.
Ralph Vince replies:
This is a period that is a serious test of traders and nerves now, more so than the usual, more than the past four or five hours at the bridge table. With this hand, it gets particularly interesting now, for those who haven;t dozed off and know what the t the contract is now.
As an extension to this line consider that one of the key tools in forecasting Bernanke’s reaction post 2008 was knowing his previous writings and statements as well as direct words including something very close to “a Japan type situation will never happen on my watch”. To that line of reasoning consider and read Yellen’s work at SF Fed on the US economy and the influence of housing, etc. and I think that is a good roadmap to her speech today and actions coming in the future.
The yoga investor was on Bloomberg the other day pitching his book and commented on how the central banks have created an asset bubble in stock and bonds. He felt it wasn't sustainable, and that something will trigger a decline. He's moving his book short duration and short exposure, or so he claims. With negative rates, its better to stash cash in the mattress.
I tend to agree, but as long as every one is admiring the emperor's new clothes it's hard to do otherwise. And the new clothes might be some new technological thing that you'd never think would work, like Amazon, or Google, or Apple that spins gold out of thin air.
One more interesting thing the upside down man said was that currencies will be the first to show some seismic shift, the canary so to speak.
The various central banks are using monetary techniques to stimulate their economies and its creating unbalanced pressures. The bubble pressure has to flow somewhere. It seems like its been coming to the US recently, and possibly when the rates go up, the flow might go even faster to the US. This would be in line with Larry's new high scenario, and we are pushing there now. That stats show a new high often leads to new highs. Remember the blowoff highs in the 2000's? Heady stuff. That the other scenario few talk about. Volatility at highs can be a different creature than volatility heading down.
Venezuela's currency is breaking down, but probably for different reasons. Yen has been active. EU is range bound. Be interesting to see what Brexit brings. Probably a big nothing like in Scotland.
Are there any Brits that can comment?
John Floyd writes:
I did not see what Bill Gross said, I assume that is who you are referring to. I would view this from a somewhat broader perspective and consider the many canaries that sing in coal mines all over the world and in many markets over many time frames. Consider that since mid-2007 the 30 year yield is down from around 5 percent to 2.65 percent currently. Consider that since the pre-2008 economic peak the US economy has risen by 10% and the Italian economy has shrunk by 6%. Consider what Milton Friedman said when the Euro was introduced. Consider the global debt binge across both developed and emerging markets. Consider commodity prices and credit prices now and circa 2008. The currencies are singing now, yes, but that must be taken in a broader context. Importantly, currencies are not anchored by any "intrinsic value" or "floors" and liquidity globally in all markets has changed. Currencies are one of the last equilibrating mechanisms in this broader picture and all involved should be able to imagine scenarios and extremes others cannot.
A cursory note of garden observations on today's walk to check the chickens. The dogwoods and redbuds are in full bloom and the fiddleheads of many fern varieties appear. It is interesting that the young dogwoods seems to be saving something and are not quite showing all the flowers they are capable of, compared to the more effusive dogwoods who are in the last half of their lifecycle. Similarly, a redbud which has been dying off is fully intent on procreating to maintain its lineage and is profusely dropping its seed.
I wonder the parallels with human life that may both be innate and extrinsic. For example, what can we learn from recollections of those at they approach or fear death? The life that flashes before the eyes of jumper who survives a plummet from the Golden Gate bridge. The person who is approaching death for whatever reason. The lessons from a man who studied 1,000 deaths to learn how to live, BJ Miller. The travels of many of a man and woman to the romance of a nubile partner.
I also wonder the parallels in markets at the end of market moves at the ends of market moves of varying magnitudes. How might they be quantified, observed, and monetized? A change in price momentum and direction after moves are exhausted. Particularly when they may not be supported by perceived or actual macro fundamentals. What are the timing mechanisms and linkages? For example, how might the recent move in oil be connected to moves in commodity currency pairs? Where might the CHANGE occur to be a catalyst, or not?
Given recent price moves in markets, upcoming economic data, geopolitical events, and market positions this may be a propitious moment to consider such factors. What about the cycles in the markets like those of certain animals, insects, and plants that only occur very few years. In that realm I would put a few broader macro-economic cycles and events. Consider most recently the Asian and LTCM events of the mid and late 1990's, the US crisis of 2008, and consider the current period and what might be happening and what is different? What might be reminded in Anna Karenina Tolstoy said "Happy families are all alike; every unhappy family is unhappy in its own way."
So what might be unhappy in today's markets in their own way? I would note that there are any number of factors to be aware of and to name a few: the comparative size of the GDP of emerging economies, the debt dynamics globally, the growth of the credit cycle in China compared to the US(2008) and Japan(1990's) and Thailand (1990's), the flexibility of EM exchange rates, the gross number of hotspots today versus previous crises, the populist political landscape and the causes thereof, the monetary and fiscal ammunition that is left and the willingness and know how to employ it, etc..
Guaranteed to happen in quest for egalitarian world state.
"Obama: UK Will Not Be Able to Strike Trade Deal With US Soon After Brexit" :
April 22 (Press Association) — Britain would not be able to strike a free trade deal with the US "any time soon" if it leaves the EU, as Washington's focus would be on reaching agreement with the European Union, Barack Obama has said.
The President was speaking after Downing Street talks with Prime Minister David Cameron during a two-day visit which he has used to speak out in favour of continued UK membership of the 28-nation bloc after the June 23 referendum.
At a joint press conference in the Foreign Office, Mr Cameron insisted that the special relationship between the UK and US was not "constrained" by Britain's EU membership. EU membership gave Britain "a powerful tool" to stand up for the values it shares with the US, said Mr Cameron, adding:
"Now, I think, is a time to stay true to those values, and to stick together with our friends and allies in Europe and around the world."
Mr Obama said the UK would be "in the back of the queue" for a trade deal if it left the EU, because the US would focus on the bigger bloc.
John Floyd writes:
Amazingly the supercilious EU has done wonders for the likes of Italy where one might consider that despite bailouts, low rates, low euro, low oil prices and many other beneficial headwinds:
- Italy is too big for the ECB to save with the 3rd largest government bond market and public sector debt that exceeds US $2 trillion.
- Italian GDP is down 6% point to point since the pre 2008 peak while the US economy is up 10% over the same period.
- Italian NPL's are around 17% compared to the European average of 6%
- Anti-European sentiment is rising and support for Renzi's government has halved over the past 2 years
- Public debt to GDP has gone from 105% in 2008 to 130% in 2015
There will soon be a new dish on the menu next to Grexit and Brexit. The chefs are now adding Itexit with a red or white sauce.
I was fortunate recently to attend a seminar in part given by a "serious" Seal Team 6 member. Recognizing that using the word "serious" in referencing a Seal Team 6 member is redundant I will do so anyway with that knowledge for emphasis. I can say this with a fair degree of accuracy given my own training and the fact I was 5 feet away for the multi hour seminar. While I was not being demonstrated on I found some time to make some notes. Later in a private conversation he and I talked about the cross application of the techniques and lessons across many fields and in nature. Here are just 6:
1. Consider a weapon not just by the traditional description but in terms of all the tools you can train and deploy, particularly your mind. Willpower is a powerful weapon.
2. Never attack from the same place more than twice at most, keep your opponent off-guard and move around.
3. Minimize emotions or you will have difficulty maintaining a focused mind.
4. Assume there is no back up and control your risk accordingly.
5. Think outside the box, but don't chase things you can't see. On offense, though, you need to own the situation.
6. Nerve, stand for something every day and remember the SAS creed "those who dare win".
In regards to the IMF, I would highlight the salient points from a recent speech by David Lipton, the number 2 at the IMF:
The weak recovery is taking place in the context of unresolved legacies. In many parts of Europe, for instance, sovereign and private sector balance sheets remain highly leveraged and banks' non-performing loans high. In the US, aging-related spending pressures and unfulfilled infrastructure needs diminish economic prospects. And in Japan, deflation is putting the recovery at risk.
At the same time, we are witnessing an emergence of new risks. The global economic slowdown is hurting bank balance sheets and financing conditions have tightened considerably. In emerging markets, excess capacity is being unwound through sharp declines in capital spending, while rising private debt, often denominated in foreign currency, is increasing risks to banks and sovereign balance sheets. Concerns about the global outlook have weighed heavily on world financial markets. The decline in equity price indices in 2016 so far this year has averaged over 6 percent, implying a loss of global market capitalization of over US$ 6 trillion (or 8.5 percent of global GDP). This is roughly half the US$ 12.3 trillion loss incurred in the most acute phase of the global financial crisis. Some Asian markets, such as in China and Japan, have been particularly hard hit, with losses of over 20 percent since the beginning of the year. Meanwhile, emerging market currencies have weakened, while their sovereign credit spreads have continued to widen—in Latin America and Africa by over 300 basis points over the past year.
What may be most disconcerting is that the rise in global risk aversion is leading to a sharp retrenchment in global capital and trade flows. Last year, for example, emerging markets saw about $200 billion in net capital outflows, compared with $125 billion in net capital inflows in 2014. Trade flows meanwhile are being dragged down by weak export and import growth in large emerging markets such as China, as well as Russia and Brazil, which have been under considerable stress.
Furthermore, inflation has fallen to historical lows. Headline inflation in advanced economies in 2015, at 0.3 percent, was the lowest since the financial crisis, and in emerging markets core inflation remains well below central bank targets. Why should we be concerned about these developments? First, because protracted low global demand, and adverse feedback loops between the real economy and markets may generate additional deflationary pressures, putting us at risk of secular stagnation. Second, and equally relevant, is that labor supply and labor productivity growth have fallen considerably over the past decade, further aggravating these adverse dynamics. While some aspects of the weak recovery are clear, we and many others in the policy world and in the markets are still debating and analyzing the role and the severity of several key transitions now underway:
• How will China's transition—with the deceleration in export oriented manufacturing activity and a pickup in sectors satisfying household demand —alter patterns of global trade and investment?
• Will the transition to lower oil and commodity prices be a plus, as predicted, or a minus? The expected pickup in consumption in commodity importers has been weaker than expected, possibly reflecting continued deleveraging in some of these economies and a limited pass-through of price declines to consumers. At the same time, declining prices have reduced investment in extractive industries, pushed some producers to or beyond the edge of profitability, and weighed on growth prospects for commodity exporting countries.
• Will geopolitical tensions, the related refugee crisis, and global epidemics further increase uncertainty and weigh on economic activity? With all these uncertainties, even our latest baseline for global growth may no longer be applicable. In any case, the downside risks are clearly much more pronounced than before, and the case for more forceful and concerted policy action, has become more compelling."
Is there a similarity between Japanese 10 year yields over the past 20 plus years and the Argentine Peso? I realize the Japanese yields are not pegged but even though Perry's black ships did arrive Japan is incredibly homogeneous and while declining Japanese bond ownership is largely domestic.
Is there a growing disconnect between the "peg" of European peripheral yields and social, economic, and political disparities that seem to be rising? For example look at GDP growth, yields, and debt level growth amongst the parties.
Further to the point on the military being a social good how does that factor in with: recent success and failure rates globally over the past few decades, growing domestic debt levels, "fair" and "delinquent" contribution to such treaties as NATO, etc…. is there a peg involved here as well?
As someone like Rocky will rightly point out this may all be well and good, right, or wrong but the key is to monetizing such theses: making the most when you are right and losing the least when you are wrong…both monetarily and mentally. Determining not only what may happen, the expected probabilities, size of possible price changes, catalysts, and how to best express the view directly within appropriate risk parameters and the best instruments with which to do so.
I figure there are a lot of phone calls between central banks [now], namely the Fed calling the shots [just like] after 2008.
I see that after consolidation, the dollar yen ramped up for about 10 months (after the Japanese stepped it up the week after the Fed stepped it down on qe) and eurusd was belted for about 10 months from top to bottom. Funnily enough Draghi had his cake and ate it too. (The last sentence kept the Fed happy).
So how about the USD has a breather [i.e declines] until about October, and then everyone has had their day in the sun [i.e has had a turn at depreciating their currency], and maybe fx101 is back on track.
John Floyd writes:
I would caution some danger of being too sanguine of such prospects and consider the following question: "What are the differences between 1998, 2008, and the current set up in 2016?".
One might consider the key question to ask preceding 2008 was what was driving the US consumer and what were the prospects for housing, mortgage equity withdrawal, the size of consumption as percent of the US economy, and the US economy as a percent of world GDP.
The vulnerabilities in 2016 are not centered in the US and the emerging markets represent a significantly larger portion of world GDP. China is now the world's second largest economy and emerging markets as a whole account for about 40% of the world's GDP.
But, unlike 1998, the emerging world's weakness is not anchored to fixed exchange rates that were prevalent in Asia and Latin America and public finances are in better shape.
Rather than being US centric fault lines are seen on multiple fronts such as the UK, China, Brazil, South Africa, Russia, Japan, and the European periphery to name a few.
The room for official policy maneuvering is also very different in 2016 than it was in 1998 or 2008.
One of the things I found most helpful pre 2008 was the simple math of looking at the components of GDP by country and the global weights of GDP and anticipating the direction and size of changes. Today, that same math yields some interesting conclusions into the possible outcomes and market reactions.
Didn't they do this in the 80s as well? Was this on the Commercial and Industrial (C&I) loans in the 80s?
John Floyd writes:
10 year government yields tell you the story [quote]. Factor in the deflation, lack of growth, and JPY move [link]. More recently look at the shifts in the Balance of Payments in large part driven by oil and nuclear issues [link]. But the core of the question is best summarized by asking what are the likely policy actions going to be and how might markets react given where the macro story is likely to move to. For example, consider the sovereign debt levels [link], demographics trends and their influence on consumption, etc., where is future inflation likely to be, and then factor in Japanese stoicism [link].
January 18, 2016 | Leave a Comment
While the world was mesmerized with China currency "manipulation", and played hot potato with equities worldwide - the Japanese retail and institutional investors decided over the weekend that they've had it enough with chasing South African yields. The result was a 10% gap opening that produced a new all-time low in that country's currency. Of course, the opening was overdone, and the extreme quotes were way too wide to deal any substantial size. Yet, the signal went out - even if it was little noticed.
So the South Africa Reserve Bank will have to deal with run on their currency. Indeed, no Central Bank will allow overly rapid devaluation - so they'll have to be buying Rand in the open market, daily. With what? Obviously, they can't spend their meager reserves of US Dollars doing that - and they'll have to auction off or pledge some of their Gold reserves (I believe they hold Platinum bricks as well).
Now, when I pointed that out at last night's CME open, Gold was still up much bigger than Silver - on pure speculation. Speculation based on standard notion that Gold would be more valuable than Silver "during Stock Market uncertainty". That's pure speculation. The dynamics I point out about the South African Central Bank is less of a speculation - they are rather the actual procedural transactions in these kinds of circumstances. Thus buying Silver futures against a sale of Gold futures was a smart thing to do right from the Sunday night open. And that's as close to easy money as one can come!
Just read the South African Reserve Bank's annual report and appendix: "Management of gold and foreign exchange reserves." They don't have any platinum. Their forex reserves have increased to over $60 Billion (according to this document). So they've got plenty of ammunition to intervene if they want to.
Markets will do what they want to do. However, if the gold and silver markets are behaving based on Anatoly's theory, the mkts are wrong on the facts.
John Floyd writes:
My African Grey parrot has learned to whistle the beginning of the Rocky theme song. I would frame the opening two rounds between anonymous and Anatoly more broadly by considering the following.
1. To what extent does the move in the South African Rand last night portend for future pockets of illiquidity, for example the stock flash crash, the fixed income flash rally, the Chinese currency devaluation, etc. ? How might that be best handling offensively and defensively?
2. Why has the decline in oil and gasoline prices not transpired to a more robust pickup in consumer spending?
3. Why are corporates generally more willing to buy back stock than increase capital spending?
4. Is it an issue that according to the BIS emerging market debt has risen from $15 trillion in 2010 to $25 trillion today?
5. What happens to domestic risks when foreign currency denominated debt has increased from $1.5 trillion to $5 trillion?
6. What happens to inflation when emerging market currencies plunge and how do central banks respond in an already weak domestic economy?
7. If the Fed was concerned about global risks in September how might this change their behavior?
8. In 2008 troubles in the US$10 trillion mortgage market had broad implications, are there parallels today?
9. What might occur to cause present market themes and trends to reverse?
That is enough for 9 rounds and hopefully we can all make a victory run up the Philadelphia Museum of Art steps and perhaps make enough to buy van Gogh's Sunflowers inside.
We all must acknowledge that the stock market (and subsequently bond markets) seem connected at the hip with the crude price right now. Does this make sense? I don't know. But it is what it is.
This oil discussion got me to finally run some quick numbers. I'm sure similar numbers have been in the press, but I like to look things up for myself.
In my cheap-seat view of the world from my gopher hole, I've been thinking about how there are certain crucial parts of the global equilibrium that have gone through important changes, and that part the current volatility is a process of finding the new equilibrium.
The various QEx/on-off moves are part of this. And also China, in that they are (slowly [probably]) moving away from the mercantilist import/currency/capital control system, which created the macro-financial jet stream effect where we bought their stuff, and they sent the dollars back to their Fed account, to the tune of a few hundred billion a year, while they paid off their exporters with new yuan and thus created a global inflation sink.
But the biggest, quickest change has been oil. Some nice rounded numbers, referring to the change in $/bbl from June 2014 to present:
global avg daily consumtion: 90M bbl price change: -$77/bbl loss of revs to oil producers: $6.93B/day annualized loss: $2.53T
A big chunk of that money flows into Saudi (about 1/9 of global oil revs), and they have some kind of pattern of spending and investment. Used to be the Saudis spent a big piece of it on gold. Probably not so much now.
They are like one of those deep-sea hot-water vents where the life grows around it. There has been an equilibrium for a long time with that money flowing into oil producers and providing the hot water for those vents. In a very short time, ~$2.5B of flow has shifted away from that system, not to mention all the downstream segments like the integrateds, mids, E&Ps, etc.
I remember when big numbers had an M. Then we moved to B. Now to be big, a number has to have a T. I figure a $2.5T change in the global equilibrium is going to take a while to digest, not to mention the unrealized political consequences in the Middle East and elsewhere.
Again, without being overly precise, subtract US oil exports from imports, and you wind up with 9.2M bbl/day, which translates to a little over $700M/day in payments, which annualizes to $260B. Which, all other things being equal, should be less downward pressure on the USD.
Cui bono? The American consumer, of course. Again, June 2014 to present:
avg gas price/gal:
June 2014: $3.766
Dec 2015: $2.144
US est daily gas consumption: 375M gal
Daily savings: $608M
That's our piece of the action, and it has to be really good for somebody.
I can't think of a clever summary, so there it is.
October 23, 2015 | Leave a Comment
I would posit that the Asian markets, and the emerging markets in particular have had a predictive and leading impact on the US stock market. They went down hard before our crash, and now are going up strong before the Dow and SPU close the year at all time highs. However, I ask a general question. Is there one market, anywhere in the world an any time in the 24 hour cycle that has a predictive and profitable impact on another, and if so how long will it be before the cycles change?
John Floyd writes:
On a slightly more qualitative avenue I would consider the prevalence over the past decade plus to say the least of "bad economics leading to bad politics leading to bad economics loop"
The recent Portugal elections and ECB statements today are an upwelling of fertile information to consider in terms of Europe in the immediate future.
The extension could go to Asia as well where the capital outflow and reserve losses from China share some parallels with that of Russia in 1998.
I have noticed a discernable change in the last several dozen Uber rides I have taken across many distances and locales. For example: greater price variability for similar routes, more frequent surge pricing, drivers less familiar with the most direct route, errors in estimated pick up times, drivers quicker to cancel your pick up because you are not at the exact spot and time and therefore collect a penalty fee. Overall the experience and service is good and I continue to use but this is a significant shift from where it was.
Questions to ask: Is there somewhat of an S curve effect in what is happening at Uber? What does this say about other similar technologies? What happens if the competition begins to use the technology more, such as taxis? What does this say, if anything, about overall market valuations and expectations in the future for other market classes, for example the biotech index (NBI) which are imputing certain levels of future growth?
Drivers are figuring out that the normal fares paid by Uber in non-surge times are not commensurate with time, cost of vehicle, maintenance on vehicle, risk of accident and injury, and dealing with drunk inconsiderate riders, so the supply of drivers is not meeting demand. So basic supply-demand economics is causing more surge pricing to encourage more supply of drivers willing to drive at the higher rate.
Confederacy in Wonderland and Tales of Trojan Horses, Broken China, and a Trip to the Drugstore with the Fed, from John Floyd
September 10, 2015 | Leave a Comment
One of the key elements in trading is to ask the right question, almost in a Columbo like fashion. Holding the issue of macroeconomic policy theory in abeyance let me outline just a few questions on my mind.
The Greek election is September 20 and the polls are showing Syriza and New Democracy tied at around 27%. The winner of the election will likely be forced to form a coalition with at least two other parties. Stronger Greek governments in the past were not able to meet the conditions of similar creditor bailout programs. Is it right to question a new and weaker Greek government's ability to meet the conditions of the third bailout? What are the implications for Europe and the respective financial markets?
China's share of world GDP(USD terms) has gone from 2% in 1995 to 12% in 2013 and is now the world's second largest economy. Chinese growth is now slowing sharply by any measure and the credit bubble is deflating. By comparison, Chinese credit growth between 2006 and 2014 is estimated to have been 90% of GDP while Japan's preceding the 1990's bust was 45% of GDP and in the US it was 40% of GDP during the credit boom preceding the 2008-09 housing bust. Is it right to consider that the inevitable prolonged slowdown in China will continue to influence global financial markets, support further US dollar strength, and continue to negatively influence emerging markets?
The FOMC on September 17 will announce any changes to monetary policy. Markets currently show the probability of a 25 basis point hike at just under 30%. The reasons for the Fed to hold off from tightening monetary policy might include: fragility in global financial markets, the strength in US dollar, the weakness in oil prices, credit conditions, inflation and inflation expectations well below target, weakness in diffusion indices, labor market conditions, etc. While one tightening may not influence the economy in the medium to long term it may influence financial market in the short term which have a feedback loop to the real economy. Is it right to consider there may be other reasons for the FOMC to raise rates a token amount? Perhaps this is a coming of age moment for the FOMC where they have waited a long time to raise rates and now finally will take the step, even if by a token amount? Perhaps the FOMC wants to nudge rates off the floor and test out the new money market operations? Perhaps certain FOMC policy makers have been concerned about the influence of QE on financial markets and excessive speculation and risk build up? Does a small tightening allow some room to test the impact on markets? The real question going forward though medium term is if the FOMC is going to parallel to Benjie in the movie Summer of '42. Is a consummation of tightening by the FOMC looked back upon as a onetime event as the tracks of the economy in the sand remain of subpar growth and low inflation?
August 13, 2015 | Leave a Comment
So now they tell me why the S&P rose 30 points from noon to close yesterday.
What is the appropriate proverb for this? "The news follows the price"? "Too late by half"? "Prediction is easy–after the event has occurred". "A stitch too late helps no fate"? "Better late than never"? "Better to be late than risk being wrong". "It is easy to be wise– after the event"? "Wait before you leap". "A prediction after the fact is never wrong"?
Okay. Thinking about it leads me to believe that one of the most important things for summer markets is to wait. Sit on your hands. Don't trade until half an hour has passed?
"Finland's Stubb Optimistic Greek Bailout Deal Will Be Reached"
2015-08-13 09:45:26.142 GMT
By Chad Thomas and Raine Tiessalo
(Bloomberg) — Finnish Finance Minister Alexander Stubb expressed optimism that a deal will be struck with Greece in the coming days, allowing the government in Athens to meet debt payments later this month.
"Things are looking much better right now," Stubb said in an interview on Thursday in Helsinki. "We have indicators that the Greek government is more serious now. The path towards recovery has started. It is going to be long but we have weathered the worst of the storm."
Stubb said he's confident that euro-area finance ministers gathering Friday in Brussels will be able to reach either a conclusive deal to provide 85 billion euros ($95 billion) in aid or at least extend a bridge loan to the country in time for Greece to make a payment to the European Central Bank of 3.2 billion euros next week. Germany's government on Wednesday withheld approval of the draft bailout plan, saying a bridge loan remains an option if a full aid program isn't agreed in time for the ECB payment.
"We are quite agnostic about which one is used," Stubb said. "If more time is needed we can do that. If we can already now verify that the measures that have been agreed by the Greek government and the troika will fully take place, we will probably be willing to give a green light to the program."
John Floyd writes:
Build a strong foundation of knowledge of what is driving the European macroeconomic and geopolitical cycles and how market will respond. Analyze how the opponent is moving and perhaps it is better to attack the single or double corner. Perhaps the attack is directed to the currency markets as in the past year. Or, rather, perhaps the attack is directed to the rate markets as in years prior. The opponent continues to move and play the same strategy. You remind yourself as Einstein said "Insanity: doing the same thing over and over again and expecting different results". But, there is a time to press the position and there is a time to wait out the opponent's hubristic bad moves. Stick to the knitting of the core repertoire that are the main arrows in the quiver.
In consideration of some recent market themes and timeless maxims I have been thinking about the following:
1. Develop your own repertoire of analytical and combative techniques. What works for one person is not the same as what may work for another. Faulty and ill reasoned theses will detract from your ability to succeed. Is the U.S. really like Greece? What are the similarities and differences between say Greece and Puerto Rico? Learn from and incorporate from others but you need to sow your own techniques and own the trades.
2. The right distance is critical in both being able to strike at opportunities and not be hit by ill-timed forays. If in fact the U.S. is like Greece what, when, and how is the best way to trade that view? You want to keep a distance at which you can activate offense at any time and score. But, you want also want to be able to keep your distance measured so mental and physical capital is not unduly expended.
3. Utilize the power of the message of the markets and prevailing trends. The recent trend in commodities, emerging markets, and related assets is a prime example. Was it right to anticipate a top in 2009 if the thesis was the bailouts, monetary, and fiscal measures globally would not sufficiently engender an economic turnaround? Or was it better to wait until that fact became evident to enough market participants?
4. Anticipate the markets through analytics but wait for the market to confirm before fully committing.
5. Hone your focus and test the waters with small forays into a thesis with limited risk through options or position sizing.
6. If the thesis is right what is the best way to leverage not only the capital in a portfolio but the power of the market? How does one not sit idling by and watch an expected move with an incorrectly sized position?
7. Consider warning signs as to when that trend may be exhausted and due for a correction or reversal. For example does the recent establishment of short positions in gold by speculators mean anything? How might this be combined market positions and expectations with the upcoming data releases in the US, Chinese stock market, US Fed policy and expectations, Greek developments?
8. Find the most direct expression of a view, don't get distracted by trading the derivatives of a thesis.
9. It is not about what you think is right but the what the market is doing. The recent plunge in the US consumer confidence indicator and market reaction was not about what the validity of a number but what the number was going to be and how to predict the number and the market reaction. Ari Kiev used to emphasize this to me all the time in our frequent discussions.
10. Find the balance of not being complacent or dogmatic but also fully committing mentally and with sizable risk when a strong thesis is in motion. Mushin no Shin .
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.
One wonders how a 30 year yield of 3.1 % and 10 year of 2.4% might impact the economy negatively and whether that will give pause to hawkish activities especially before an election. One wonders also how the inflation adjusted bonds fit in with these numbers.
John Floyd writes:
The 5y5y inflation swap [see chart below] has remained in a range, the election and/or referendum to watch may be the one in Greece, which I would say is greater than 50/50 probability of occurring, that is likely to have some impact on Bunds and UST, and the sirens of Fed and ECB don't seem quite confident on economic growth.
Vanderbilt used to cross at slack tide. There appears to be no slack tide in Europe:
Stefan Jovanovich writes:
Vanderbilt sold the last of his steamships in 1864; like the Greek shipowners (Onassis et. al.) whose fortunes got going after WW II using the money paid by the British government in war damage compensation, most of the sales proceeds for Vanderbilt came from the public purse. That was the money he used to buy and build what later became known as the New York Central. The Commodore would have agreed with John about the tides in Europe; for him there was only one currency - gold coin. The arbitrage between greenbacks, Treasury bonds - redeemable and non-redeemable, and coin were the Commodore's first serious speculations in the market (as opposed to the largely private battles for control of the feeder Boston railroads to the Long Island sound that were the source of his steamboat passenger traffic). Then, as now, FX was THE GAME.
One of my martial art instructors emphasized when facing an adversary a practice of never fixing your eyes, focus, or thoughts on any one specific attack. The thesis is that attention to a particular area leaves you vulnerable to secondary attacks. For example, when you are solely fixated on a potential blow to your right rib cage the real threat might be a spin kick to your head. The attention to one area delays both your reaction time and distracts your mind from other threats. Rather, the objective is to deal with the opponent in a more general sense, using peripheral vision and react spontaneously. Years of practice hone these skills to a point where they are intuitive. A chess master will recognize patterns on the board in similar fashion.
In fact, the saccadic movements of our eyes compress time subjectively. Saccadic eye movements as described by Neuroscience magazine are "rapid, ballistic movements of the eyes that abruptly change the point of fixation…..Saccadic eye movements are said to be ballistic because the saccade-generating system cannot respond to subsequent changes in the position of the target during the course of the eye movement. If the target moves again during this time (which is on the order of 15–100 ms), the saccade will miss the target, and a second saccade must be made to correct the error." . Scientific work by Concetta Morrone, John Ross and David Burr and others have shown that subjective time and space are compressed prior to saccadic eye movements. The remapping process of the brain is the likely cause of the distortions in time and space.
The lessons can be carried to the markets. In terms of multiple attacks and space compression a few things come to mind. The combination of factors such as the FOMC meeting in March, market positioning, sentiment, and economic data in Europe, Greece, and the United States that may have contributed to the recent selloff in the US dollar The rise in interest rates over the past fortnight and the feedback mechanisms and knock on impact to other markets. In terms of space compression others come to mind. The similarities between bond market reactions and timing to quantitative easing's actual implementation in both the US and Europe. In terms of the future how might similarities between the old Argentine Peso peg to the dollar at 1.0 and the current Euro currency regime play out?
April 10, 2015 | 6 Comments
One of the most frustrating things in trading is when you research a (qualitative, not a systematic) trade, stay up late figuring out how you want to express the idea to maximize gain and minimize loss, and then the next day when you want to put on the trade that stock is up near 3%.
Considering it has done nothing for months you figure, "I will wait till to buy on a decline a bit lower". Then the next day you see it is up 8% and the options you had looked at were would be up 60% in a few days had you conceived of the idea just 1 day sooner.
I think at such times (similar things have happened to me 3 times so far this year) one is very prone to going on tilt, such as finding some other market to chase, or otherwise do something out of frustration that is not logical and end up losing what you would have made had you been one day sooner.
I am wondering if there is any way this sequence of events can be generalized beyond specific circumstances of one trader, to general market phenomenon, maybe even events that lead to predictable circumstances.
Jeff Watson writes:
Whenever I go surfing, I miss a lot of good waves. I either am in a wrong position, miss it completely, or just blow it off thinking a better one will be behind. I never feel bad about missing a wave because there will always be another wave sooner or later. I look at trading exactly the same way I look at surfing.
John Floyd writes:
Agreed, put another way as someone once said to me “there is a bus every 5 minutes”. Also importantly in terms of the limits of time and energy don’t spend it worrying about missed moves, focus on what is ahead.
I read a poignant quote recently in The Joyful Athlete: ”Second tier athletes tended to beat themselves up for mistakes, while the champions simply noted their errors and moved on, wasting no energy on self-recrimination.”
Stefan Jovanovich writes:
I have the same problem. Sometimes I wait on a trade too. I think it is greed, the desire to seize the least/highest perfect. So I remember: "Luke, trust your instincts!"
I strenuously disagree with the philosophy that "there is a bus every five minutes." (My late great father used to say, "there's always another street car.")
This is a rationally flawed analysis. Because it treats an opportunity cost as economically different from a realized cost. The reality is that the P&L from an opportunity cost is real, and it compounds over time. And this is true so long as one is consistent regarding timeframe, methodology and performance benchmarking. The most pernicious thing about this street car delusion is that it can be hidden, rationalized and forgotten.
By way of example, our fellow Spec Lister and Bitcoin Booster, Henrik Andersson declared on March 12: "Crashing commodity prices, currency war, crashing yields (with a big chunk of European debt trading at negative yield), surely this can't be because everything is so rosy in the world, this cant possibly be 'good' news. Couple this valuations close to ATH and I have for the first time in 25 years sold everything (I started investing when I was 12). Everything."
Since this declaration, the SPX, Dax and Nikkei have all risen between 3 and 6% — and the DAX is at an all time high. If Henrik measures his performance on a daily or weekly basis, this is a bona fide opportunity loss of substantial note. But if Henrik measures his performance on a long term, multi-year basis, it is way too early to render a verdict and this opportunity cost may well morph into an opportunity gain.
John Floyd comments:
Point well taken and a good one. I was afraid my quick comment might garner the need for elaboration. The point I was trying to make is if you “miss” a trade you should learn from the experience and move on, while trying not to repeat the same error in the future. Juxtaposed against expending energy lamenting the perceived lost opportunity, which also has a cost. Assuming this is done with some degree of improvement I think it is both rational and sound. In this way the opportunity cost is treated as real and minimized over time. If there is improvement made then returns are compounded in a positive fashion as opposed to a pernicious one. In anonymous’ example that might even mean Henrik recognizes what may or may not have been an incorrect thesis and “buys” everything the minute he read anonymous’ post.
Sushil Kedia writes:
My two cents on the table:
Opportunity costs as well as realized costs are both known and quantifiable only after the market has moved. At the instant of a decision as to whether to decide to take a trade or not, both are unknown.
Since a real P&L is a progression of a series of unknown infinitesimally sized but infinite number of moments, it is likely a flawed debate to undertake whether or not opportunity costs compound, since if those said opportunity costs actually turned out to be realized losses they too would compound.
Transliterating approximately what the Senator has said often in the past, the purpose of a trader is not to be in the market, but to come out of the market, one would like to tune one's mind to focusing on how much could one gain without losing beyond a point. For each this is a unique set of numbers despite the market being same for all. This uniqueness comes not only from different skills, but different restrictions on the types of trade one is allowed to take, the different marketing pitch each has to use for garnering risk capital (oh we keep transaction costs low), the different risk tolerances each must remain within etc. etc.
So each needs to focus on how one will travel from an infinite series of infinitesimally small pockets of time in deciding when to not decide.
Paolo Pezzutti writes:
With regards to missed opportunities, I have two observations.
Firstly, I think our mind is biased in focusing on the good trades that one could have made. We tend to forget the bad calls. It is true, however, that if your trading methodology is systematically not "efficient" then your performance will eventually be sub par.
Secondly, if you continue to miss opportunities, you may have an issue in pulling the trigger when it is the right time to do it. I have a long way to go to improve my trading and I think I have to work on both these areas. My trades are inefficient, because I can spot good entry points but my exits too often get only crumbles that the market mistress is willing to leave on the floor after a lavish dinner. Moreover, one tends to be afraid of taking the trade right when the risk/reward is more convenient, that is when fear is the prevalent sentiment in the market, the moment when you should "embrace you fears" as Larry Williams would say.
As a final comment, I have to commend the market mistress for her naughtiness and deceitfulness. The employment report on Good Friday released with markets closed saw prices of stocks plunge seriously (20 pts in 1 hour) to get 30 pts back on Monday. Many opportunities during the Easter weekend in stocks, bonds, currencies, commodities because of ephemeral end deceptive moves. Who knows if they were orchestrated or simply "random".
I went short gold on Thursday at the close (1715) at 1202.6. The first price printed on Monday was 1212.7. I eventually took a loss later that day of about 14 points. After 2 days gold was down at 1994. Focused on my potential loss, I did not exploit the huge opportunities offered. Afraid of even bigger losses, I liquidated my position instead of trying to close the big gap printed at the open. Moreover, I did not buy stocks or bonds to trade the obvious lobagola move. Double damage.
It is a matter of mindset. There are coincidences, situations; there is the ability of a trader to translate into action tests, statistics related to these conditions created by the market mistress. The more extreme the conditions, the more compressed is the coil, stronger and more powerful it will be the reaction in the opposite direction. Much to learn.
Duncan Coker writes:
I have always had a hard time reconciling opportunity costs/gains with realized costs/gains, though I know in economics they are comparable. For example, a casual friend offered me a private investment opportunity which didn't smell quite right and I declined and I left the money in cash earning -1% real rates. Shortly thereafter the enterprise went bankrupt and all would have been lost. I suppose on an opportunity basis it was a huge success for me, 100% gainer, and yet my cash account is the same earning -1%. Every day trading is a missed opportunity to be fishing on a nearby river which is easier for me to grasp and adds to the overall cost of the trading endeavor. Being able to forget and move on is a useful thing in trading. A swim or run at the end of the day does it for me.
I do believe one can go broke from taking profits. Maybe if one has very few positions at a time this could take a while to notice (the benefit to marketing a long term strategy of any sort– few observations) but everyone will fail.
Think of football, a defense might determine that if they can hold the other team to 17 points that they have won their part. What if the offense deploys their secondary after 14 points? May your successes be larger than your defeats.
We are playing an unbounded game, we have no idea the amplitude of future gains or losses, let alone their frequency. Taking profit when unwarranted may not give us a chance at tomorrow.
As for opportunity, we all balance the fear of missed opportunity with the fear of loss. The more successful traders I've known are slightly more fearful of leaving money on the table than losing money. Slightly.
But that depends on the difference between the value and utility of the opportunity. Duncan, you bring up the ultimate question about the purpose of life. Way to make this a deep conversation.
On the currency moves versus the dollar the headlines get it sort of correct. A currency change seems to effects the non-US country much more that the US. For example since 2003 when the Euro/$ gown down 3 points over 10 days on average,n35 the Dax goes up 50 over next 10 days. When the Euro/$ goes up 3 points over 10 days, the Dax goes down -32 over the next 10 days on average, n05. In both cases the SP is relatively flat during those period. Admittedly the R square is very low. Todays outperformance of the DAX so far is unprecedented since 2003 with the Dax up over 200 and SP up a fraction or possibly down.
Meanwhile, the US consumer is the envy of the world. Energy cost halved, currency at 12 year highs. Rate at historic lows. What's not to like, except US equity markets which lag every other Western nation, except of course Greece.
John Floyd writes:
"I skate to where the puck is going to be, not where it has been." -Wayne Gretzky
I for one would consider the IMF assumption that a 20% rise in the US dollar has a 1% impact on both GDP and inflation. What if the Fed tightens in June to September and the US dollar is still appreciating and markets approach more Greek issues, a UK election, and upcoming Portuguese and Spanish elections?
Chris Cooper writes:
I've been short non-US currencies for some time. But this appears to have been successful mostly because it is a "risk off" trade. In other words, one theme. My question is similar to Mr. Floyd's. Even if we assume that "risk off" will continue, at what point does USD cease to be a good vehicle for this theme? Is there, or will there be, a better vehicle, such as corporate bonds?
The Greek finance minister is very astute with game theory forte. So far he has made a credible threat of a willingness to blow out of the EU–not a bad first move from a disadvantaged starting position.
John Floyd writes:
Many excellent points are being made in our discussions on Greece, Europe, and related topics such as Russia's 1998 default. Inclusive in the comments are the micro, macro, political, and social influences. Stefan is always excellent at bringing some historical context. Fittingly I am listening to the American Colossus at the moment.
One of, if not the KEY question, as a speculator is how best to extract capital from markets given a specific view, market, potential, catalysts, time frame, risk level, etc. A close friend, Dr. Ari Kiev, used to say to me when I would elaborate on a market thesis "John, that is great and makes a lot of sense. But, how is the best way to make money from it? What are the specific goals, etc.?".
The economics and politics of the European situation are fairly straight forward. I have followed them, more fastidiously than I care to admit for many, many years. I have included everything from men on the ground following bank deposits, meetings with current and past leaders and the 10,000 foot view of how this may play out on a broad macro level. Milton Friedman made some typically prescient comments upon the forming of the single currency, and they are panning out. Many of the same issues and characteristics were present in the European Rate Mechanism (ERM). Those more learned than I might also weigh on the potential utility of different currencies in the present day U.S., the Confederate currencies, etc.
Directly from a market perspective though I would consider some key points and questions:
How do previous crises provide some examples for a potential playbook? In the past few decades for examples…how was the Tequila Crisis backstopped? What about the ERM crises? The Argentine peg removal? Hungary's revaluations and devaluations? The currency policy of Egypt in the mid 1990's?
Does the size of the problem relate to the size of the market impact? The Russian default was relatively small and debt held by a limited number of participants. I can remember sitting in a conference room with a group who held about 80% of the local debt. But the market impact globally was very large. What was the macroeconomic situation at the time? Why did the default happen when it did? Further a butterfly flapping it's wings in tiny Iceland had a demonstrably large global impact.
If a country leaves the single currency, Eurozone, etc. does the Euro go up or down? What happens to rates, equities, etc.? What is the path and what market instruments can be best employed? The flash crash, October 2014 market moves, and more recently SNB move all would point to the need to try and answer this question.
What is the sequence and through which markets and how fast is this likely to play out? I can remember positioning for wider spreads between Germany and Spain in 2005 at about 25 basis points on the same thesis that is playing out now. But, that view has required quite a bit of timing, frustration, etc.
What is the broader thesis guiding what is happening and where else and how is it likely to play out?
This is just a quick list. What else is there to consider?
The Swiss National Bank (SNB) in a way played a good game of 3 Card Monty the past few years with market participants. The winning card was where the rate was going to be. On September 6, 2011 the SNB set a peg for the EuroSwiss rate at 1.2 when prevailing market rates where approximately 1.1, a depreciation of the Swiss Franc of about 9%. Between September 6, 2011 and January 15, 2015 the EuroSwiss rate traded between 1.20 and 1.2650, a roughly 5% range. On January 15, 2015 the SNB removed the 1.2 floor and at the extreme the EuroSwiss market rate went close to .8500, a move of about 30%. Who played the game? Who controlled the cards? Who were the shills? I could not help but recall my own adventures in 3 Card Monty and loss of a $50 bill as a student playing Holden Caulfield in Times Square circa 1983.
What trading lessons might there be in the move by the SNB and subsequent moves in markets? How can these lessons be embodied to provide a future playbook of offensive and defensive plans? Following some delirium from trading the markets the past few days some clarity came to mind on some runs the past day or two. First, some empathy to all have may lost in the market this past week. One close friend of many years described the feeling just 30 minutes after the SNB decision by saying " I feel like I just got my leg blown off, I can barely think straight".
10 rules, lessons, and examples I have found effective and illustrative.
1. Find and trade markets where your edge is the greatest.
2. Avoid markets were the probability of rule changes and lack of transparency is present.
3. Think of and imagine market scenarios others fail to.
4. Fundamental macroeconomic forces will ultimately prevail.
5. Trading time frames and profit objectives though must coincide with what the market is giving you at any one time.
6. Quantify risk with a multidimensional perspective, not just by one or two measures such as VAR or a price stop.
7. Learn from history. Jay Gould and his attempts to corner the gold markets in the late 1860's. The Russian default of 1917 and 1998. The European Rate Mechanism break up. The Tequila crisis of 1994. The Asian financial crisis.
8. Be deadly serious, as Gichin Funakoshi said "You must be deadly serious in training". If you have a position make it a meaningful size and monitor it carefully. I recall many comments from fellow traders the past few years saying something like "I am long EuroSwiss just to have some on but not really watching it."
9. Define and use a trading methodology that incorporates a process and framework that works for you. Inclusive in this should be a daily routine that includes diet, exercise, family time, etc.
10. Seek out catalysts for CHANGE in markets. Where are the forces, in a Newtonian like law of motion, building up the greatest to cause a CHANGE and movement in markets?
What further elaborations and examples might there be?
Stefan Martinek writes:
I was thinking about it recently. Great list. I would only add: (a) Be prepared that liquidity in any market can disappear regardless of historical data or experience; (b) Mind counterparty risk.
Anatoly Veltman writes:
Excellent lessons from John. The dilemma here is of common variety, though. Similar to an individual smaller stock: you're either an insider, or a mark. In case of the SNB last few years: you were either in bed with the devil, or you were exposed to a chance of a -100000% annualized loss on any given random day
There's lots of PE money going to Europe. Given the continent wide slowdown, I have to ask: why?
Tim Melvin writes:
There is a ton of PE and distressed money moving into Europe to buy bank assets and southern Europe. RE, KKR, Apollo, Baupost WL Ross and others have moved in a big way this year. The fund manager survey does not track this more patient (and probably smarter) money at all. Basically the PE and distressed guys are buying what the classic asset managers ares selling. Guess whose side I'm on?
On the macro level the fact that Germany is slowing is a major source of concern for the European economy, and the experiment in the single currency. Considering the Asian export market slowdown, persistence uncertainty in the Ukraine and ME it is unlikely German will have a meaningful pick up in 2014. German was supposed to be the main source of growth of Europe as the rest of Europe tightens budgets and deals with domestic crunch. The growing debt levels in the periphery, persistent weak growth, disinflationary forces, social and political discontent cannot portend well for the future.
The Italian government bond market is the 3rd largest in the world and they can borrow at roughly the same level as the US. Since 2010 public debt has gone from 120% of GDP to 135% and over the past 10 years GDP has been barely above .3%.
There is value in many of these assets being liquidated by banks and asset managers but expect the ECB to remain easy and the currency to make much of the adjustment necessary balance the macro picture.
Milton Friedman said:
I think the euro is in its honeymoon phase. I hope it succeeds, but I have very low expectations for it. I think that differences are going to accumulate among the various countries and that non-synchronous shocks are going to affect them. Right now, Ireland is a very different state; it needs a very different monetary policy from that of Spain or Italy. On purely theoretical grounds, it's hard to believe that it's going to be a stable system for a long time. … If we look back at recent history, they've tried in the past to have rigid exchange rates, and each time it has broken down. 1992, 1993, you had the crises. Before that, Europe had the snake, and then it broke down into something else. So the verdict isn't in on the euro. It's only a year old. Give it time to develop its troubles.
Boris Simonder writes:
Interesting quote by MF. That must be a very old one judging by his comment. Fourteen and half years later the Euro is alive and kicking, in fact, well beyond of what any skeptic would believe given recent years.
John Floyd adds:
The quote was from 2000, alive and kicking is relative, the euro straight jacket has done no favors to other macro indicators such as GDP, productivity, debt levels, etc….I am not making a prediction on Euro survival or failure, in the end that will be a largely political event, as was the inception, one cannot ignore the fact now that a negative political and economic vortex is forming and become self-reinforcing, where the braking mechanism is in asset prices I am not sure, and full disclosure I have been bearish the Euro concept since inception, luckily I have learned from mistakes and been able to squeeze out some profits and both sides and from other asset markets playing the same thematic tones, such as long the front end curves, I merely ask the question now is the timing and confluence of catalysts pushing us closer to seeing the Euro move lower? And yes alive and kicking for some time it has been, but so did the Argentine Peso pegged at 1 for about 10 years.
Boris Simonder writes:
The macro indicators you are referring to has more to do with national and cultural structures of each individual EU country, than the currency itself - As for betting against the Euro since inception, I'm sure no one envisioned an almost 100% rise between 2002-2008. Euro moving lower? Speculators net positioning in the futures market would think so, and perhaps the macro crowd betting on widening EU/U.S rate-spreads would support as well. If you consider Euro to be a risk-on currency, then the climate isn't perhaps the best to support that. Or how about the bag of technical breakdowns since May.
As for the comparison to Argentine Peso, can you really compare a pegged currency against a free-floating one? Or yet a single country against a bloc of countries with far more political and monetary power?
I was at the Whole Foods this weekend and spotted a very attractive woman giving out samples of a new, "Small Batch" whiskey made by a new "craft" manufacturer. Naturally, I stepped up and requested a sample. While I sipped (slowly, as I am not a regular whiskey drinker) she rambled incessantly, providing the charming "back-story" of this "craft manufacturer." It was a "secret recipe" passed down for generations, etc.
I pulled out my phone and took a picture so I could easily research the brand further when I got home. It turns out this "craft" brewer was featured in the following article.
The "secret recipe" of this "brand" is the unaltered factory product from the standard, generic producer of this Whiskey variety. The entire "charming story" is a work of fiction. I am not naive enough to think that this not often the case, but at some point it gets ridiculous. I think it was that this woman wasted three minutes of breath telling me the ludicrously bogus story that put it in a different perspective. Perhaps if she was not busy telling the fraudulent story, we could have had a decent conversation — which would have made my time sipping the mass-industrially produced whiskey far more enjoyable.
Victor Niederhoffer writes:
As the Senator would say, where's the picture of the con artist?
David Lillienfeld writes:
My wife is a pathologist who also completed post-doctoral training in epidemiology/outcomes research. Her thesis was on reasons physicians adopt new laboratory tests. It turned out it was the first time the question had been posited, at least in the academic sphere. It blew her thesis advisor's mind. I was in my Marketing 201 class at the time, and both she and her advisor were surprised with my response to her finding-"Don't you think that the marketing departments earn their keep? If they didn't, that cost would have been cut already." I've been told that mine is a naive view, that no one in a business would dream of cutting marketing back do the degree I suggested if the exercise had little ROI.
Same thing here. Someone in marketing had some rich ideas, and it sounds like the sales department was executing nicely.
John Floyd writes:
What are the usual tells and ways to decipher such marketing? I wonder about market parallels such as market reversals shortly after events that were fully priced, i.e. the market reaction after the first shots in Gulf War, etc….also makes one think of the famous Schlitz live beer taste during NFL games.
Chris Cooper writes:
It has always been hard for me to understand the appeal of small-batch, "artisanal" marketing stories. Nevertheless, we sometimes use it ourselves in marketing our bottled iced coffee. But the sooner I can scale to big-batch brewing the happier I'll be. I designed the process so that it would scale…now I just need the sales.
Better than any marketing story is simply letting people sample the product. Even better is blind tasting against the competition. When people try it, they know it is the best. But that marketing approach does not scale.
Frigid temperatures and snow in northern climates often barely make a dent in daily routines. Yet place the same weather in a more southerly climate not used to it and the daily routine is often put in a tail spin.
Exercise and sport training is generally done best done progressively building upon a base in conjunction with one's skills and ability. Without that, you're going to be prone to injury.
What are some methods to extend your conditioning and preparation in the markets without setting yourself up for a tailspin or injury?
Examples might span from research on potential economic developments, statistical modeling, risk measures for loss minimization and profit maximization, expansion of the breadth of products traded, etc.
In contemporaneous markets, for example, you might ask how have markets become conditioned to the Fed's monetary policy and what might be the spillover effects to this stopping and the weather changing?
Very true. I've noticed that when we in the southern states get hit by a major devastating event (like the flood that nailed Nashville a couple of years back) it merits about 30 seconds of national coverage because someone happened to film a schoolroom trailer being washed away down the Cumberland River.
Yet should NY or NJ get hit with some major adverse weather event, every minor inconvenience gets covered and the major ones become "national news" — and, of course, require immediate, and enormous, federal relief programs. Meanwhile the citizens of states like Minnesota and Wisconsin manage to dig themselves out of all sorts of major floods, snowstorms and tornadoes with hardly a word.
What's happened to the descendants of the Atlantic coasters who initiated and successfully implemented a revolution? Now it's become more common to whine and seek federal largesse…and if received, will be it tax-free.
January 7, 2014 | Leave a Comment
Here are the three most important things I've learned from you and the DailySpec.
1. Count. Then count some more. If you see something you think is promising, capture it in a statistical test and see–first hand–how correlated it is with what you already know and how much variance in prospective price change it truly accounts for. There is no better antidote for overconfidence bias (and no better stimulus for humility, objectivity, and perspective) than to rigorously test one's ideas.
2. Explore. What you observe in nature, human events, music, and so many other facets of life can teach you a great deal about people and markets. Some of the best market inspirations come from being away from markets and absorbing wisdom from insightful people, good books, and the arts and sciences.
3. Achieve. Half of life's battle is staying young-hearted and benevolent in spirit. There is no better barometer of a person's sense of life than seeing his or her emotional response to great achievement. Being young hearted means staying inspired and always pursuing new vistas. It means reveling in the best of others and thereby fueling the best within us.
Victor Niederhoffer writes:
I believe that most of us including me, consider Brett one of the most sagacious personages we've ever had contact with. He says explore exploring "what you observe in nature, human events, music, and so many other facets of life can teach you a great deal about people and markets. Some of the best market inspirations come from being away from markets and absorbing wisdom from insightful people, good books, and the arts and sciences."
I thought it might be useful to explore if there are some things we learn from sports that might be useful in markets. I have some ideas along these lines like offense wins the game more than defense. The home team always wins. The first blow is half the battle. Wins by a few points are not indicative of future success. The lucky shots and lucky wins tend to reverse. The end of the game tells the form. Slow and steady wins the game. The horses change at the beginning of new season. Start young if you wish to achieve mastery. Don't play your opponent's best game. You can't run with the hounds and play with the foxes. I haven't quantified many of these ideas, but some I have. But Brett seems to imply that big ideas even when not quantified (perhaps the counting can come later ) can be useful. I'd like to hear if any of you have ideas from sports helpful for markets, (other than that Smith and Antoni are the curses from the Bad One).
John Floyd writes:
Focus on developing a good base of fundamentals(trading principles/methodology) and follow them, gimmicks and tricks will only go so far at higher levels.
Play to your strengths, don't trade others ideas or positions.
Longevity and being able to stay in the game is key, you can't win if you are ejected from the game.
Maintain balance, overreaching and thinking you can master many markets often spreads one too thin.
Cross market feedback mechanisms(how does a slowdown in China impact Brazil, etc.), skills in one sport are often complementary to others.
Discipline and routine, when this change it is all too easy get off track.
Jim Sogi writes:
1. Big waves come in sets, and rarely is the first the biggest. Never take the first wave.
2. Trust your board. Stay on it as long as you can. Riding until the end of the wave is the safest exit.
Recent conversations with a close friend have had me thinking about "The Basics". How, and to what extent, does an understanding and focus on the basics of a particular subject contribute to the building of a strong foundation from which to expand outward in a stable and progressive manner? While they may never be mastered, an understanding of what the basics are seems to apply to a myriad areas of life. The foundation in the basics in various areas of life's pursuits would seem to provide the base from which to advance. Conversely, lacking such a core likely limits movement forward relative to one might be able to go.
In sport we might learn the basics on the very first day of study. In traditional Japanese karate the student often begins with the making of a fist and the punch. The simple mechanics are improved upon and practiced in every training session from white belt to 10th dan black belt. In fencing experts say that basic footwork is 65% of the game. In mountaineering one is told of the importance of keeping one foot moving after the other and not stopping too often to rest.
In nature the basics of survival and expansion can be seen in both plants and animals. Sequoia Giganteum, the giant sequoia, manages to live several thousand year through thick bark that protects against fires and pests amongst other factors.
In relationships the basics of simple greetings and compliments by name and eye contact seem to go far.
In games like chess the building of a solid foundation and harmony amongst pieces goes a lot further than memorizing openings.
In civilizations there are often core values that act as a bulwark against more nefarious forces. The founding fathers of the United States had some ideas on this topic. What might be learned about current events and political forces globally and those of say Rome and the British Empire?
In the daily routine the art of breathing properly, stretching, posture, exercise, hygiene, and diet.
In trading the basics might include first the art of survival. Important on the list would also be the daily routine, the size and number of winners versus losers, the ability to evolve with markets yet maintain core principles without style drift amongst many others.
In Japan there is a saying " Ichi Nichi Issho" or "One Day One Lifetime". At the core one might view this as a starting point in the basic building blocks and unfolding of one's life.
Many books could be written about all this topic and this is meant to be only a short list and some thoughts. What other areas and basics might be considered in various endeavors? Who can we look to as examples of success built upon the mastery of the basics? What books or learning tools might be applied and studied?
Anatoly Veltman writes:
There will be a lot covered in this topic, but I'll touch on Technical Analysis. Specifically, on what's commonly referred to as "a basing pattern". In 2012, this pattern played out to its best in USD/JPY. The cross has languished in 76-78 yen area just long enough to lull everyone. The technical foundation for a blistering rally thus had been built. Technical Analysts refer to this set-up as "things that stay horizontal the longest — go vertical the fastest"
Jim Sogi comments:
The myth is the "basics" are easy. The 10th Dan karate master still studies the basic punch because there is so much depth to it, the timing, the placement, the purpose. Musashi Miyamoto after a lifetime of study of the sword still pondered the basic sword cut and the purpose of it. Basic diet sounds simple, but eating and cooking properly with nice taste and presentation everyday is very very hard. Breathing sounds easy and everyone does it, but to breath with the right mindset can be the key to nirvana. Talking sounds easy and everyone does it, but to say the right things…well you get my point. Real mastery of the basics, especially at the highest levels, is difficult.
The mid to late 1990s saw the development of the Icelandic housing bond market. Some very good early investment opportunities in these bonds and the currency. Brokerage firms then became more heavily involved and wrote numerous research reports touting the benefits of the bonds. The Icelandic Kroner became one of the darlings of the emerging market carry currencies. Icelandic banks become more heavily involved, balance sheets exploded, the local population benefited, etc. Macro-economic imbalances continued to grow through the millennium and the end result was becoming all too familiar. Like many trades, though, the imbalances persisted for much longer than expected. In all too familiar fashion markets also unraveled much faster than anticipated.
Secondly, when a butterfly flapped its wings in Iceland reverberations occurred on a global scale given the increasing interrelatedness of markets.
I would encourage a visit to Iceland. It is a short trip from the US east coast and the UK. I spent some time there prior to 2008 and enjoyed the hospitality of a local surf crew.
My submission for article of the day: "Why is the Euro so Perky? "
The article presents a medium term bearish view of the Euro. The view that the Euro is relatively strong because of the 200 days moving average seems ridiculous. Moreover, the ECB as a lender of last resort has been brought on only recently, while the Euro crisis is a long process started back in back 2009. The idea of a weaker Euro because of structural issues that cannot be solved by a divided group of leaders and nations can be shared, however, this has been a European problem (actually THE European problem) for centuries.
The Euro resiliency is a temporary phenomenon. Right, there are several outstanding reasons for the Euro to be near parity vs the USD. None of them has been sufficient, however, over the past 3/4 years to weaken significantly the Euro. If you compare prices between Europe and the US prices are at least 20% lower in the US. One example: the Ipod Touch 32 Gb cost 329 Euro vs 299$ in the US.
The Fed's "quantitative easing" program has provided underpinning for the Euro. The push of the Fed in the direction of a weak dollar is very strong and has so far outweighed the structural Euro weakness. In relative terms, it has to seen how quickly the 2 trends evolve respectively in Europe and in the US. If the US "system" is more resilient and the crisis in Europe accelerates because from the sovereign financial level it spreads heavily at the social and political level then we'll see the parity of the EURUSD. In this context, the unemployment rate in the Eurozone and especially in the southern nations is an important indicator. It is steadily increasing and it emphasizes the risk of a deterioration of the social structure should this trend continue longer.
David Lilienfeld writes:
Based on what I saw and heard in Barcelona in August, I think the matter has now gone out the ECB's domain. Granted it's a very small sample, but as I've noted before, many Barcelonians have become disillusioned with the EU and with their country in particular. That will, at some point, manifest in spending patterns and capital flight–and I doubt that that thinking will change soon. The European leaders "successfully" kicked the can down the road, but with the result of raising both the cost and the pain of the inevitable crisis resolution. Hence, the issue is no longer whether the Fed's efforts with regard to the dollar are stronger than the impact of the EU's structural problems. Those structural problems, in part because they've been unattended to for so long, will ultimately lead to the euro depreciating relative to the dollar. What the Fed is doing is at best temporary, ie, tactical. The problems with the euro, however, are strategic.
Bottom line: I agree with your concern, and at this point, I'm not sure I see how even the exit of Spain and Greece would help matters much. France is now stagnating. That doesn't bode well for crisis resolution anytime soon.
Paolo Pezzutti replies:
David, actually this is not temporary…
John Floyd writes in:
The key, I believe, is to recognize the Euro is a political animal. The politics are now unraveling from both the top (core countries) and bottom (peripheral countries). Bad economics have led to bad politics and the circle is becoming self-reinforcing. The U.S. dollar, rightly or wrongly, remains the world's reserve currency at the moment. There are approximately $200 trillion in derivative contracts denominated in Euros. The size of the decline in European growth, the politics, and the market product entanglement is making the Euro's ultimate price more difficult than ever to forecast as it may be 1.0 or .80, or lower. The expected returns of the thesis that the Euro goes lower in value however are increasing rapidly as the vortex of the deciding forces gather momentum and power.
Anatoly Veltman writes:
That was interesting reading, until you got to "forecast, may be". How to interpret what follows?
John Floyd responds:
My point was not to be interesting but to outline what I think are the key drivers of the Euro and the potential feedback mechanisms through trade and financial channels globally.
As to how to interpret what follows that is up to you. As a guide I would think outside the box and remember some combination of the following: the Tequila Crisis, the ERM crisis, why "hedged GKO's" were not really hedged, the Malaysian Ringgit fixing, how a butterfly flapping its wings in Iceland had a major global impact, etc.
Jeff Rollert writes:
I like to think of it as the behavior of the passengers in a plane, which just lost altitude suddenly.
They suddenly realize the only ones in control are in the cockpit, yet are unable to see where they're going (just where they are and a little of where they've been).
John's point is very good. History is not a (literal) guide but how investors react to the unexpected is useful.
I'm finding many pieces of evidence of avoidance behavior, including an overweight of whatever was last read.
The model may be a reversal from highly regulated markets to highly unregulated ones.
I've been going to ethnic markets for insight recently, as the calmest investors I observe are immigrants, for insight on their interaction.
Rocky asked this question once a year or so ago about the outlook for the Euro after one of the many EU/peripheral events, and I thought it was a good one. So how might we measure and estimate, and what are people’s expectations for moves on Sunday-Monday following the Greek elections?
I am of the opinion in the medium term the elections don’t even matter. But, that is a different topic and exclusive of any short term opportunities.
Anatoly Veltman writes:
A quick note on S&P: I think current risk is enormous (due to recent complacency).
Paolo Pezzutti writes:
I think that we have to be aware that if Germany accepts the eurobond concept, Europeans will buy a lot of time although will only delay to pay the bill. That may have a significant impact on eurusd and equities. Not sure how likely is that, but as the situation worsens pressure on Germany increases. Especially after that in France, an important player, it prevailed the idea that socialists can improve things by increasing public spending.
John Netto writes:
Long gold / short silver. I've been working this position for most of this week and it is telling us about some of the macro variables at play. This ratio is currently shy of 57 and can ascend to 60 given all of the global macro variables at play. Silver has been trading very heavy and under most circumstances I put together, the long gold short silver one helps me take on the sort of risk-adjusted exposure I like…
GL in the markets…
Enoch Powell predicted in the 1970's exactly what would happen to the Euro when a individual country's interests were opposite to the greater good of the European community as a whole. It is amazing to see it playing out. I predicted that Brussels would be the best real estate market in the world when I visited in 2002.
I predicted this because of the expected build up in the European community infrastructure, and the associated NGO's and lobbyists and purveyors. I felt that this build up would be even greater than Washington DC, which has never had a down real estate market, because there would be less countervailing force for economy from the heterogeneous and distant countries that make up the E.U. as compared to the individual states in the U.S.
It would be interesting to see if that prediction turned out to be true.
Peter C. Earle comments:
It was sheerly utopian in the Marxist sense to expect that nations as diverse as found in Europe might be corralled into a single currency unit, a classic conflation of proximity with uniformity. Sic semper alvei.
Here's my hoping, but not expecting, that in Greece the forces of Gresham will be brought to bear in the selection of a new currency.
An anonymous contributor adds:
It is debatable whether having a common currency is adverse to a country's interests — if there is labor mobility and free trade. In fact, Hayek free market/hard money theory might? argue the opposite. But this is predicated on certain RULES being followed. The reality is that Greece etc. decided to break the rules and follow short-sighted expedient policies. A skeptic would argue that this was inevitable….
Uncle Milton (Friedman) was also negative/skeptical on the Euro, but (like me) was surprised that they were able to put it together in 1999. (One recalls that part of LTCM's implosion were the Eurozone convergence trades that blew up when Russian defaulted in 1998. I was on the right side of that trade for entirely wrong reasons.)
Here is a nice Cato institute essay that quotes Uncle Milton.
"Not only are member countries unable to finance government
spending through inflation, they are bound by the Stability Pact to
keep their deficit at less than 3 percent of GDP. Except under
unusual recessionary circumstances, violators would face automatic
or semi-automatic and massive fines (The Economist 1996). As long
as these rules are respected, discretionary fiscal policy on the part of
national governments will disappear. Finally, the adoption of a single
European currency would mean the end of arbitrary manipulations
of the exchange rate-"exchange rate policy," as it was called, would
vanish. In its intentions at least, the Maastricht world is one of strict
and impartial rules, a living monument to the market-liberal wisdom."
Can the euro be considered an application of the lessons we have
learned from Milton Friedman? In a sense yes, in a sense no, and in
yet another maybe. Yes, the monetary constitution embedded in the
euro construction is Friedmanian in that it aims at price stability,rules out debt monetization, and helps prevent exchange rate manipulation. No, because the European Central Bank's accountability is
very weak and because the monetary rule is not made explicit.
Nothing is said about how price stability will be achieved. Maybe,
because the monetary authorities could pursue a stable course,
avoiding both stagnation and inflation (yes, in this case), but they also
have the power to destabilize the entire European economy (obviously no, if this happens).
Also, the construct is still based on the rule of man rather than the
rule of law: if things go wrong, there is no provision for remedying the
situation. Milton would not have approved this particular facet. He was
well aware that the unrestrained power to do good is also the
unchecked possibility to do harm. The liberal wisdom, at least since
David Hume, has always assumed that, since it is possible that knaves
could end up ruling, we should draw constitutions on that assumption.
Not because that scenario is inevitable but because it is possible.
So far the ECB has behaved acceptably and it has succeeded in
resisting pressures from national governments, but we have no guarantee that this is going to be the rule in the future. As Milton often
said: "Money is too important to be entrusted to central bankers." He
may prove to be right once more.
John Floyd writes:
Those are pretty big "IFS". While Greece is the headline culprit du jour remember both France and Germany also "excused" themselves from following the rules. I don't have the exact number on hand but I believe various Maastricht or other rule violations would number in the dozens. The economics and politics speak for themselves currently as to the validity of the system working. Remember this currency was borne almost entirely of political will.
The interesting questions to me going forward are:
Does the Greek election even matter anymore?
How large are the feedback loops and knock on impact from future European developments?
Is the market too sanguine given firepower of monetary, fiscal, and bailout money is perhaps largely exhausted?
If the actions of a butterfly flapping its wings in a place like Iceland was a contributing cause to much turmoil how might Europe be viewed?
Who else has positions and exposure similar to JPM?
What about US money market fund exposure to Europe?
What about the size of Spanish private sector non-financial debt?
Why can't the Euro trade at .50?
I would also posit that well beyond current events there will be future attempts at a New Euro of some sort.
I've been hearing a lot of recent JPY mentions these days. Yen seems to be taking a header. YTD post several years as a champion. What is the bear case? High Debt, Low Yields/Carry/Risk On, Zombie Banks, Relative "Value" in a crisis given preexisting low rates rolling off, poor demographics, export economy seeks a weak yen. Any major selling points I am missing? Is this move a head fake to be reversed in the next leg of the rolling brownout crises or a major trend reversal?
John Floyd responds:
There are some many possible answers to your question encompassing multiple time frames and potential driving factors. But let me try to put some of this in perspective and at least attempt to ask the right questions.
In 1985 I arrived in Japan after 23.5 hours of travel, bought some JPY at the airport at 248.55, headed to Tokyo by bus and as I put my head down on the futon there was an earthquake tremor that shook the building. The next day I read the classifieds for an English teaching job and was hired within 2 hours for a $40 an hour cash paying job. My only qualification and employment test was that I spoke English and could read the equivalent of what amounted to be a 5th grade English story book. I met many nice students ranging from businessmen in Kawasaki to the actress who later became embroiled in some sheep-poodle issues. I soon thereafter also worked for an investment company during which my first day I was informed that any lunch would have to be preordered very early and any possibility of going out to lunch would have to be done by reserving hours or days in advance. Japan was booming, money was spent with excess, and the now aging demographic spectrum was 25 plus years younger.
Since that time in 1985 the JPY has appreciated versus the U.S. dollar to 75.35, the "bubble" burst in 1989, and Japan entered what has been two lost decades of a stagnant economy. In the past several months the BOJ has adopted an inflation target of 1%, the BOP's has shown further signs of shifting course, and further intervention by the MOF/BOJ to weaken the JPY by selling it in the open market was revealed. In the longer time frame many other factors are at play such as debt levels, demographics, ownership of the JGB market, macroeconomic shifts, etc.
The message of the markets and the message I take from the recent action is Japan's new experiment bears careful watching. The shift that may be occurring in the collective forces and thoughts in Japan is potentially a very powerful catalyst juxtaposed to the macroeconomic fundamentals. The potential for the JPY to reverse much of the gains versus the U.S. Dollar from 1985 bears careful consideration and potential opportunity.
It's amazing how smart the public is, and how ridiculous all the experiments of the expert's breakfast friend are that duplicitously show how irrational the public is when confronted with contrived situations with deceptive self serving to the academics answers. They always sense when someone knows what he's talking about and pay attention as they did to my lessons from hard ball squash, giving more responses than any other of my posts except the one about Lady Gaga and what she can teach us about the idea that has the world in its grip.
Okay, I have to give some more lessons from the one thing I know about.
7. Never hit a soft drop shot. The opponent will be able to get there near the end of a game and kill it. It's especially bad near the end of a game, when the opponent will run for anything, do or die. Lobs are sure losers near the end of a game also for the same reason. Don't ease into your positions. You'll only get filled when it breaks out, and that's the only time that the opponents will certainly have the weather gauge. And don't arabesque into trial positions in small markets just to get your feet wet as the Pelicans at the top of the pyramid will always eat your bait, as they don't allow outsiders to dine at their expense, especially when the resources are limited.
8. Don't try to win the point with the same shot over and over. Your opponent knows when they run you up to the front right, on your rightie forehand that you are going to hit it cross court. If you happen to catch the perfect angle so that your opponent can't intercept it, and belt it down the backhand wall, for sure it was luck or he'll try harder the next time and you will lose the point. Always be ready to return the straight drop to the right side wall down the wall instead. Please don't try to make money from the market the same way two times in a row. How foolish do you think the adversary is to allow you to take his chips twice in a row. He was only setting you up for the big kill. Most people have a very good memory of what happened the last time, especially if it was a vivid loss. They are so angry that they will put their resources against you the next time, without hesitating to take billions of bail out money which they have received, or use costless loans from their past, current or future cronies at the Fed to go against you.
9. Please learn from racquetball and jai alai how to hit a proper backhand. The swings of the racquetball players on the backhand, very nicely memorialized by the Hobo are infinitely better than the squash swings. They have 5 separate torque in there to give it exponentially more power than the placid Philadelphia, old boy English swing. And the Philadelphia swing is 10 times more powerful than the ridiculous backhand that the old Harvard players were taught in the hard ball game with the slice backhand with hardly any backswing, and no torque at all. I shudder at how high a % of the games I lost came because of the weak Harvard backhand I was taught and was too foolish ever to change, possibly because the only one that could beat me was Sharif. Martie Hogan's backhand in racquetball was a thing of beauty and since that time, it's been improved upon every 3 years or so by the next generation of racquetball players. Pedro Baccalo had the best backhand in squash which he learned from jai alai, and he could hit it 5 times harder than any other player because of all the torques in it. Learn from these improvements instead of watching the placid, effete swings of all the old time squash players and as far as I can see, the current crop of Internationalists. Okay, for crying out loud. The best lessons in markets and any field come from the borders where it meets another field. You'll learn more about markets from studying checkers or ecology or statistics or sports betting than you will from all the books on markets combined. Study the greats in other fields, e.g. Bronstein, or Armstrong or the Globetrotters to see the secrets of winning in markets.
The first six lessons:
I often get asked to talk to kids about the good old days of squash when you could make a point with a sharp angled shot and a long point only lasted 30 seconds. At a recent occasion talking to Hopkins kids I tried to relate the lessons of squash to wider endeavors. While doing it, I found myself in a dream world where flashes from markets, life, business, and school, circled around, crossed over, and fed back on each other. Since this is the one subject I know about, I thought it might be useful if I turned the tables and tried to think of the lessons that I learned from squash and how it relates to markets.
1. The game is always changing. Who would have thought that hard ball squash would now be as dead as squash tennis, or court tennis. There were once 2,000 court tennis courts in France before the revolution, but now say 10 in the world. There were once 10,000 hard ball squash courts in the world. Now, hardly any as they've all been converted. The markets you are trading now are likely to be very different from the ones you'll trade in 25 years. The rules and equipment will have changed. Electronic speed and international standards will replace manual method. I find it hard to believe that the things I traded 10 years, ago, foreign exchange, bonds, options, are no longer viable for me. How many others will find this out to their cost if they don't prepare for it.
2. The officials, the rule making body, the association in squash, will always be like most such associations a body devoted to maximizing the power, perks and profits of the officials. Time and again, they stood in the way of professional play on the grounds that it would weaken the amateur spirit of the game, the English way of stiff upper lip, poverty for the serfs, and noblesse oblige. If you wanted to be successful in squash, it was very important to stay in the officials' good side so that they wouldn't keep you out of the good spots and good tournaments, as they so often did to me and Gardner Molloy, and countless others. If you want to be successful in the markets, be sure that the rules are not stacked against you. That you will not receive margin calls so that the officials can take the other side against you, that the members will not be able to get the edge on you thru access to unlimited capital, flexionism, and self serving decisions like those that arise when you go to arbitration on an Exchange, where the referees, and judges are invariably chosen by the exchange itself. How can you expect them to rule against their friends and cronies.
3. Counting and record keeping are crucial. A good squash player, should know exactly where the ball will land, when he hits any shot, given his current position on the court, the angle of the wall he aims for, and the velocity of the shot. You could work it out by geometry given starting with the angle of incidence equaling the angle of reflection. Very few players take the trouble to figure it out, or even think about it. How many good market players don't know what the expected volatility is on their trades given how fast and the direction it's been going in the past?
4. The first blow is half the battle. The player that gets ahead by 2 or 3 points is inordinately likely to win the game. The importance of a good start and good preparation are paramount. Bronstein once waited 2 hours before deciding on his opening move while the clock was running. The first blow in markets is still crucial. The expectations are much higher when the first x minutes are up compared to down.
5. One of the keys to winning in squash is never to stretch. When you stretch you can't hit a hard shot, and you're limited in where you can hit it, so you're opponent can always anticipate perfectly where the shot is going. The other side is that you should always take the extra step so you'll be in position to hit any shot. It's so enticing to stretch because it saves you the step and enables you to get the ball in play but so certain to lose to losing. How many time do you stretch in markets. Put on too big a position, take a regularity that only has happened 3 of the last 5 times and run with it? How often do you end up leaving yourself vulnerable to an adversary who knows exactly how extended you are, and come into full force against you? Certainly one of the worst errors in markets.
6. I could never figure out why Sharif Khan had a winning record on me. He was sure to make at least 5 errors a game, and had a weak backhand that turned over the ball whereas I could go a whole match without making a single error. Then I realized he was the only person that could make 7 winners a game against me, where the ball bounced twice before I could touch it. Then I realized that what he did was to take every shot on the half volley. He worked off my power so that the ball came back at a higher velocity. He also didn't give me time to set up to return the ball. Most important though, by violating the stricture we had learned to wait and make the opponent commit, he prevented one from anticipating his shot and tucking in to retrieve it. Since that time Agassi and even the more loathsome sportsman Connors have pioneered using the half volley in tennis to beat players with much better equipment than they in tennis. Nowadays it's de rigeur in tennis.
Taking it on the half volley in markets means not waiting until the afternoon to put your positions on, not waiting until every market that 's a pilot fish for your market is in the right direction, not waiting for the announcements to reduce your uncertainty. If you want to speculate you have to speculate. Only the house can wait and grind you to oblivion. Taking it on the half volley in markets is getting in way before the pivot has occurred, way before the trend has changed. It's the secret of success of great players in racket sports and markets. Come to think of it, it was the secret of success in handball also.
The old time handball players are so much better than the current ones. Why? For one they hit the off the wall with deadly precision. Artie had a fantastic off the wall shot, and somehow his football killed arm was able to miraculously get back to its youthful vigor when he hit it. He always said that Ralphie Adelman was the best because he could hit everything off the wall for a killer. I now see that Martie Hogan is espousing standing in front of the service line on each shot in racket ball as the key to success there. Some day someone will teach the handball and racket ball players of today that the off the wall killer is key in games and markets.
Chris Tucker writes:
Point 5 is the similar to using power tools as I mentioned in "On Taking Down a Tree":
Never extend your reach beyond what is comfortable. Using a tool at more than arms length puts you in a position that prevents you from reacting quickly if something goes wrong. It puts undue stress on you and the tool. It removes whatever leverage you have on the tool. It also prevents you from "feeling" properly through the tool. When using a power tool you receive signals about the material you are cutting and the nature of the stresses on that material. You can always tell when a branch is about to go if you are listening carefully to the tool. That feedback is denigrated by reaching too far or by using only one hand.
When developing skills you must, occasionally reach beyond your current level. This is different from overextending your reach. But it is important to do so incrementally as overstepping your bounds too egregiously can result in devastation and trauma. Taking small steps into new areas or higher intensity or greater complexity allows you to learn while remaining close to your comfort zone. Yes, you have to reach in this sense, but you want to do it in such a way that you don't destroy yourself in the process. When you push yourself in this way you also expand your comfort zone and your skill set. This can be the translated into taking on larger size, increasing leverage, having more trades on at one time, or introducing new instruments to your repertoire.
John Floyd comments:
I think Ari would say, "you should set goals that are constantly reaching further, but attainable, then gradually keep moving forward. If you have a stumble then pause and evaluate why. If you set a goal too far out of reach you may be faced with disappointment at not getting it".
Charles Pennington writes:
Steve Sailer has a nice illustration of the problem with some of Kahneman's questions.
Apparently the following background information is NOT supposed to convince you that Jack is more likely to be an engineer:
"Jack has a B.S. degree from Purdue. At work, Jack wears a short-sleeve button-front shirt with a pocket protector full of mechanical pencils, just like most of Jack's coworkers on his floor. Jack always wears a tie clasp to keep his necktie from getting smudged by the blueprints when he leans over a drafting table. Jack's favorite line from Shakespeare is, "The first thing we do, let's kill all the lawyers." In fact, that's the only line from Shakespeare he knows. Jack wanted to name his firstborn son Kirk Spock, but his wife wouldn't let him."
David Hillman comments:
From Forbes' "Five Leadership Lessons from James T. Kirk" (applies to lone wolves and markets as well) :
“You know the greatest danger facing us is ourselves, an irrational fear of the unknown. But there’s no such thing as the unknown– only things temporarily hidden, temporarily not understood.”
“One of the advantages of being a captain, Doctor, is being able to ask for advice without necessarily having to take it.”
“Risk is our business. That’s what this starship is all about. That’s why we’re aboard her.”
“Not chess, Mr. Spock. Poker. Do you know the game?”
“‘All I ask is a tall ship and a star to steer her by.’ You could feel the wind at your back in those days. The sounds of the sea beneath you, and even if you take away the wind and the water it’s still the same. The ship is yours. You can feel her. And the stars are still there, Bones.”
February 24, 2012 | Leave a Comment
Greece has been "sold"; should America be for sale?
A footnote to the Greece default/restructured bonds is a detach-able coupon that pays an amount based on future Greek GDP.
See this article for more details.
Interestingly, Professor Shiller recently proposed (in a recent Harvard Business Review article) that countries should replace their sovereign T-Bills with "shares" that represent earnings of their economies. Read this article. Should other countries go down this path, it will open a Pandora's box of unintended consequences, incentives and problems.But first things first. If the USA does an IPO, will it be a "hot" deal???
And, does it give new meaning to "selling America short…"
Rudolf Hauser writes:
This idea strikes me as very stupid. GDP is not a reliable measure containing many assumptions and imputations. Such an instrument would give governments a strong incentive to cheat and the GDP is an easy measure to manipulate if so desired. It is also a number that is constantly and often significantly revised. How would the instrument handle this. Would investors who were overpaid have to return some of those funds? Aside from more modest revaluations every year, major revisions in the methods of calculation are made every number of years along with benchmarks based on more extensive surveys which are not conducted every year. For how many decades would such adjustments have to be made? Any investor who trusted the honesty of such instruments should have his head examined.
Rocky Humbert writes:
One notes the large and relatively liquid market for global inflation-linked bonds..which are also vulnerable to gov't tampering and revisions.
I agree that there are many consequential problems with selling what is essentially floating rate debt, with the coupon linked to GDP…too numerous to type on my blackberry…
However, I have total confidence in Wall Street's ability to underwrite, and Mr Market's ability to "value" these securities (just like they did with subprime CDO's based on arcane and idiotic models.)
Gary Rogan adds:
Some day there may even be a pan-european agreement that Greek GDP was actually negative and investors are required to compensate the Greek government for the privilege. If they can rule that a default is not a default but an agreement to pay less, anything is possible.
John Floyd writes:
In fact there actually used to be. I do not think it exists any longer, a traded market in a few major econ. Indicators such as employment, CPI, and a few others I believe run by some of the banks ( DB and perhaps GS) in para mutual style betting. I don't believe the total payouts ever got very large though.
Rudolf Hauser responds:
Unlike other economic indicators, the non-seasonally adjusted CPI figures are not subject to revisions. That is what makes them useable in legal contracts. It is true that adjustments for quality changes allow for some manipulation, but it pales in comparisons with the assumptions that are made in calculating GDP. The revision problem alone is enough to make it an undesirable instrument even if the government statisticians are perfectly honest and unbiased in their calculations.
Other traded indicators were in essence just bets on what the government statisticians would report on the next released indicator. That is different than an instrument that will have a life of many years or even many decades. A short term trader has no reason to give a damn about true fundamental values -only about what the price will be in the short term, which only depends in small part on fundamental values. That is not true of a long-term investor. As to the markets knowing how to properly price securities, if that was so you would not have so many major losses (or gains) in securities seen so often in history.
January 17, 2012 | Leave a Comment
I was reminded today that when the U.S was downgraded in the summer U.S. bond yields went down. Despite the moves by European officials spreads continue to widen, etc. Furthermore, some of the starlets of the pageant like Ireland are now beginning to tire. While I think the movement in prices in Europe and the Euro are far from complete it is not too soon to consider the knock on effects and feedback mechanisms throughout other currency pairs globally. Consider the size of European GDP (along with the US and Japan at the very least below trend growth) and the impact on the world via trade, sentiment, growth, etc. The math is not dissimilar to the impact of mortgage equity withdrawal, housing, consumption as it impacted U.S. growth and through the U.S. the rest of the world.
Paolo Pezzutti writes:
Europe will drag the US into a recession. Unless markets accept further QEs from the fed, ECB and why not the Chinese. This because the only acceptable way for equity markets is ti go up in this situation? What is the limit to central banks balance sheets? If this solves the problem in the short term to politicians ans at the same time provides profits to corporates and keeps alive banks, it looks like the holy grail. Except that at some point someone has to pay the bill? But when?
Some questions about the Fitch announcement:
1. When a ratings service says there is a potential for contagion if the situation worsens, is this bullish or bearish.
2. If it were true, is it bullish or bearish.
3. What are the chances it is true?
4. Why does it happen at 310 so as to liquidate longs.
5. Is it subsumed by the next highly important piece of data like the state of manufacturing in the phil area?
6. Does is serve any purpose except to create friction so the strong can take chips from weak.
7. When the market drops 2 % in a half hour like it did, is it bullish or bearish?
8. Is the sentiments of a rating service related to the threat by the French to vet all their methodologies and to switch in the future? How does this relate to the profit margins and survivability of the services
9. Do the sentiments of one rating service tend to be unduly reversed by an announcement from the next rating service?
10. What other queries would seem relevant?
Rocky Humbert adds:
About the Fitch announcement:
1. Why do people tend to attribute market price moves to announcements by credit rating agencies? Has there been a single news story that notes that the US Treasury is higher versus when the USA lost its AAA; whereas the French 10 year is roughly 8 points lower since it held its AAA at the same moment in time.
2. Why do people think that falling gasoline prices are bullish but spiking WTI prices are not bearish? Why do people choose to pick particular headlines as "explanations" but ignore the other hundreds of headlines that appear coincidentally? (i.e. MF Global's bankruptcy judge yesterday withheld his ruling on the release of billions in frozen collateral (which isy leveraged into massive liquidity)…and this non-decision arguably has a much bigger impact on the day-to-day price moves)…etc.
3. The ratings agencies receive no compensation for their ratings of the G7 sovereign debt. They do this as a "public service" and a legacy. Why do they do this? If they ceased to issue sovereign ratings, would anything change? Would that be bullish or bearish?
4. After a multi-week/multi-month period of downward prices, a 2% spike in the last 30 minutes brings out the naysayers "the market cannot be trusted," "it's a bear trap," etc. But I've found with absolutely no statistical significance (due to insufficient data points) that it's often a very tradeable bottom. In contrast, a 2% decline in those conditions rarely makes the news.
5. What does bullish or bearish mean?
John Floyd makes three points:
1. Today's action in Europe provides and interesting contrast. Amongst other negative factors the Spanish bond auction was by almost accounts a failure and yet spreads are tighter between Spain-Germany, Germany yields are up, the Euro higher, etc. So perhaps there are many factors at play that determines what drives prices and it is instructive to observe how the market moves relative to a given piece of news in comparison as to how one would expect it to react. For example if Spanish bond spreads had been tightening the past few days prior to the auction would they react the same?
2. I am not sure given the daily volatility in SPX and the track record or operations of rating agencies that they are able to time and focus on the minutia of the market in such a way. I would need to look but I imagine there are instances like the Spain one above where the market acts in opposite fashion as to what one might expect.
3. I would liken the rating agencies to a biker in the back of a peloton, or a swimmer behind a pack of others, they are getting dragged along by other forces en masse, not breaking new ground. There is the consideration however that a ratings change may cause sales (or buys) buy making an asset class unavailable or available to a subset of market participants.
Such a stark contrast today: one of the greatest innovators and leaders succumbs to a terrible disease and beyond the loss in stock price one can imagine there is so much more potentially lost in productivity, pleasure, etc. for so many…..
One of the "great insiders" decides from the bathtub a day or two post a conversation with the President that he will invest a tidy sum in a financial institution that is well entrenched in the system at some many points.
This is an interesting study on what makes a winning sprinter. I wonder if there are applications and lessons to trading? For example in the use of leverage and sizing as applies to the amount of force used? The volatility of markets in relation to leg speed? The size of the fund and alacrity that may be required in various markets do to sizing and visibility and physical characteristics of a sprinter?
Jeff Watson writes:
This reminds me of a thread on DailySpec last year about the golf swing problem that nobody could really give a correct answer to. The observers of the runner were correct in their methodology in measuring the underlying influences of a quick sprint. Separating and isolating all forces (seeing what forces are really influencing and in play) and solving them independently is the first lesson that they teach you in any physics 201 class.
After euro leaders announced a new (big) aid package for Greece and measures to prevent bond yields rising further in Spain and Italy, it seems that Europe has solved its sovereign debt problems…. Markets celebrate the European version of QE. Also Europeans (we'll see what Americans will now do about it, but I think the answer is pretty clear and markets know it) can now delay any tough decisions on deficits. Someone else will pay the bill. Pretty sad. However, markets go up and everybody is happy so far.
Kim Zussman writes:
Do not recall the oft-heard warning that a Greek default or failure to raise US debt limit will result in financial Armageddon prior to the Lehman collapse. That not yet distant memory still has usable power. Perhaps a day's meal in that.
Bruno Ombreux writes:
The 100s of billions will mainly come from the pockets of the German, French and Dutch taxpayers, since the ECB printing powers are limited. As for the Greek, they have lost their sovereignty but they will find freedom though work. You know. Arbeit macht frei. That is at least for the next few months until bailout 3 is needed and the whole show starts again.
Also, about the question from the bleachers: How are the ECB's "printing powers" more limited than the U.S. Federal Reserve's?
read this: European Central Bank
They need to maintain some capital and this capital is provided by the central banks of the member states. They cannot do too outrageously stupid things, because they can get bankrupt if some member state central banks stop capitalizing them.
And you can be sure that the German or Dutch have an uncle point.
Politically, the ECB is also far less inclined to print than the Fed:
- It has only one mandate, low inflation, whereas the Fed has a dual mandate: inflation and economic growth. In effect, the ECB doesn't really care about economic growth. - The German have been paranoid about inflation since Weimar and would not let the ECB go too far. - If you look at the ECB board, it is predominantly hawkish according to analysts and observers that spie every word uttered by these guys.
But the main reason they have less power to print than the Fed is that they have to please a lot of member states. Which creates checks and balances. Whereas the Fed only has to please one guy, the US president, who nominates board members.
John Floyd adds:
Leaving any debates on what is considered QE and what is not.
The ECB has lent to the periphery through its rediscount window Euro 330 billion, this is in addition to the Euro 75 billion in secondary market purchases of peripheral country bonds. The ECB has a capital cushion of about Euro 10 billion. One could argue this might be a stretch of the single mandate of the ECB's 1998 charter.
To Ireland alone the ECB has exposure of Euro 180 billion, or about 100% of Irish GDP.
Other thoughts on the most recent Euro summit:
The general reaction in markets and the street research has been this plan delivers slightly more than expected and is a bold plan. Not surprisingly this has been the analysis of most of the rescue packages globally since 2008. Yet, the failure of the packages on so many levels is fairly evident if one looks at economic growth, interest rate spreads, etc.
The most recent package clearly will buy some time. How much is an open ended question but I expect much less than previous packages as the Pavlovian reaction wears thin.
Amongst the many issues of implementation, political approval, private sector etc. I think the key failings are:
1) There was no increase in the size of EFSF. Furthermore, even the relatively paltry and debatable rating of current EFSF has yet to approved. To cover Spain and Italy would require 1.5-2.0 trillion Euros.
2) Concessions on rates and maturity extensions for Ireland and Portugal are nice but small relative to the fiscal adjustment required.
3) The debt relief to Greece is insignificant and will bring debt to GDP from 172% to around 150-160%, depending on whose estimates you are using.
4) Given that there is not much debt relief and the fiscal adjustment is massive there cannot be much hope that the domestic political willingness in Greece will be there to stay the course.
There is a hairy rule of thumb that sleeping in the buff is healthier for you than not. It relates I believe to the actual tested idea that sleeping with open windows is much healthier and gives much less respiratory disease than sleeping with closed windows as Asian women are all too prone to do, especially those living in air conditioned countries like Singapore. And it should be tested whether their respiratory diseases are much more common than they should be to their decreased longevity. We should ask Keeley what his tests on this show, or Louis L' Amour's study of wildlife.
As for its relation to markets, one comes back to the idea of playing canasta against 5 men named Doc. Impossible to win when markets are inactive as flexions must take their overhead out. Thus one must deal with the Asians, and the hotter the country, the greater the dishonesty I believe.
Jeff Watson writes:
Florida's a pretty hot place and I refuse to do business with any brokers or money people in this state because of the general lack of honesty. Something about the sun, surf, and sand that attracts people of questionable character.
Kim Zussman writes:
Corruption looks to be (inversely) related to latitude, with the obvious glaring exception of The Motherland.
Gary Rogan writes:
Speaking of hot dishonest Asian countries, I coincidentally just came across this story about the black market in Indonesia in RIM playbooks and other things.
John Floyd writes:
There is a somewhat new science that recommends "compression clothing" and I have been experimenting with it for both sleeping and exercise. I have found some merit to use.
In terms of fresh air as I recall the studies I have read indicate the high levels of air pollutants that accumulate inside a building, within in air ducts, etc. I always sleep with windows open regardless of the temperature outside and also use a hospital grade air purifier.
In Japanese there is a saying "Renma" meaning always polishing and improving. I think we can look at air circulation and blood circulation in the same way. Same is true for trading and the more we foment new ideas and ways to improve hopefully the better we become and avoid staleness.
Having lived in the Caribbean for several years and experienced months of absence from the heat while in New England winters I can tell you the adjust to the heat without air conditioning does take at least a day. But I found within a day I was fully adjusted. I think it becomes more difficult if you switch back and forth from A/C to non A/C in a hot climate. Again the trading link here may be one of consistency and allowing for adjustment processes that may be bring one out of their comfort zone.
In terms of the various prevalence of crime, corruption, work ethic, etc. across regions that I think is for one to do some research and analysis that would include Charles Murray's findings, geopolitical history, and personal experiences to reach their own conclusions.
Of course one would need to draw upon a sufficient sample size to determine for example whether those in Korea, Japan, Hong Kong or the Caribbean, etc. have a certain characteristics.
I know that there have been posts not long ago on great books for kids regarding business. My seven year old son has been showing a keen interest in the idea of business and particularly in entrepreneurship. I was wondering if readers of this site might share the names of books or other resources that might assist me in fostering this in his development. The kid wants to make money!
Mark Schuetz writes:
Hate to bring up a touchy subject, but I think it would be fun for kids to read about Buffett starting out. Definitely an interesting story about how he went from a paper route, to repairing pinball machines, to buying and renting a house, and so on, and SAVED money the whole time instead of spending it. It doesn't even have to be Buffett– maybe a kid could relate more to reading about famous businesspeople/investors when they were young and how they developed even at a very young age. It could inspire kids to think about more current ideas for themselves (very few will be interested in repairing pinball machines).
An editor writes:
When I was a kid I really enjoyed the book The Toothpaste Millionaire about a 6th grader who starts a business selling toothpaste and becomes very successful.
Victor Niederhoffer recommends:
John Floyd adds:
The Girl Who Owned a City.
Gibbons Burke adds:
This is an oldie but a goodie: The Richest Man in Babylon by George S. Clason. Many meals for a lifetime in this book.
Another good one for personal development skills helpful in business is Og Mandino's The Greatest Salesman in the World.
December 31, 2010 | 61 Comments
- 31 Spec-listers contributed to the 2011 Investment Contest with "specific" recommendations.
- Average 4 recommendations per person (mean of 4.2, median and mode of 4) came in.
- 6 contestants gave only 1 recommendation, 3 gave only 2 and thus 9 out of the total 31 have NOT given the minimum 3 recommendations needed as per the Rules clarified by Ken Drees.
- The Hall of Fame entry for the largest number of ideas (did someone say diversification?) is from Tim Melvin, close on whose heels are J. T. Holley with 11 and Ken Drees with 10.
- The most creatively expressed entry of course has come from Rocky Humbert.
- At this moment 17 out of 31 contestants are in positive performance territory, 14 are in negative performance territory.
- Barring a major outlier of a 112.90% loss on the Option Strategy of Phil McDonnell (not accounting for the margin required for short options, but just taking the ratio of initial cash inflow to outflow):
- Average of all Individual contestant returns is -2.54% and the Standard Deviation of returns achieved by all contestants is 5.39.
- Biggest Gainer at this point is Jared Albert (with his all in single stock bet on REFR) with a 22.87% gain. The only contestant a Z score greater than 2 ( His is actually 4.72 !!)
- Biggest Loser at this point (barring the Giga-leveraged position of Mr. McDonnell) is Ken Drees at -10.36% with a Z Score that is at -1.45.
- Wildcards have not been accounted for as at this point, with wide
deviations of recommendations from the rules specified by most. While 9
participants have less than 3 recommendations, those with more than 4
include several who have not chosen to specify which 3 are their primary recommends. Without clarity on a universal measurability wildcard accounting is on hold. Those making more than 1 recommendations would find that their aggregate average return is derived by taking a sum of returns of individual positions divided by the number of recommends. Unless specified by any person that positions are taken in a specific ratio its equal sums invested approach.
- A total of 109 contracts are utilized by the contestants across bonds, equity indices (Nikkei, Kenyan Stocks included too!), commodities, currencies and individual stock positions.
- The ratio of Shorts to Longs across all recommendations, irrespective of the type of contract (call, put, bearish ETF etc.) is 4 SELL orders Vs 9 Buy Orders. Not inferring that this list is more used to pressing the Buy Button. Just an occurence on this instance.
- The Average Return, so far, on the 109 contracts utilized is -1.26% with a Standard Deviation of 12.42%. Median Return is 0.39% and the mode of Returns of all contracts used is 0.
- The Highest Return is on MICRON TECH at 28.09, if one does not account for the July 2011 Put 25 strike on SLV utilized by Phil McDonnell.
- The Lowest Return is on IPTV at -50%, if one does not account for the Jan 2012 Call 40 Strike on SLV utilized by Phil McDonnell.
- Only Two contracts are having a greater than 2 z score and only 3 contracts are having a less than -2 Z score.
Victor Niederhoffer wrote:
One is constantly amazed at the sagacity in their fields of our fellow specs. My goodness, there's hardly a field that one of us doesn't know about from my own hard ball squash rackets to the space advertising or our President, from surfing to astronomy. We certainly have a wide range.
May I suggest without violating our mandate that we consider our best sagacities as to the best ways to make a profit in the next year of 2011.
My best trades always start with assuming that whatever didn't work the most last year will work the best this year, and whatever worked the best last year will work the worst this year. I'd be bullish on bonds and bearish on stocks, bullish on Japan and bearish on US stocks.
I'd bet against the banks because Ron Paul is going to be watching them and the cronies in the institutions will not be able to transfer as much resources as they've given them in the past 2 years which has to be much greater in value than their total market value.
I keep wondering what investments I should make based on the hobo's visit and I guess it has to be generic drugs and foods.
What ideas do you have for 2011 that might be profitable? To make it interesting I'll give a prize of 2500 to the best forecast, based on results as of the end of 2011.
David Hillman writes:
"I do know that a sagging Market keeps my units from being full."
One would suggest it is a sagging 'economy' contributing to vacancy, not a sagging 'market'. There is a difference.
Ken Drees, appointed moderator of the contest, clearly states the new rules of the game:
1. Submissions for contest entries must be made on the last two days of 2010, December 30th or 31st.
2. Entries need to be labeled in subject line as "2011 contest investment prediction picks" or something very close so that we know this is your official entry.
3. Entries need 3 predictions and 1 wildcard trade prediction (anything goes on the wildcard).
4. Extra predictions may be submitted and will be judged as extra credit. This will not detract from the main predictions and may or may not be judged at all.
5. Extra predictions will be looked on as bravado– if you've got it then flaunt it. It may pay off or you may give the judge a sour palate.
The desire to have entries coming in at years end is to ensure that you have the best data as to year end 2010 and that you don't ignite someone else to your wisdom.
Market direction picks are wanted:
Examples: 30 year treasury yield will fall to 3% in 2011, S&P 500 will hit "x" by June, and then by "y" by December 2011.
The more exact your prediction is, the more weight will be given. The more exact your prediction, the more weight you will receive if right and thus the more weight you will receive if wrong. If you predict that copper will hit 5.00 dollars in 2011 and it does you will be given a great score, if you say that copper will hit 5.00 dollars in march and then it will decline to4.35 and so forth you will be judged all along that prediction and will receive extra weight good or bad. You decide on how detailed your submission is structured.
Will you try to be precise (maybe foolhardy) and go for the glory? Or will you play it safe and not stand out from the crowd? It is a doubled edged sword so its best to be the one handed market prognosticator and make your best predictions. Pretend these predictions are some pearls that you would give to a close friend or relative. You may actually help a speclister to make some money by giving up a pearl, if that speclister so desires to act upon a contest–G-d help him or her.
Markets can be currency, stocks, bonds, commodities, etc. Single stock picks can be given for the one wildcard trade prediction. If you give multiple stock picks for the wildcard then they will all be judged and in the spirit of giving a friend a pearl–lets make it "the best of the best, not one of six".
All judgments are the Chair's. The Chair will make final determination of the winner. Entries received with less than 3 market predictions will not be considered. Entries received without a wildcard will be considered.The spirit of the contest is "Give us something we can use".
Bill Rafter adds:
Suggestion for contest:
"Static" entry: A collection of up to 10 assets which will be entered on the initial date (say 12/31/2010) and will be unaltered until the end data (i.e. 12/31/2011). The assets could be a compilation of longs and shorts, or could have the 10 slots entirely filled with one asset (e.g. gold). The assets could also be a yield and a fixed rate; that is one could go long the 10-year yield and short a fixed yield such as 3 percent. This latter item will accommodate those who want to enter a prediction but are unsure which asset to enter as many are unfamiliar with the various bond coupons.
"Rebalanced" entry: A collection of up to 10 assets which will be rebalanced on the last trading day of each month. Although the assets will remain unchanged, their percentage of the portfolio will change. This is to accommodate those risk-averse entrants employing a mean-reversion strategy.
Both Static and Rebalanced entries will be judged on a reward-to-risk basis. That is, the return achieved at the end of the year, divided by the maximum drawdown (percentage) one had to endure to achieve that return.
Not sure how to handle other prognostications such as "Famous female singer revealed to be man." But I doubt such entries have financial benefits.
I'm willing to be an arbiter who would do the rebalancing if necessary. I am not willing to prove or disprove the alleged cross-dressers.
Ralph Vince writes:
A very low volume bar on the weekly (likely, the first of two consecutive) after a respectable run-up, the backdrop of rates having risen in recent weeks, breadth having topped out and receding - and a lunar eclipse on the very night of the Winter Solstice.
If I were a Roman General I would take that as a sign to sit for next few months and do nothing.
I'm going to sit and do nothing.
Sounds like an interim top in an otherwise bullish, long-term backdrop.
Gordon Haave writes:
My three predictions:
Gold/ silver ratio falls below 25 Kenyan stock market outperforms US by more than 10%
Dollar ends 10% stronger compared to euro
All are actionable predictions.
Steve Ellison writes:
I did many regressions looking for factors that might predict a year-ahead return for the S&P 500. A few factors are at extreme values at the end of 2010.
The US 10-year Treasury bond yield at 3.37% is the second-lowest end-of year yield in the last 50 years. The S&P 500 contract is in backwardation with the front contract at a 0.4% premium to the next contract back, the second highest year-end premium in the 29 years of the futures.
Unfortunately, neither of those factors has much correlation with the price change in the S&P 500 the following year. Here are a few that do.
The yield curve (10-year yield minus 3-month yield) is in the top 10% of its last 50 year-end values. In the last 30 years, the yield curve has been positively correlated with year-ahead changes in the S&P 500, with a t score of 2.17 and an R squared of 0.143.
The US unemployment rate at 9.8% is the third highest in the past 60 years. In the last 30 years, the unemployment rate has been positively correlated with year-ahead changes in the S&P 500, with a t score of 0.90 and an R squared of 0.028.
In a variation of the technique used by the Yale permabear, I calculated the S&P 500 earnings/price ratio using 5-year trailing earnings. I get an annualized earnings yield of 4.6%. In the last 18 years, this ratio has been positively correlated with year-ahead changes in the S&P 500, with a t score of 0.92 and an R squared of
Finally, there is a negative correlation between the 30-year S&P 500 change and the year-ahead change, with a t score of -2.28 and an R squared of 0.094. The S&P 500 index price is 9.27 times its price of 30 years ago. The median year-end price in the last 52 years was 6.65 times the price 30 years earlier.
Using the predicted values from each of the regressions, and weighting the predictions by the R squared values, I get an overall prediction for an 11.8% increase in the S&P 500 in 2011. With an 11.8% increase, SPY would close 2011 at 140.52.
Factor Prediction t N R sq
US Treasury yield curve 1.162 2.17 30 0.143
30-year change 1.052 -2.28 52 0.094
Trailing 5-year E/P 1.104 0.92 18 0.050
US unemployment rate 1.153 0.90 30 0.028
Weighted total 1.118
SPY 12/30/10 125.72
Predicted SPY 12/30/11 140.52
Jan-Petter Janssen writes:
PREDICTION I - The Inconvenient Truth The poorest one or two billion on this planet have had enough of increasing food prices. Riots and civil unrest force governments to ban exports, and they start importing at any cost. World trade collapses. Manufacturers of farm equipment will do extremely well. Buy the most undervalued producer you can find. My bet is
* Kverneland (Yahoo: KVE.OL). NOK 6.50 per share today. At least NOK 30 on Dec 31th 2011.
PREDICTION II - The Ultimate Bubble The US and many EU nations hold enormous gold reserves. E.g. both Italy and France hold the equivalent of the annual world production. The gold meme changes from an inflation hedge / return to the gold standard to (a potential) over-supply from the selling of indebted nations. I don't see the bubble bursting quite yet, but
* Short gold if it hits $2,000 per ounce and buy back at $400.
PREDICTION III - The Status Quo Asia's ace is cheap labor. The US' recent winning card is cheap energy through natural gas. This will not change in 2011. Henry Hub Feb 2011 currently trades at $4.34 per MMBtu. Feb 2012 is at $5.14. I would
* Short the Feb 2012 contract and buy back on the last trading day of 2011.
Vince Fulco predicts:
This is strictly an old school, fundamental equity call as my crystal ball for the indices 12 months out is necessarily foggy. My recommendation is BP equity primarily for the reasons I gave earlier in the year on June 5th (stock closed Friday, June 4th @ $37.16, currently $43.53). It faced a hellish downdraft post my mention for consideration, primarily due to the intensification of news flow and legal unknowns (Rocky articulated these well). Also although the capital structure arb boys savaged the equity (to 28ish!), it is up nicely to year's end if one held on and averaged in with wide scales given the heightened vol.
Additional points/guesstimates are:
1) If 2010 was annus horribilis, 2011 with be annus recuperato. A chastened mgmt who have articulated they'll run things more conservatively will have a lot to prove to stakeholders.
2) Dividend to be re-instated to some level probably by the end of the second quarter. I am guessing $1.00 annualized per ADS as a start (or
2.29%), this should bring in the index hugging funds with mandates for only holding dividend payers. There is a small chance for a 1x special dividend later in the year.
3) Crude continues to be in a state of significant profitability for the majors in the short term. It would appear finding costs are creeping however.
4) The lawsuits and additional recoveries to be extracted from the settlement fund and company directly have very long tails, on the order of 10 years.
5) The company seems fully committed to sloughing off tertiary assets to build up its liquid balance sheet. Debt to total capital remains relatively low and manageable.
6) The stock remains at a significant discount to its better-of breed peers (EV/normalized EBITDA, Cash Flow, etc) and rightly so but I am betting the discount should narrow back to near historical levels.
1) The company and govt have been vastly understating the remaining fuel amounts and effects. Release of independent data intensifies demands for a much larger payout by the company closer to the highest end estimates of $50-80B.
2) It experiences another similar event of smaller magnitude which continues to sully the company's weakened reputation.
3) China admits to and begins to fear rampant inflation, puts the kabosh to the (global) economy and crude has a meaningful decline the likes of which we haven't seen in a few years.
4) Congress freaks at a >$100-120 price for crude and actually institutes an "excess profits" tax. Less likely with the GOP coming in.
A buy at this level would be for an unleveraged, diversified, longer term acct which I have it in. However, I am willing to hold the full year or +30% total return (including special dividend) from the closing price of $43.53 @ 12/30/10, whichever comes first. Like a good sellside recommendation, I believe the stock has downside of around 20% (don't they all when recommended!?!) where I would consider another long entry depending on circumstances (not pertinent to the contest).
Mr. Albert enters:
Single pick stock ticker is REFR
The only way this gold chain wearing day trader has a chance against all the right tail brain power on the list is with one high risk/high reward put it all on red kind of micro cap.
Basic story is this company owns all the patents to what will become the standard for switchable glazings (SPD smart glass). It's taken roughly 50 years of development to get a commercialized product, and next year Mercedes will almost without doubt use SPD in the 2012 SLK (press launch 1/29/11 public launch at the Geneva auto show in march 2011).
Once MB validate the tech, mass adoption and revenues will follow etc and this 'show me' stock will rocket to the moon.
Dan Grossman writes:
Trying to comply with and adapt the complex contest rules (which most others don't seem to be following in any event) to my areas of stock market interest:
1. The S&P will be down in the 1st qtr, and at some point in the qtr will fall at least
2. For takeover investors: GENZ will (finally) make a deal to be acquired in the 1st qtr for a value of at least $80; and AMRN after completion of its ANCHOR trial will make a deal to be acquired for a price of at least $8.
3. For conservative investors: Low multiple small caps HELE and DFG will be up a combined average of 20% by the end of the year.
For my single stock pick, I am something of a johnny-one-note: MNTA will be up lots during the year — if I have to pick a specific amount, I'd say at least 70%. (My prior legal predictions on this stock have proved correct but the stock price has not appropriately reflected same.)
Finally, if I win the contest (which I think is fairly likely), I will donate the prize to a free market or libertarian charity. I don't see why Victor should have to subsidize this distinguished group that could all well afford an contest entrance fee to more equitably finance the prize.
Best to all for the New Year,
Gary Rogan writes:
1. S&P 500 will rise 3% by April and then fall 12% from the peak by the end of the year.
2. 30 year treasury yields will rise to 5% by March and 6% by year end.
3. Gold will hit 1450 by April, will fall to 1100 by September and rise to 1550 by year end.
Wildcard: Short Netflix.
Jack Tierney, President of the Old Speculator's Club, writes:
Equal Amounts in:
TBT (short long bonds)
YCS (short Yen)
GRU (Long Grains - heavy on wheat)
CHK (Long NG - takeover)
BONXF.PK or BTR.V (Long junior gold)
12/30 closing prices (in order):
Bill Rafter writes:
Buy: FXP and IRWD
Hold for the entire year.
William Weaver writes:
For Returns: Long XIV January 21st through year end
For Return/Risk: Long XIV*.30 and Long VXZ*.70 from close today
I hope everyone has enjoyed a very merry holiday season, and to all I wish a wonderful New Year.
Ken Drees writes:
Yes, they have been going up, but I am going contrary contrary here and going with the trends.
1. Silver: buy day 1 of trading at any price via the following vehicles: paas, slw, exk, hl –25% each for 100% When silver hits 39/ounce, sell 10% of holdings, when silver hits 44/ounce sell 30% of holdings, when silver hits 49 sell 60%–hold rest (divide into 4 parts) and sell each tranche every 5 dollars up till gone–54/oz, 59, 64, 69.
2. Buy GDXJ day 1 (junior gold miner etf)—rotation down from majors to juniors with a positive gold backdrop. HOLD ALL YEAR.
3. USO. Buy day 1 then do—sell 25% at 119/bbl oil, sell 80% at 148/bbl, sell whats left at 179/bbl or 139/bbl (whichever comes first after 148)
wildcard: AMEX URANUIM STOCKS. UEC, URRE, URZ, DNN. 25% EACH, buy day 1 then do SELL 70% OF EVERYTHING AT 96$LB u http://www.uxc.com/ FOR PRICING, AND HOLD REST FOR YEAR END.
Happy New Year!
Ken Drees———keepin it real.
Sam Eisenstadt forecasts:
My forecast for the S&P 500 for the year ending Dec 31, 2011;
S&P 500 1410
Anton Johnson writes:
Equal amounts allocated to:
EDZ Short moc 1-21-2011, buy to cover at 50% gain, or moc 12/30/2011
VXX Short moc 1-21-2011, buy to cover moc 12/30/2011
UBT Short moo 1-3-2011, buy to cover moc 12/30/2011
Scott Brooks picks:
Evenly between the 4 (25% each)
Sushil Kedia predicts:
3) Japanese Yen
30% moves approximately in each, within 2011.
Rocky Humbert writes:
(There was no mention nor requirement that my 2011 prediction had to be in English. Here is my submission.) … Happy New Year, Rocky
Sa aking mahal na kaibigan: Sa haba ng 2010, ako na ibinigay ng ilang mga ideya trading na nagtrabaho sa labas magnificently, at ng ilang mga ideya na hindi na kaya malaki. May ay wala nakapagtataka tungkol sa isang hula taon dulo, at kung ikaw ay maaaring isalin ito talata, ikaw ay malamang na gawin ang mas mahusay na paggawa ng iyong sariling pananaliksik kaysa sa pakikinig sa mga kalokohan na ako at ang iba pa ay magbigay. Ang susi sa tagumpay sa 2011 ay ang parehong bilang ito ay palaging (tulad ng ipinaliwanag sa pamamagitan ng G. Ed Seykota), sa makatuwid: 1) Trade sa mga kalakaran. 2) Ride winners at losers hiwa. 3) Pamahalaan ang panganib. 4) Panatilihin ang isip at diwa malinaw. Upang kung saan gusto ko idagdag, fundamentals talaga bagay, at kung ito ay hindi magkaroon ng kahulugan, ito ay hindi magkaroon ng kahulugan, at diyan ay wala lalo na pinakinabangang tungkol sa pagiging isang contrarian bilang ang pinagkasunduan ay karaniwang karapatan maliban sa paggawa sa mga puntos. (Tandaan na ito ay pinagkasunduan na ang araw ay babangon na bukas, na quote Seth Klarman!) Pagbati para sa isang malusog na masaya at pinakinabangang 2011, at siguraduhin na basahin www.rockyhumbert.com kung saan ako magsulat sa Ingles ngunit ang aking mga saloobin ay walang malinaw kaysa talata na ito, ngunit inaasahan namin na ito ay mas kapaki-pakinabang.
Dylan Distasio comments:
Gawin mo magsalita tagalog?
Gary Rogan writes:
After a worthy challenge, Mr. Rogan is now also a master of Google Translate, and a discoverer of an exciting fact that Google Translate calls Tagalog "Filipino". This was a difficult obstacle for Mr. Rogan to overcome, but he persevered and here's Rocky's prediction in English (sort of):
My dear friend: Over the course of 2010, I provided some trading ideas worked out magnificently, and some ideas that are not so great. There is nothing magical about a forecast year end, and if you can translate this paragraph, you will probably do better doing your own research rather than listening to the nonsense that I and others will give. The key to success in 2011 is the same as it always has (as explained by Mr. Ed Seykota), namely: 1) Trade with the trend.
2) Ride cut winners and losers. 3) Manage risk. 4) Keep the mind and spirit clear. To which I would add, fundamentals really matter, and if it does not make sense, it does not make sense, and there is nothing particularly profitable about being a contrarian as the consensus is usually right but turning points. (Note that it is agreed that the sun will rise tomorrow, to quote Seth Klarman) Best wishes for a happy healthy and profitable 2011, and be sure to read www.rockyhumbert.com which I write in English but my attitude is nothing clearer than this paragraph, but hopefully it is more useful.
Tim Melvin writes:
Ah the years end prediction exercise. It is of course a mostly useless exercise since not a one of us can predict what shocks, positive or negative, the world and the markets could see in 2011. I find it crack up laugh out loud funny that some pundits come out and offer up earnings estimates, GDP growth assumptions and interest rate guesses to give a precise level for the year end S&P 500 price. You might as well numbers out of a bag and rearrange them by lottery to come up with a year end number. In a world where we are fighting two wars, a hostile government holds the majority of our debt and several sovereign nations continually teeter on the edge of oblivion it's pretty much ridiculous to assume what could happen in the year ahead. Having said that, as my son's favorite WWE wrestler when he was a little guy used to say "It's time to play the game!"
Ill start with bonds. I have owned puts on the long term treasury market for two years now. I gave some back in 2010 after a huge gain in 2009 but am still slightly ahead. Ill roll the position forward and buy January 2012 puts and stay short. When I look at bods I hear some folks talking about rising basic commodity prices and worrying about inflation. They are of course correct. This is happening. I hear some other really smart folks talking of weak real estate, high jobless rates and the potential for falling back into recession. Naturally, they are also exactly correct. So I will predict the one thing no one else is. We are on the verge of good old fashioned 1970s style stagflation. Commodity and basic needs prices will accelerate as QE2 has at least stimulated demand form emerging markets by allowing these wonderful credits to borrow money cheaper than a school teacher with a 750 FICO score. Binds go lower as rates spike. Our economy and balance sheet are a mess and we have governments run by men in tin hats lecturing us on fiscal responsibility. How low will they go Tim? How the hell do I know? I just think they go lower by enough for me to profit.
Nor can I tell you where the stock market will go this year. I suspect we have had it too good for too long for no reason so I think we get at least one spectacular gut wrenching, vomit inducing sell off during the year. Much as lower than expected profits exposed the silly valuations of the new paradigm stocks I think that the darling group, retail , will spark a sell-off in the stock market this year. Sales will be up a little bit but except for Tiffany's (TIF) and that ilk margins are horrific. Discounting started early this holiday and grew from there. They will get steeper now that that Santa Claus has given back my credit card and returned to the great white north. The earnings season will see a lot of missed estimates and lowered forecasts and that could well pop the bubble. Once it starts the HFT boys and girls should make sure it goes lower than anyone expects.
Here's the thing about my prediction. It is no better than anyone else's. In other words I am talking my book and predicting what I hope will happen. Having learned this lesson over the years I have learned that when it comes to market timing and market direction I am probably the dumbest guy in the room. Because of that I have trained myself to always buy the stuff that's too cheap not to own and hold it regardless. After the rally since September truly cheap stuff is a little scarce on the ground but I have found enough to be about 40% long going into the year. I have a watch list as long as a taller persons right arm but most of it hover above truly cheap.
Here is what I own going into the year and think is still cheap enough to buy. I like Winn Dixie (WINN). The grocery business sucks right now. Wal mart has crushed margins industry wide. That aside WINN trades at 60% of tangible book value and at some point their 514 stores in the Southeast will attract attention from investors. A takeover here would be less than shocking. I will add Presidential Life (PLFE) to the list. This stock is also at 60% of tangible book and I expect to see a lot of M&A activity in the insurance sector this year and this should raise valuations across the board. I like Miller Petroleum (MILL) with their drilling presence in Alaska and the shale field soft Tennessee. This one trades at 70% of tangible book. Ill add Imperial Sugar (IPSU), Syms (SYMS) and Micron tech (MU) and Avatar Holdings (AVTR) to my list of cheapies and move on for now.
I am going to start building my small bank portfolio this year. Eventually this group becomes the F-you walk away money trade of the decade. As real estate losses work through the balance sheet and some measure of stability returns to the financial system, perhaps toward the end of the year the small baileys savings and loan type banks should start to recover. We will also see a mind blowing M&A wave as larger banks look to gain not just market share but healthy assets to put on the books. Right now these names trade at a fraction of tangible book value. They will reach a multiple of that in a recovery or takeover scenario. Right now I own shares of Shore Bancshares (SHBI), a local bank trading at 80% of book value and a reasonably healthy loan portfolio. I have some other mini microcap banks as well that shall remain my little secret and not used to figure how my predictions work out. I mention them because if you have a mini micro bank in your community you should go meet then bankers, review the books and consider investing if it trades below the magical tangible book value and has excess capital. Flagstar Bancorp(FBC) is my super long shot undated call option n the economy and real estate markets.
I will also play the thrift conversion game heavily this year. With the elimination of the Office of Thrift Services under the new financial regulation many of the benefits of being a private or mutual thrift are going away. There are a ton of mutual savings banks that will now convert to publicly traded banks. A lot of these deals will be priced below the pro forma book value that is created by adding all that lovely IPO cash to the balance sheet without a corresponding increase in the shares outstanding. Right now I have Fox Chase Bancorp (FXCB) and Capital Federal Financial(CFFN). There will be more. Deals are happening every day right now and again I would keep an eye out for local deals that you can take advantage of in the next few months.
I also think that 2011 will be the year of the activist investor. These folks took a beating since 2007 but this should be their year. There is a ton of cash on corporate balance sheets but lots of underperformance in the current economic environment. We will see activist drive takeovers, restructures, and special dividends this year in my opinion. Recent filings of interest include strong activist positions in Surmodics(SRDX), SeaChange International (SEAC), and Energy Solutions. Tracking activist portfolios and 13D filings should be a very profitable activity in 2011.
I have been looking at some interesting new stuff with options as well I am not going to give most of it away just yet but I ll give you one stimulated by a recent list discussion. H and R Black is highly likely to go into a private equity portfolio next year. Management has made every mistake you can make and the loss of RALs is a big problem for the company. However the brand has real value. I do not want town the stock just yet but I like the idea of selling the January 2012 at $.70 to $.75. If you cash secure the put it's a 10% or so return if the stock stays above the strike. If it falls below I' ll be happy to own the stock with a 6 handle net. Back in 2008 everyone anticipated a huge default wave to hit the high yield market. Thanks to federal stimulus money pumping programs it did not happen. However in the spirit of sell the dog food the dog will eat a given moment the hedge fund world raised an enormous amount od distressed debt money. Thanks to this high yield spreads are far too low. CCC paper in particular is priced at absurd levels. These things trade like money good paper and much of it is not. Extend and pretend has helped but if the economy stays weak and interest rates rise rolling over the tsunami f paper due over the next few years becomes nigh onto impossible. I am going take small position in puts on the various high yield ETFs. If I am right they will explode when that market implodes. Continuing to talk my book I hope this happens. Among my nightly prayers is "Please God just one more two year period of asset rich companies with current payments having bonds trade below recovery value and I promise not to piss the money away this time. Amen.
PS. If you add in risk arbitrage spreads of 30% annualized returns along with this I would not object. Love, Tim.
I can't tell you what the markets will do. I do know that I want to own some safe and cheap stocks, some well capitalized small banks trading below book and participate in activist situation. I will be under invested in equities going into the year hoping my watch list becomes my buy list in market stumble. I will have put positions on long T-Bonds and high yield hoping for a large asymmetrical payoff.
Other than that I am clueless.
Kim Zussman comments:
Does anyone else think this year is harder than usual to forecast? Is it better now to forecast based on market fundamentals or mass psychology? We are at a two year high in stocks, after a huge rally off the '09 bottom that followed through this year. One can make compelling arguments for next year to decline (best case scenarios already discounted, prior big declines followed by others, volatility low, house prices still too high, FED out of tools, gov debt/gdp, Roubini says so, benefits to wall st not main st, persistent high unemployment, Year-to-year there is no significant relationship, but there is a weak down tendency after two consecutive up years. ). And compelling arguments for up as well (crash-fears cooling, short MA's > long MA's, retail investors and much cash still on sidelines, tax-cut extended, employee social security lowered, earnings increasing, GDP increasing, Tepper and Goldman say so, FED herding into risk assets, benefits to wall st not main st, employment starting to increase).
Is the level of government market-intervention effective, sustainable, or really that unusual? The FED looks to be avoiding Japan-style deflation at all costs, and has a better tool in the dollar. A bond yields decline would help growth and reduce deflation risk. Increasing yields would be expected with increasing inflation; bad for growth but welcomed by retiring boomers looking for fixed income. Will Obamacare be challenged or defanged by states or in the supreme court? Will 2011 be the year of the muni-bubble pop?
A ball of confusion!
4 picks in equal proportion:
long XLV (health care etf; underperformed last year)
long CMF (Cali muni bond fund; fears over-wrought, investors still need tax-free yield)
short GLD (looks like a bubble and who needs gold anyway)
short IEF (7-10Y treasuries; near multi-year high/QE2 is weaker than vigilantism)
Alan Millhone writes:
I note discussion over the rules etc. Then you have a fellow like myself who has never bought or sold through the Market a single share.
For myself I will stick with what I know a little something. No, not Checkers —
Rental property. I have some empty units and beginning to rent one or two of late to increase my bottom line.
I will not venture into areas I know little or nothing and will stay the course in 2011 with what I am comfortable.
Happy New Year and good health,
Jay Pasch predicts:
2010 will close below SP futures 1255.
Buy-and-holders will be sorely disappointed as 2011 presents itself as a whip-saw year.
99% of the bullish prognosticators will eat crow except for the few lonely that called for a tempered intra-year high of ~ SPX 1300.
SPX will test 1130 by April 15 with a new recovery high as high as 1300 by the end of July.
SPX 1300 will fail with new 2011 low of 1050 before ending the year right about where it started.
The Midwest will continue to supply the country with good-natured humble stock, relatively speaking.
Chris Tucker enters:
Buy and Hold
Wildcard: Buy and Hold AVAV
Gibbons Burke comments:
Mr. Ed Seykota once outlined for me the four essential rules of trading:
1) The trend is your friend (till it bends when it ends.)
2) Ride your winners.
3) Cut your losses short.
4) Keep the size of your bet small.
Then there are the "special" rules:
5) Follow all the rules.
and for masters of the game:
6) Know when to break rule #5
A prosperous and joy-filled New Year to everyone.
John Floyd writes:
In no particular order with target prices to be reached at some point in 2011:
1) Short the Australian Dollar:current 1.0220, target price .8000
2) Short the Euro: current 1.3375, target price 1.00
3) Short European Bank Stocks, can use BEBANKS index: current 107.40, target 70
A Mr. Krisrock predicts:
1…housing will continue to lag…no matter what can be done…and with it unemployment will remain
2…bonds will outperform as republicans will make cutting spending the first attack they make…QE 2 will be replaced by QE3
3…with every economist in the world bullish, stocks will underperform…
4…commodities are peaking ….
Laurel Kenner predicts:
After having made monkeys of those luminaries who shorted Treasuries last year, the market in 2011 has had its laugh and will finally carry out the long-anticipated plunge in bond prices.
Short the 30-year bond futures and cover at 80.
Pete Earle writes:
All picks are for 'all year' (open first trading day/close last trading day).
1. Long EUR/USD
2. Short gold (GLD)
MMR (McMoran Exploration Corp)
HDIX (Home Diagnostics Inc)
TUES (Tuesday Morning Corp)
PBP (Powershares S&P500 Buy-Write ETF)
NIB (iPath DJ-UBS Cocoa ETF)
KG (King Pharmaceuticals)
Happy New Year to all,
Paolo Pezzutti enters:
If I may humbly add my 2 cents:
- bearish on S&P: 900 in dec
- crisis in Europe will bring EURUSD down to 1.15
- gold will remain a safe have haven: up to 1500
- big winner: natural gas to 8
J.T Holley contributes:
The Market Mistress so eloquently must come first and foremost. Just as daily historical stats point to betting on the "unchanged" so is my S&P 500 trade for calendar year 2011. Straddle the Mistress Day 1. My choice for own reasons with whatever leverage is suitable for pain thresholds is a quasi straddle. 100% Long and 50% Short in whatever instrument you choose. If instrument allows more leverage, first take away 50% of the 50% Short at suitable time and add to the depreciated/hopefully still less than 100% Long. Feel free to add to the Long at this discretionary point if it suits you. At the next occasion that is discretionary take away remaining Short side of Quasi Straddle, buckle up, and go Long whatever % Long that your instrument or brokerage allows till the end of 2011. Take note and use the historical annual standard deviation of the S&P 500 as a rudder or North Star, and throw in the quarterly standard deviation for testing. I think the ambiguity of the current situation will make the next 200-300 trading days of data collection highly important, more so than prior, but will probably yield results that produce just the same results whatever the Power Magnification of the Microscope.
Long the U.S. Dollar. Don't bother with the rest of the world and concern yourself with which of the few other Socialist-minded Country currencies to short. Just Long the U.S. Dollar on Day 1 of 2011. Keep it simple and specialize in only the Long of the U.S. Dollar. Cataclysmic Economic Nuclear Winter ain't gonna happen. When the Pastor preaches only on the Armageddon and passes the plate while at the pulpit there is only one thing that happens eventually - the Parish dwindles and the plate stops getting filled. The Dollar will bend as has, but won't break or at least I ain't bettin' on such.
Ala Mr. Melvin, Short any investment vehicle you like that contains the words or numerals "perpetual maturity", "zero coupon" and "20-30yr maturity" in their respective regulated descriptions, that were issued in times of yore. Unfortunately it doesn't work like a light switch with the timing, remember it's more like air going into a balloon or a slow motion see-saw. We always want profits initially and now and it just doesn't work that way it seems in speculation. Also, a side hedge is to start initially looking at any financial institution that begins, dabbles, originates and gains high margin fees from 50-100 year home loans or Zero-Coupon Home Loans if such start to make their way Stateside. The Gummit is done with this infusion and cheer leading. They are in protection mode, their profit was made. Now the savy financial engineers that are left or upcoming will continue to find ways to get the masses to think they "Own" homes while actually renting them. Think Car Industry '90-'06 with. Japan did it with their Notes and I'm sure some like-minded MBA's are baiting/pushing the envelopes now in board rooms across the U.S. with their profitability and ROI models, probably have ditched the Projector and have all around the cherry table with IPads watching their presentation. This will ultimately I feel humbly be the end of the Mortgage Interest Deduction as it will be dwindled down to a moot point and won't any longer be the leading tax deduction that it was created to so-called help.
Short Gold, Short it, Short it more. Take all of your emotions and historical supply and demand factors out of the equation, just look at the historical standard deviation and how far right it is and think of Buzz Lightyear in Toy Story and when he thought he was actually flying and the look on his face at apex realization. That plus continue doing a study on Google Searches and the number of hits on "stolen gold", "stolen jewelery", and Google Google side Ads for "We buy Gold". I don't own gold jewelery, and have surrendered the only gold piece that I ever wore, but if I was still wearing it I'd be mighty weary of those that would be willing to chop a finger off to obtain. That ain't my fear, that's more their greed.
Long lithium related or raw if such. Technology demands such going forward.
Long Natural Gas. Trading Day 1 till last trading day of the year. The historic "cheap" price in the minds of wannabe's will cause it to be leveraged long and oft with increasing volume regardless of the supply. Demand will follow, Pickens sowed the seeds and paid the price workin' the mule while plowin'. De-regulation on the supply side of commercial business statements is still in its infancy and will continue, politics will not beat out free markets going into the future.
Long Crude and look to see the round 150 broken in years to come while China invents, perfects, and sees the utility in the Nuclear fueled tanker.
Long LED, solar, and wind generation related with tiny % positions. Green makes since, its here to stay and become high margined profitable businesses.
Short Sugar. Sorry Mr. Bow Tie. Monsanto has you Beet! That being stated, the substitute has arrived and genetically altered "Roundup Ready" is here to stay no matter what the Legislative Luddite Agrarians try, deny, or attempt. With that said, Long MON. It is way more than a seed company. It is more a pharmaceutical engineer and will bring down the obesity ridden words Corn Syrup eventually as well. Russia and Ireland will make sure of this with their attitudes of profit legally or illegally.
Prepare to long in late 2011 the commercialized marijuana and its manufacturing, distribution companies that need to expand profitability from its declining tobacco. Altria can't wait, neither can Monsanto. It isn't a moral issue any longer, it's a financial profit one. We get the joke, or choke? If the Gummit doesn't see what substitutes that K2 are doing and the legal hassles of such and what is going on in Lisbon then they need to have an economic lesson or two. It will be a compromise between the Commercial Adjective Definition Agrarians and Gummit for tax purposes with the Green theme continuing and lobbying.
Short Coffee, but just the 1st Qtr of 2011. Sorry Seattle. I will also state that there will exist a higher profit margin substitute for the gas combustible engine than a substitute for caffeine laden coffee.
Sex and Speculation:
Look to see www.fyretv.com go public in 2011 with whatever investment bank that does such trying their best to be anonymous. Are their any investment banks around? This Boxxx will make Red Box blush and Apple TV's box envious. IPTV and all related should be a category that should be Longed in 2011 it is here to stay and is in it's infancy. Way too many puns could be developed from this statement. Yes, I know fellas the fyre boxxx is 6"'s X 7"'s.
This is one category to always go Long. I have vastly improved my guitar playin' in '10 and will do so in '11. AAPL still has the edge and few rivals are even gaining market share and its still a buy on dips, sell on highs empirically counted. They finally realized that .99 cents wasn't cutting it and .69 cents was more appropriate for those that have bought Led Zeppelin IV songs on LP, 8-track, cassette, and CD over the course of their lives. Also, I believe technology has a better shot at profitably bringing music back into public schools than the Federal or State Gummits ever will.
Long - Your mind. Double down on this Day 1 of 2011. It's the most capable, profitable thing you have going for you. I just learned this after the last 36 months.
Long - Counting, you need it now more than ever. It's as important as capitalism.
Long - Being humble, it's intangible but if quantified has a STD of 4 if not higher.
Long - Common Sense.
Long - Our Children. The media is starting to question if their education is priceless, when it is, but not in their context or jam.
Short - Politics. It isn't a spectator sport and it has been made to be such.
Short - Fear, it is way way been played out. Test anything out there if you like. I have. It is prevalent still and disbelief is rampant.
Long - Greed, but don't be greedy just profitable. Wall Street: Money Never Sleeps was the pilot fish.
I had to end on a Long note.
Happy New Year's Specs. Thanks to all for support over the last four years. I finally realized that it ain't about being right or wrong, just profitable in all endeavors. Too many losses led to this, pain felt after lookin' within, and countin' ones character results with pen/paper.
Russ Sears writes:
For my entry to the contest, I will stick with the stocks ETF, and the index markets and avoid individual stocks, and the bonds and interest rates. This entry was thrown together rather quickly, not at all an acceptable level if it was real money. This entry is meant to show my personal biases and familiarity, rather than my investment regiment. I am largely talking my personal book.
Therefore, in the spirit of the contest , as well as the rules I will expose my line of thinking but only put numbers on actual entry predictions. Finally, if my caveats are not warning enough, I will comment on how a prediction or contest entry differs from any real investment. I would make or have made.
The USA number one new product export will continue to be the exportation of inflation. The printing of dollars will continue to have unintended consequences than its intended effect on the national economy but have an effect on the global economy.. Such monetary policy will hit areas with the most potential for growth: the emerging markets of China and India. In these economies, that spends over half their income on food, food will continue to rise. This appears to be a position opposite the Chairs starting point prediction of reversal of last year's trends.
Likewise, the demand for precious metals such as gold and silver will not wane as these are the poor man's hedge against food cost. It may be overkill for the advanced economies to horde the necessities and load up on precious metals Yet, unlike the 70's the US/ European economy no longer controls gold and silver a paradigm shift in thinking that perhaps the simple statistician that uses weighted averages and the geocentric economist have missed. So I believe those entries shorting gold or silver will be largely disappointed. However in a nod to the chair's wisdom, I will not pick metals directly as an entry. Last year's surprise is seldom this year's media darling. However, the trend can continue and gold could have a good year. The exception to the reversal rule seems to be with bubbles which gain a momentum of their own, apart from the fundamentals. The media has a natural sympathy in suggesting a return to the drama of he 70's, the stagflation dilemma, ,and propelling an indicator of doom. With the media's and the Fed's befuddled backing perhaps the "exception" is to be expected. But I certainly don't see metal's impending collapse nor its continued performance.
The stability or even elevated food prices will have some big effects on the heartland.
1. For my trend is your friend pick: Rather than buy directly into a agriculture commodity based index like DBA, I am suggesting you buy an equity agriculture based ETF like CRBA year end price at 77.50. I am suggesting that this ETF do not need to have commodities produce a stellar year, but simply need more confirmation that commodity price have established a higher long term floor. Individually I own several of these stocks and my wife family are farmers and landowners (for full disclosure purposes not to suggest I know anything about the agriculture business) Price of farmland is raising, due to low rates, GSE available credit, high grain prices due to high demand from China/India, ethanol substitution of oil A more direct investment in agriculture stability would be farmland. Farmers are buying tractors, best seeds and fertilizers of course, but will this accelerate. Being wrong on my core theme of stable to rising food/commodity price will ruin this trade. Therefore any real trade would do due diligence on individual stocks, and put a trailing floor. And be sensitive to higher volatility in commodities as well as a appropriate entry and exit level.
2. For the long term negative alpha, short term strength trade: I am going with airlines and FAA at 49.42 at year end. There seems to be finally some ability to pass cost through to the consumer, will it hold?
3. For the comeback of the year trade XHB: (the homebuilders ETF), bounces back with 25% return. While the overbuilding and vacancy rates in many high population density areas will continue to drag the home makes down, the new demand from the heartland for high end houses will rise that is this is I am suggesting that the homebuilders index is a good play for housing regionally decoupling from the national index. And much of what was said about the trading of agriculture ETF, also apply to this ETF. However, while I consider this a "surprise", the surprise is that this ETF does not have a negative alpha or slightly positive. This is in-line with my S&P 500 prediction below. Therefore unless you want volatility, simply buying the S&P Vanguard fund would probably be wiser. Or simply hold these inline to the index.
4. For the S&P Index itself I would go with the Vanguard 500 Fund as my vehicle VFINXF, and predict it will end 2011 at $145.03, this is 25% + the dividend. This is largely due to how I believe the economy will react this year.
5. For my wild card regional banks EFT, greater than IAT > 37.50 by end 2011…
Yanki Onen writes:
I would like to thank all for sharing their insights and wisdom. As we all know and reminded time to time, how unforgiven could the market Mistress be. We also know how nurturing and giving it could be. Time to time i had my share of falls and rises. Everytime I fall, I pick your book turn couple of pages to get my fix then scroll through articles in DSpecs seeking wisdom and a flash of light. It never fails, before you know, back to the races. I have all of you to thank for that.
Now the ideas;
-This year's lagger next year's winner CSCO
Go long Jan 2012 20 Puts @ 2.63 Go long CSCO @ 19.55 Being long the put gives you the leverage and protection for a whole year, to give the stock time to make a move.
You could own 100,000 shares for $263K with portfolio margin ! Sooner the stock moves the more you make (time decay)
-Sell contango Buy backwardation
You could never go wrong if you accept the truth, Index funds always roll and specs dont take physical delivery. This cant be more true in Cotton.
Right before Index roll dates (it is widely published) sell front month buy back month especially when it is giving you almost -30 to do so Sell March CT Buy July CT pyramid this trade untill the roll date (sometime at the end of Jan or begining of Feb) when they are almost done rolling(watch the shift in open interest) close out and Buy May CT sell July CT wait patiently for it to play it out again untill the next roll.
- Leveraged ETFs suckers play!
Two ways to play this one out if you could borrow and sell short, short both FAZ and FAS equal $ amounts since the trade is neutral, execute this trade almost free of margin. One thing is for sure to stay even long after we are gone is volatility and triple leveraged products melt under volatility!
If you cant borrow the shares execute the trade using Jan 12 options to open synthetic short positions. This trade works with time and patience!
Vic, thanks again for providing a platform to listen and to be heard.
Phil McDonnell writes:
When investing one should consider a diversified portfolio. But in a contest the best strategy is just to go for it. After all you have to be number one.
With that thought in mind I am going to bet it all on Silver using derivatives on the ETF SLV.
SLV closed at 30.18 on Friday.
Buy Jan 2013 40 call for 3.45.
Sell Jan 2012 40 call at 1.80.
Sell Jul 25 put at 1.15.
Net debit is .50.
Exit strategy: close out entire position if SLV ETF reaches a price of 40 or better. If 40 is not reached then exit on 2/31/2011 at the close.
George Parkanyi entered:
For what it's worth, the Great White North weighs in ….
3 Markets equally weighted - 3 stages each (if rules allow) - all trades front months
3 JAN 2011
BUY NAT GAS at open
BUY SILVER at open
BUY CORN at open
28 FEB 2011 (Reverse Positions)
SELL and then SHORT NAT GAS at open
SELL and then SHORT SILVER at open
SELL and then SHORT CORN at open
1 AUG 2011 (Reverse Positions)
COVER and then BUY NAT GAS at open
COVER and then BUY SILVER at open
COVER and then BUY CORN at open
Hold all positions to the end of the year
3 JAN BUY PLATINUM and hold to end of year.
. Markets to unexpectedly carry through in New Year despite correction fears.
. Spain/Ireland debt roll issues - Europe/Euro in general- will be in the news in Q1/Q2
- markets will correct sharply in late Q1 through Q2 (interest rates will be rising)
. Markets will kick in again in Q3 & Q4 with strong finish on more/earlier QE in both Europe and US - hard assets will remain in favour; corn & platinum shortages; cooling trend & economic recovery to favour nat gas
. Also assuming seasonals will perform more or less according to stats
If rules do not allow directional changes; then go long NAT GAS, SILVER, and CORN on 1 AUG 2011 (cash until then); wild card trade the same.
Gratuitous/pointless prediction: At least two European countries will drop out of Euro in 2011 (at least announce it) and go back to their own currency.
Marlowe Cassetti enters:
FXE - Currency Shares Euro Trust
XLE - Energy Select
BAL - iPath Dow Jones-AIG Cotton Total Return Sub-Index
GDXJ - Market Vectors Junior Gold Miners
AMJ - JPMorgan Alerian MLP Index ETN
VNM - Market Vectors Vietnam ETF
Kim Zussman entered:
long XLV (health care etf; underperformed last year)
long CMF (Cali muni bond fund; fears over-wrought, investors still
need tax-free yield)
short GLD (looks like a bubble and who needs gold anyway)
short IEF (7-10Y treasuries; near multi-year high/QE2 is weaker than
Yesterday S&P cut Irish debt ratings and their yields blew out relative to other sovereign bonds. Today, an Irish debt auction was TEN TIMES oversubscribed at yields that were 48 basis points lower than an auction just two weeks ago. The Irish Finance Minister should buy the S&P analyst a pint of Guiness!
The Dublin-based National Treasury Management Agency sold 200 million euros of securities due Feb. 14, 2011, at an average yield of 1.978 percent, 48 basis points lower than at an Aug. 12 sale. It also sold 400 million euros of April 18, 2011, debt at an average yield of 2.348 percent, down 46 basis points. Both securities were oversubscribed. Irish bond yields soared yesterday after S&P cut the country's rating to AA- amid concern that the rising cost of supporting banks will swell the budget deficit. S&P increased its estimate for recapitalizing the banking system to as much as 50 billion euros from 35 billion euros previously. While the government has spent almost two years on an austerity drive totrim the country's deficit, the cost of supporting Anglo Irish Bank Corp. has undermined sentiment. "The very high bid-to-cover ratios and lower borrowing costs are eye-catching," said David Schnautz, a fixed-income strategist at Commerzbank AG in London. "It suggests some investors do see value in Irish securities after the recent sell-off. What I find encouraging is that the NTMA decided to stick to the amount it planned to sell even though they could have issued more given the strong demand." Investor Bids Investors bid for 10.1 times the Feb. 2011 securities and4.1 times the April 2011 debt. That compares with 3.6 times and 3.1 times at the Aug. 12 sale, respectively.
John Floyd writes:
Clearly the rating agencies are not at the forefront of forecasting and there may be some short term consolidation or decrease in yield spreads in the short term. However let us put this in proper context and look at the increase in yield spreads recently and take into account these auctions are being bought/funded by the ECB indirectly.
And in the medium to long term the ways out for Ireland and others in Europe is becoming a very narrow street that is leading with increasing probability to default/restructuring scenarios and much wider spreads.
I enjoyed the movie "21" about students at my alma mater counting cards at blackjack. The main character, Ben Campbell (loosely based on the real-life Jeffrey Ma), catches the attention of his math professor by correctly answering the question that has been discussed on this site about whether it would be advantageous to change one's door selection in "Let's Make a Deal" after being shown what is behind one of the other doors.
The movie has many applications to speculation. The professor recruits Ben for the blackjack team because he believes that Ben will make decisions based on statistics, not emotions. Ben is reluctant to join, but is desperately short of funds for medical school. He decides to join, but only for long enough to earn the money he needs.
The professor tests Ben by having two men suddenly throw a pillowcase over Ben's head in the midst of a game at a Boston Chinatown gambling den. The men drag him into a back room. As Ben protests, "Let me go! I haven't done anything!", the men demand, "What is the count?". Ben answers, correctly, "Plus 17". The men remove the pillowcase, and Ben sees his professor, who says he had to test whether Ben would remember the count even under great stress.
Later, the professor says, "Remember, Ben, this is a business. It is not gambling. In the excitement it can be easy to lose your head. You will not do that."
To avoid detection by casino managers determined to prevent card counting, the team uses elaborate methods of deception. All the players have assumed names and fake IDs. One team member plays, betting only the minimum. When the count becomes highly favorable, this drone player uses a gesture to signal the big player, Ben, to come to the table and place large bets. The teammates act as if they do not know one another, but the drone makes a casual comment to the dealer containing a code word to convey the count to the big player.
As Ben consistently wins, he becomes hooked on the game and keeps playing even after he has enough money for medical school. He betrays his friends, fights with a teammate, and finally lets his emotions get the best of him at the blackjack table, losing $200,000 in a night. Meanwhile, a casino enforcer determines that Ben is a counter. It all makes for a thrilling climax.
Charles Pennington writes:
They made a few hundred thousand dollars in Vegas, and that's a story worthy of a $35 million dollar film that grossed $150 million? They made real money snowing the public, not the casino.
Chris Cooper says:
Prof. Pennington is, of course correct. It is worth mentioning that casino gaming has served as a springboard into trading and speculation for many, who have become much more successful in that arena than they ever could have been in the casinos. Ed Thorp is the legendary example, but there have been many others. My gaming experiences certainly inspired me, many years ago, to return to school so I could learn the math (control systems, signal processing) I thought I would need for trading. Also there was the "Eudaemonic Pie" team. Blair Hull is another instance.
Trying to make a living via casino gaming teaches you many lessons which are directly applicable, even essential, to effective speculation.
John Floyd observes:
There is a lot to be learned from casino games, much of it applies to trading. In particular, deciding when you have a positive expected return, varying bet size, risk of ruin, etc. Not to mention that one should study the games, as is true in financial markets, and develop an understanding before putting serious capital at risk.
Many of the games offer one the ability to get a statistical edge on the house such as blackjack and some of the progressive poker machines. The problem is that any success is usually found quickly by the house. The house then takes methods to decrease your odds such as reshuffling often in blackjack and then asking you to not play anymore at their fine establishment.
A player therefore needs to take several steps to camouflage what they are doing, such as: spreading bets across several hands, decreasing bet size, not varying bet size too much, making some "dumb" bets to throw them off the scent, moving around casinos and tables when necessary, playing odd hours, wearing hats, etc. The casino runs like a machine and grinds out the vig. The pit boss is evaluated on a per hour basis of what he takes in, a hit of a few thousand dollars draws his and the house's attention very quickly.
While the challenge is fun for some time it can get tedious. Furthermore, the return on an hourly basis even if one is a good player pales in comparison to successful trading in the financial markets.
The sardine run off the coast of South Africa is a hotly anticipated event by numerous legions of predators from the shark all the way down to the sea bird. As a defense mechanism, the sardines form large groups that swim rapidly in unison in large forms that are a never ending symphony of sizes and shapes to confuse predators. Much like the flocking action of birds, this makes them look larger to prey and to confuse the prey with movement while protecting some of the core. The action by banks today resembles some of the sardine defense mechanisms. I wonder to what extent this may work, what other forms may be needed, and what pieces along the way will be stripped off by predators.
Drew Ferraro writes:
Market predators behave a bit differently than carnivorous predators found in the wild. Predators in the wild like an easy meal by pouncing upon the weak, the young and defenseless, and the old, unable to maintain a protective position in the herd. Market predators tear out the sound working organs, leaving the dying corpse for others to digest. This is evidenced by the current financial news. Barclays gets Lehman's North American banking and capital markets units for a Wall Street song.
NEW YORK (AP) — Lehman Brothers, which a year ago had a market capitalization of more than $33 billion, is now unloading its once-prized businesses for what passes as pocket change on Wall Street. Barclays PLC, the third-largest British bank, took advantage of Lehman Brothers Holdings Inc.'s bankruptcy reorganization Tuesday to reach a deal for Lehman's North American investment banking and trading operations for just $250 million.
June 20, 2008 | 1 Comment
This story just hit Bloomberg news service ("Spanish Treasury to Exclude Italian Government Bonds"). If true, it represents a real threat to the long term sustainability to the European monetary project. The credit crisis, strong euro and slowing economies are finally starting to test the patience of European policy makers. Since the inception of the Euro back in 1999, European Central Banks never distinguished between the credit quality of the various European Sovereigns. That meant that Italy for example could raise funds via debt issues at terms close to those of Germany even though Italy's financial house is in very different order from that of Germany. It was a classic misallocation of credit risk. That's all set to change and Italy's funding costs could skyrocket. Belgium, Portugal and Greece and potentially all in the same pickle. The immediate trade that comes to mind is to short Italian debt versus German or shorting the Euro, which is perhaps the most overextended against the Yen.
John Floyd adds:
All that makes sense. Italy has lost roughly 30+% of competitiveness over the past few years and has also, wisely, extended their debt maturity, not to mention their other weak macro fundamentals. The extended debt maturity would also, should they choose to do so, make it advantageous for them to leave the Euro. The sovereign spreads are all still priced fairly tight with 50 bps of each other for 5-10 year maturity. Compared to where Italy, etc. were during the EMU crisis at many hundreds of bps. I would consider higher grade corporate to be long against short the weaker sovereigns, this also has positive carry.
1) It had always seemed to me that the big differential between the rate of interest on the high yield debt, leverage buyout loans and mortgages and the treasury bond rate was a silver lining to make all the assets owned by the banks quite profitable even in a recession. Say they were earning 10% nominal on those assets with a 10% default rate of 10%. That was still 9% , and much more than the 3% available on treasuries or the fed funds rate they needed to borrow at. But now, the treasury rate is creeping up to 5% , and the differential doesn't look that attractive.
I always look at simple things like that.
My favorite mantra for fixed income has been that when the Fed makes tightening noises, this is very bullish because it keeps the long term inflation rate down.
I believe that's worked for 30 years or so, but now the interaction with the staggering amounts of leverage on the banks balance sheets adds an additional layer of complexity.
still with stocks reeling again, no way can the Fed raise interest rates as this would precipitate more problems in the differential that would truly create a lack of profitability on the income side as well as a weak balance sheet.
One realizes this is simplistic reasoning and would appreciate feedback on how predictions and tests and profits might be considered.
2) When in the merger bus in the 70's , we ran into buyers saying all the time " Why should I pay more than book for a company like this as it cant earn a return on its assets any better than average, and its activities could be duplicated. Much now seems to be clear about the brokerages and related financial institutions . Its clear that the relatively high rates of return on equity that they made, were because of high leverage and there was a corresponding low return on assets. Now that the assets have to be reduced, one is left with a ratchet brining both the bas assets and the return figure down. The Wall Street Journal in an article on Lehman says. " until Leh can prove that it has a future and find a way to regain lost investor trust, there is no reason to see why the shares should tradve above ( adjusted discounted book). Or why a potential buyer if the firm decides it can't survive on its own should pay much more ".
That's exactly what the potential buyers of companies in industries that were selling below book in the 70's used to tell me. The situation exacerbated by higher interest rates, so interest rates must go down considerably so that the problem is solved.
One realizes that the stable door is being locked late here, and that's why I concentrate on the interest rate prediction. The stock market vigilantes must show the world that interest rates must come down soon.
John Floyd adds:
I was recently invited to speak to the ECB in Frankfurt. Below are some of the key questions I raised for them as they address the challenges going forward. I also gave them an investment example from 2001 which I thought was fitting given the similarities are remarkable with the current situation, oil/food have been substituted for mad cows. Given the singularity of their mandate and the fixed system they operate in I think the challenges are formidable. Milton Friedman does a much better job than me at recognizing this, and for anyone interested I suggest you take a look at his writings on the topic.
What is striking about much of the central bank rhetoric and action over the past year or so, particularly the Fed, is the extreme swings in the views, incorrectly in many cases. Along with that the investment houses have been wagged by the prices in changing their views, i.e. the changes yesterday by some banks for Fed tightening shortly.
Given the dynamics of what is happening on the banks, credit, and real economy it seems unlikely the central banks will tighten to the extent priced by the markets (+100bp by the Fed in the next 6-8 months, etc.). As the ECB has done in recent days expect some backtracking from the Fed, especially if the USD and oil calm down a bit.
Some more quantitative testing of these ideas and the resultant trading opportunities is probably warranted.
Some Key Issues Presented to ECB last week
Macro Economic Picture How does the European economy withstand the multiple external shocks that it is being exposed to? For example, the large appreciation of the Euro, substantially higher oil and food prices, credit problems facing European banks, and a significantly weaker United States economy.
The challenge of the Euro area is that some countries need higher rates to slow inflation (France and Germany) while others might need lower rates to offset the effect of housing slowdowns (Ireland and Spain). How is the circle squared? What are the prospects of expanding the Euro area to new members?
FX Is there a competitive problem with a strong EUR, especially versus CNY? What are the chances of intervention and what would the outcome be?
Inflation Primary attention is given to keeping inflation below 2% target. Does a slower European economy bring inflation down from 3.5% to target? What sort of gap is needed between the product and labor market to achieve the goal?
Credit How does the credit crises affect European Banks? And how might it impact lending behavior? How large are the losses and why does the pace of recognition seem to be slower than in the US?
Lending Window Are there limits to the lending to banks in places like Spain with real problems because of declining housing and foreign borrowing?
2001 rate trade
In Q1 of 2001 the prevailing market view was that the ECB would continue to tighten monetary policy given inflation above the 2% target. One of the great concerns of the ECB was that wage pressure would intensify over the course of the year, thereby placing upward pressure on prices. The ECB was concerned that with unemployment around the level estimated to be full employment (8.3%) above trend growth (estimated at 2.5%) would lead to accelerating wages. In contrast, it was the fund's view that the most likely outcome would be below trend growth, and the increase in inflation was largely attributable to sharp increases in food and energy prices. Regarding growth, the reasons it was expected to lag were two-fold: first, the slowdown in the U.S. would be greater than commonly expected and exert a negative force on Europe, and second, surveys indicated that consumer and business confidence were falling across Europe suggesting a sharp deceleration in domestic activity. For example, the expectation sub-component of the IFO survey pointed to sub 1% growth over the year beginning in the fourth quarter of 2001. Importantly, growth in this range would cause the unemployment rate to rise above the full employment level, with the consequence that wages would withdraw, not add, to inflationary pressure. As this outcome became apparent, the ECB would become more confident that inflation would fall below target and ease monetary policy. In terms of inflation it was believed that food prices were event driven, due to foot and mouth disease, they were not part of an inflationary process. Energy prices were expected to go lower as global economic weakness would exert downward pressure on prices throughout the year.
A couple of non-equity market indicators at the close of today I think may be worthwhile to look at: Inflation — the 5 year, 5 year forward inflation breakeven fell 33bps to 2.32%. The high was on March 6 at 2.80%. Credit — opened wider but closed 5bps tighter on investment grade CDS, 10 year swap spreads down 9bps. Commodities — after being up around 3% Gold closed unchanged, other barometers were down much more with the DJAIG down 4.5%. Currencies — opened weak and DXY closed down .28% from an initial move of down 1% plus depending on the pair, the dollar was noticeably stronger versus GBP, NZD, AUD.
I highly recommend the adaptation of Homer's work The Adventures of Odysseus by Hugh Lupton, Daniel Morden, and Christina Balit by Barefoot Books. While I am not generally a fan of adaptations or abridged versions, the trio do a wonderful job of illustrating and telling the tale and it has been is fun and educational for my five year old daughter. A reread of this on my part has many fitting lessons for the markets and life as well. The sacrifices, the battles, the subterfuge, and the perseverance amongst others are all involved. How to escape the son of Poseidon the Cyclops Polyphemus. How to accept the fact that one must sail close to the walls of Scylla, knowingly sacrificing six men so as to avoid the doom of the entire ship and men. How to avoid the temptations of the beautiful Sirens and the seemingly delectable cows grazing in the fields of forbidden of the god Hyperion. The lessons are countless, both overt and covert.
We have read a fair number anecdotes, biographies and controversies, but perhaps another way to look at Bobby Fischer is to think about what we can learn from him in terms of both life and any applications of his life and chess as they apply to the markets.
Independent thinking and willingness and adaptability to live in any number of places: Iceland, Japan, Philippines, and Hungary. Having been to or lived in all of them I can attest to the fact they are all vastly different. Fischer also demonstrated his ability and the longevity of his talents by making a comeback, on his own terms, as in his match with Boris Spassky in 1992. Or, when it seems as victory is improbable to make a dramatic and hard fought comeback as in his 1972 match against Spassky. How many times does the market make us question our own abilities and how needed it is to focus on ones methods and talents while still evolving and improving to achieve success? The need to be aggressive at all times whether it is attacking or using subterfuge as seems to be the case in his match against the grandmaster Robert Byrne.
This is not a suggestion to disregard or ignore his many faults but rather so that we can focus and learn from many of his positive attributes as well. Fischer's almost single-mindedness on Chess and his many transfers and incarnations also seem to have limited the scope of his achievements and therefore what could have been learned from him. As in nature when a tree grows, or is transplanted, it needs the root structure to support a broadening of the branch material and growth above.
Not being an expert on chess or Fischer, or life, I welcome all other suggestions and observations.
Laurence Glazier adds:
An icon of my youth gone, and the same applies for many of us.
It's a big question what to do about great artists who became antisemitic. Most notably in music, Wagner; and there is an open debate in Israel whether to hear his music.
I was never a fan of the recently late Karlheinz Stockhausen, but I listened to him no more after he psychopathically described 9-11 as a great work of art.
We have to take a broader view. Should we deprive ourselves of the works of DH Lawrence and TS Elliot because they were tainted as children with pervasive cultural prejudice? To boycott all literature by antisemitic English authors pre 1950 would leave very few (George Orwell a notable exception).
Probably not an Icarus, more a Narcissus who, lacking a mentor to grab his shoulder, fell - ever unaware - through the squared pool into muddy waters.
GM Nigel Davies adds:
I think there are many things to be learned from Fischer. Here's what comes to my mind:
1) Work rate: Fischer's 'remarkable' comeback becomes more comprehensible when one realises that all he ever did during his 20 year break was to study chess. I heard stories about his time in Hungary, that anyone seeking an audience was well advised to send in some of the latest chess books and magazines as a peace offering.
If you read 'Bobby Fischer goes to War' the comparison with the Russians becomes clear. In their training camps they studied a little chess in the mornings and then got the cards and booze out at midday.
2) Ascetic Lifestyle: Bent Larsen told me a funny story once about how he had to rescue a bottle of cognac from Fischer when the latter was intent on pouring it down the sink. Fischer also took a lot of exercise during his best years, mainly swimming I understand.
3) Learning from history: Fischer had a remarkable breadth of knowledge, studying the old games as well as the new. Amongst the openings Fischer rehabilitated were the Bishop's Gambit, the Evans Gambit and the Exchange Spanish.
4) Will to win: Fischer's disdain for short draws is well documented, one of the most famous examples being to laugh when Geller (who had a big plus score against Fischer at the time) offered him a draw on move 7 in their game at the Sousse Interzonal.
5) Preparation: Fischer took opening preparation to new levels of excellence, a trait which Garry Kasparov was to emulate in later years.
A few more will probably occur to me, Fischer was a truly remarkable player whose play was greatly respected (feared) by his rivals.
With the market up a few percent this year, and daily ranges often running 2% or more, it becomes more important to have some sense, some base of operations regarding what these ranges imply. To start with, one would make the obvious point that the ranges are designed by the invisible evil hand, the bad market mistress et al. to relieve you of good positions. Since many of the market hands are addicts however, the mistress has had to go deeper and deeper into the bag of tricks to get you out. She's given us 23 days of up 40 or more since 1996 , none since October 15 2002, and then 2 this year. On the other side, she's given us 19 down 40 big points or more since 1996, none from 9 17 2001 through year end 2007. And then given us 5 in 2007 to date. At least we're making it harder for her to do her work. And when she does relieve you, it hurts.
Other base of operations stuff to follow such as Nasdaq up very big while S&P up just a little. The fantastic moves from 330 to close just when you're complacent. The big range early in the day just to be recapitulated on a Lobagola basis the rest of the day. And most of all, the look like the end of the world on a Thursday, with the leak of an announcement saving the day before the actual move on Friday. Then of course the fantastic run of big down opens totaling 30 points that follows the one big up 30 the preceding day et al. And of course the fake moves before the big announcements often tripping the stops. Oh, the stops. How the market seems to know exactly where they are, even when the screen is opaque supposedly, and worse yet, when only you know the stop. And the beautiful moves in Vix that always seem to precede the next days moves on a reverse basis. Oh what a beautiful and complex thing it has become. Things like that have to be put in the manuscript of all good market players. I 'll try to quantify some of the meals for a lifetime in similar things provided they are not overly meal for a dayish.
John Floyd adds:
Adding to the complexity of this: the shifting correlations between asset classes, and the economies that are, in part, the drivers of these assets. For an example today (Dec 21) one can look at the moves in gold, the G10 FX carry index (Bloomberg ticker for one is fxcarrsp index) or some of its components by default (yen, nzd, and aud), bond yields, oil, and Emerging Market currencies to name a few.
From an economic standpoint one only has to look at many of the components of growth and see the recent correlations and drivers. Whether it be the influences of housing on growth on the U.S. and U.K. or the export oriented growth of Germany and Japan that now is fading and lacks strong domestic demand to pick up the slack. One can look at what is priced in to interest rate markets in terms of central bank expectations over the next year and see that roughly 80-140 bps of easing is priced for the US, Canada, and UK, not much change for Switz, Europe, and NZ, and small tightening for Japan, Aust, Sweden, and Norway.
Investigating how to best capture the leads and lags here on both a day to day and more medium term basis seems like a potentially profitable exercise. The day to day volatility has increased and the short term ranges often exceed multi period point to point moves by large amounts. Look at the Sept 09 Eurodollar as an example where it has circulated roughly between 96.40 and 96.00 about 5 times in the past 11 days as an example.
James Bitumen adds:
The big boys who are up on the year are not participating in these markets, unless there is free money up on the table — that they surely take.
Flows are being dictated by two types of market participants:
1. The smaller guys who typically trade all the time and are regular market participants. Through leverage, they still possess a considerable amount of firepower.
2. Managers who run sizable books who are clinging on to flat, or only slightly positive, returns on the year. Even moves of 50-60bps might determine their annualized outcome just a week away. They do not want to play, but they are forced to play in order to achieve a neutral outcome in 2007 for their clients, or maybe catch a year end move that could provide some grotesque form of consolation.
"Free trade" seems to me one of those unfortunate phrases (like "tax cuts can pay for themselves") that misrepresents and undercuts what is a wonderful idea. Small trading entrepots like the Dutch Republic in the 17th and 18th centuries and Singapore today have practiced "free" trade; but larger countries have always had customs and excise. If there really had been a magic moment of "free" trade in the 19th century, families of smugglers would not have been there to save Butler's hero in The Way of All Flesh. What did occur in the United Kingdom after the defeat of Napoleon was the successful opposition to the Corn Laws by Cobbett, the Irish liberals and the merchants of London and manufacturers of Sheffield. Cobbett and the Irish liberals wanted cheaper grain for the poor to buy; the merchants and manufacturers wanted the sovereigns that Britons paid for grain to be recycled into iron and creamware exports. That political alliance resulted in the abolition of tariffs that had been so high that they had worked as quotas on grain and other imports. Trade was made much "freer", but it was never "free."
Within a few decades of the abolition of the Corn Laws, the London merchants found themselves increasingly interested in the finance that could be done under a rule of Imperial preference. The prospects for lending money to Britain's colonies seemed even more attractive than issuing trade bills on exports to North and South America. Added to this was the reaction to America's explosive military growth during the Civil War (at its end the Union Army and Navy were each the largest forces of their kind in the world). Both Britain and its erstwhile enemies and allies — France, Prussia, the Hapsburgs, and Russia — found themselves eager to adopt the uses of steel and steam that American military railroads and ironclads had pioneered.
Ironically, the United States was the one country that took a different path. To the amazement of the rest of the world, the United States did not take its Army north to Canada and/or south to Mexico and the Caribbean but instead disbanded its forces. President Grant hoped that Santa Domingo could be peacefully annexed, but incorporating even more free blacks into the Union was too much even for a nominally Republican Congress to accept. What he was able to establish was a political consensus that accepted tariffs but not quotas or protectionism. The customs excise could not be exclusionary; it would simply be the tax by which the Federal government would pay for itself. The success of this "freer" trade revolution can be seen in Grover Cleveland's clever campaign slogan — Tariffs for Revenue Only. The Republicans, Cleveland argued, were failing to live up to Grant's promise; they were using the tariff as a means of rewarding their favorite constituents. It worked. To this day Cleveland is the only President to win reelection on his second try.
John Floyd relates:
This morning my five year old, after reading the various labels and boxes from a recently assembled telescope, asked "Why does everything say "Made in China?". The question led to several explanations that provided lessons on free market economics, internationalization, and geography, amongst other topics. For one it is in the self interest of countries to engage in free trade, and the rule of law, as the most efficient and cost effective means of production is most likely to be utilized. The benefits can then be passed along to consumers in the form of product diversity, quality, and cost. Furthermore, if protectionism, tariffs and other forms of artificial support were lifted we all would be better off. The impact of trade protectionism and higher taxes following the '29 crash were greatly responsible for turning the crash into a depression. My answer also led to a discussion of the development of the port areas that receive many of these goods such as Long Beach, LA, NY/NJ, and Charleston in the U.S. and Singapore, Hong Kong, and Rotterdam outside the U.S. It is also interesting to note that the vast majority of global trade is still transported over water. The reception of materials has been centralized a bit more into large container ports in the latter half of the 20th century as opposed to going to a more widespread geography of ports as in the 19th century. As a kid I can remember many goods produced having the label "Made in Japan" or "Made in Hong Kong" as those economies have evolved into the service sector we have seen China replace them as the producer of many of these goods. I wonder who is going to replace China in the coming decades in "Made in …".
I take the subway to work daily. While not the most prestigious means of transportation, it is definitely in my case the most practical, economical, and time saving. I happen to live three subway stops from the beginning of the line.
By the time I catch the subway, it is usually full with no seats available. Sometimes, I am in dire need for a seat to get a little nap, especially if I am caught trading overnight. An hour nap can do wonders in my case.
Out of this need I become more creative about finding this precious vacant seat. Knowing that the previous two subway stops to my own have only two sets of stairs closer to the front end of the train, I started walking all the way to the opposite end in hope that most people will go for the closer compartments. This is in fact the case except oddly enough that the farthest compartment is always packed.
My reasoning in this case is that most people play the same game I do hoping for the precious nap and seat. However, three cars away from the far end seems to be day after day the optimum solution to this game. Now that I choose the optimum car successfully, sometimes I still am not lucky enough to get a seat unless one of the passengers gets off the train.
I start analyzing the passengers’ profiles trying to figure out which ones are likely to get off the train first to sit in his or her place. This is not an easy task but some knowledge of the city and behavior can do the trick. For instance, I stay away from all people over 30 in business suits as chances are that they are headed to my same destination. Once this category is eliminated, I try to eliminate all university students by guesstimating their ages simply because four out of five universities are located downtown (at the end of the line) so the odds are clearly not in my favor there either. I try to spot two age groups. High school students and under since parents most likely prefer to send their kids to nearby schools so it is unlikely that this group will travel all the way downtown for schools. Also, the elderly group is most likely not traveling far either. This whole process usually takes few seconds since I usually get lucky enough to get a seat before we reach the next stop.
This process is very similar to gaming the mistress although I admit it's never this straight forward with her. Incentive, incentive and incentive. I play the market for monetary profits and only profits. I don't care what philosophical reasoning a speculator would give you a la George Soros; the bottom line is that it is all about the monetary reward. It is all about the nap in the case of my subway trip.
I always try to figure the line of least resistance in speculation, the car with the fewest passengers. This is usually the road least followed by the public. In search for prosperity, I have to copper the public play at all times (by going to the opposite end in the case of the subway), but sometimes the simple contrary play is not good enough to win the game. A little tweaking is often needed. In the subway example I had to go to the third car from the opposite end and not the last since some smart passengers figured out the "simple" contrary play by going straight to the last car.
Timing is also a very critical factor and can make all the difference between a win and a loss. In the case of the subway one has to process some information and position oneself accordingly in a few seconds before reaching the following stop. Flexibility is also a key to successful speculation as no fixed system will beat the market forever. In the subway example, my game plan is different on the way back home since a different crowd is taking the subway at that time.
Ever-changing cycles also plays a great role in this game. The last car was full as the public got wiser and I am sure the third will be one day and a new game plan and system will have to be developed.
Knowing who you are playing against is critical to any speculative game as is the case of the passengers' profiles of this subway. An extensive knowledge of the markets you participate in is essential to your success as is a knowledge of the different subway stops and what they represent to different passengers.
I will end this post here as I reached my subway stop and have to vacate my seat for the next player.
Sam Humbert comments:
In my Manhattan years, I'd often give up my seat to a person of gender or age. For me, the psychic pain of sitting whilst a pregnant woman or pensioner is standing outweighs the benefit of sitting down. Often I'd get the fish-eye from my fellow New Yorkers — they were silently thinking "he must be mentally ill." I'd sometimes make eye contact and explain "I'm not originally from New York," and this would calm them.
Craig Mee adds:
Watching commuters pile into the tubes in London, there is sheer brawn! Doors open at the station and boom, some people are fixed on the destination, i.e., empty seats and God help anyone getting in there road. Funnily enough this is usually concentrated to a certain gender. Some people like to try and muscle markets around too!
Chad Humbert adds:
1. Watch for mothers with small children. Sometimes a child will scurry, and the mother will have to leave her seat to retrieve him. Voila! Open seat!
2. The elderly are often slow. I've found I can often simply beat them to the open seat by walking somewhat faster. If I'm careful, I can make it appear that I passed them inadvertently. "Oh, were you going to sit here? I'm sorry! Do I need to move?" Most of them want to be polite, and they insist that I keep the seat. Copper the elderly.
3. I've found that the handicapped seating rules are rarely enforced, and when they are, it's just a small fine. I pay that fine many times over with the extra trading profits I generate from feeling refreshed after a nice nap.
Yishen Kuik offers:
Mr Saad's comment on how the farthest caboose is not the optimal choice because of gamesmanship, but rather some not so inconvenient caboose reminds me of a well known behavioral finance game.
Ask 100 people in the audience to pick a number between zero and 100. The winner is the one whose number is closest to two thirds of the average.
Eggheads will zero in on zero, but that answer merely demonstrates deductive abilities without canniness.
People with a more limited appreciation of convergent series might pick 33 instead, based on the assumption that the average will be 50. People able to think one more step ahead might pick eleven. People able to think one more step in the convergence series might pick nine, and so on.
The real challenge of the game is to guess the distribution of this gradient of deductive powers among the audience and weight one's answer accordingly.
e.g. If you think half the people in the room will guess 33 and the other half are extremely bright but guileless and will guess zero, you should guess eleven.
So perhaps if the challenge is given in a lecture room at MIT, guess one (zero is pointless because of the likely pot split). If the challenge is given to the general public, guess between ten and fifteen.
Philip Tetlock, whom I'm reading currently, reports that the most common winning answer is thirteen.
Barry Gitarts contributes:
Here are a few of my subway gaming experiences as they relate to the market.
Gain an edge by counting - I use the grip mats markers to note where the train doors open when the train stops, so next time I will be standing there well in advance of the train arriving. This prevents others from being the first in the door. This takes several observations, because the train never stops in exactly the same spot, but it’s remarkable how close to the doors you can be. Standing on different parts of the platform to observe which cars are the emptiest helps in figuring out which car you would want to focus on.
Work harder then the next guy and be prepared in advance - Even if you are the first in at your door, there will be others coming into the same car through other doors, competing for the same seats as you, this is why you must start looking for empty seats through the windows as the train is still pulling in so you know exactly which seat you need to go for, instead of walking in, looking around and then going for a seat. Those two seconds are the difference between sitting and standing.
Know the relationships between markets - I find that sometimes, especially during rush hour, it makes sense to take a different train one stop away from your destination so one can catch the transfer one stop before the mob boards.
Capitalize on the public fears long after the threat is gone - Unlike Mr. Saad, in my case the last two cars are the emptiest, because the train I take starts in a more unfriendly part of the city where people wouldn't want to be caught sleeping in the last car, so when the train gets to midtown, every car is packed like sardines except the last two which are near empty.
George Zachar strategizes:
As someone who sits most of the day in front of screens, my subway priority is not getting a seat but minimizing total transit time. I have a mental map of where the stairs are at my destination, and maneuver to get closest to the doors that will open nearest to my exit route.
Market lesson? Different players have different goals. Absolute or relative return? Style box restriction? etc.
John Floyd adds:
I spent one of my school day summers as a messenger in Manhattan. To increase efficiency I learned the exact subways, waiting positions on platforms for door openings, and the correct cars to place me near an exit that would easiest to get me to my destination. I did this for as many of the routes I traveled as possible.
The numbers of possible routes in terms of subways, exits, etc. are myriad. The proper choice allowed me to be the first off the car and up the stairs, oftentimes placing me right inside the building I needed to reach. This was an added benefit as I avoided the often hot, humid, and crowded streets. I would estimate that this on average increased my efficiency by 20-30% at least. Conversely when I rode my motorcycle across the country I looked at the map once in the morning to get a general idea on the direction I wanted to head and roads I might want to take and then just drove. My efficiency of time probably dropped by 50% but my efficiency of pleasure went up by equal.
When traveling now I try to use the time to read, listen to books on tape, or use the time as a period of thoughtful reflection. I do this mostly because I find it most productive for me given I do not find the sleep comfortable or useful to me in modes of transport. I can understand others find it as a useful battery charger that allows them to be productive later.
So I would extend the logic and say that while the goals –profits, learning, etc., may be the same, the path and methods to getting there may be very different. I think another important point is that one needs to decide and focus on what works best for them, as it may not be the same as what works best for others.
James Sogi comments:
We don't have subways here in Hawaii, but I try to find the best time to find uncrowded waves for surfing. The best bet is to take my boat to spots such as the nearby national park that has nice waves, but only with a long walk and even longer paddle which weeds most out. The boat takes me to the front row spot and a short paddle, with refreshments waiting.
The other method is to go right after lunch, but before school is out and before workers get out. That seems to be the old guys’ slot, and usually only one or two old guys like me are left still surfing.
The other odd thing, is that even if its crowded, many in water can't see where and when the wave will form and break. If you calmly paddle to the spot where the wave will form as you see it coming over the horizon before anyone else realizes where or when it will come, you will be right at the right spot as it breaks without paddling and catch the perfect wave with a single stroke without effort at the perfect spot while all the crowd is scrambling around trying to catch the wave in the wrong spot.
This of course takes about 40 years water experience and have obvious market application as well. Study of the bottom, which many in water don't bother looking at, triangulation of shore navigation aids, like palm tree lined up with volcano peak and far point, and timing of the waves and sets all help find the ideal entry point. I guess it’s like standing at the right spot on the subway platform.
Another method if the waves are small, or really big, is to use a big board. All the kids ride short boards and only have one board, so if the waves are mushy they can't catch rides, or if the waves are big, they can't catch rides, and with 12 different boards for each micro category of waves it’s easier to catch the nice ones. So really good equipment helps.
Another method is to exercise and train even when the waves suck, so when the waves come, you are in great shape and can charge while the kooks are gasping for breath. Of course pros like Shane Dorian exercise all day long lifting weights, and after surfing five hours, swim around Tavarua Island twice. Geeze.
There are a million ways to beat the crowd. The last one is move a million miles away. The market still reaches here in about 89 milliseconds.
Victor Niederhoffer extends:
These posts on how to get a good subway seat are a fine pyrotechnic display of native ingenuity. Presumably many of our readers, in their days as poor shavers, also had to apply these techniques to finding parking spaces, especially if they lived in urban areas and didn't want to pay $50 a day for a garage. What I'd like to ask, however, is how these ingenious delectations could be applied to getting a seat in the market. When someone is forced to get out at an unfavorable price, how do you know it's coming, like on the subway, and how can you take his place at a very favorable position to you? One hint is to study Michael Covel and his gurus.
Allen Gillespie replies:
In my experience, a sign of an open seat in the markets frequently presents itself when everyone sells a stock from news on a single company. A recent example is the retail selloff following SHLD's news — only to have WMT, HD, and retails sales numbers lead the market higher a few days later.
Questions I always try to ask myself in those situations:
1) Is the news company-specific or general?
2) Is the bad news the result of good play by a competitor?
3) Did the valuation make the news appear more important than it really is?
4) Which companies have future catalysts?
Hany Saad contributes:
A fund manager using a trading system that has been losing for more than three consecutive reporting periods is usually a good bet, especially if the majority of fund managers trading the system fall into the switch trap by moving to a different system (usually a very thorough read of the fund prospectus is necessary in this case). They usually give up on the first system at the exact wrong time when it is on the verge of a big win, falling into what Rob Bacon warned against in his wise words "beware of the switches", leaving a seat wide open for the wise observant player.
The same reason I wager that trend following will make a killing next year with the only reservation being that it should be on the long side.
Barry Gitarts adds:
I have tried to predict who would get up on the train, but such efforts have usually been futile. Instead I stand ready, knowing that anyone could be the next person to get up and I'll be ready to run for the seat. Of course this works better standing in the part of the car where there are fewer people, since there will be less competition for that seat when someone does get up.
In the market, this is like predicting the next big selloff. I can't predict when it will come, but I can be sure I have sufficient reserves for when the opportunity presents itself. As in the subway, this may work better where it is less crowded, and in stocks/markets with less media/analyst coverage.
I've found in my 45 years of business experience, as a rule, starting with Tyco's toy racecars (by far the fastest) was that the company with the superior speed or design or popular fancy was always overtaken by a competitor who came up with a comparable or better product. As a complete layman, I wonder how long it will be before someone comes out with a better phone than Apple, and whether this makes the profits form the iPhone ephemeral. Please excuse my ignorance in this field.
George Zachar comments:
Technology acceptance is heavily influenced by network effects and compatibility issues that make the diffusion of digital products take a different trajectory from their non-digital predecessors.
John Floyd adds:
"Leapfrogging" is a real danger. It is also evident in the way Japan evolved in car manufacturing in the 1960s and 1970s. I can remember driving in my uncle's "nouveau Datsun" as a five-year-old and hearing him tell me about the benefits in terms of cost, fuel efficiency, luxury, etc.
From a stock performance perspective I would imagine tests exist and can be done to look at stock performance post introduction of a new product for a variety of markets and products, Apple obviously included. What seems likely difficult to quantify is the "wow" factor: the market's potential to extrapolate huge multiples going forward based on various forms of growth, as happened in cases like the Internet stocks.
Henrik Andersson writes:
It seems like Apple is holding on to their market share for portable music players even though it might not have a superior technology. I can envision the same happening for the phone, which I think would be very suitable for WiMax in the US rather than 3G.
James Lackey writes:
There are so many elegant angles to the iPhone. When you look at the products vs. cycles, prices and innovation, many examples of car production vs. tech can be used. Examples include the furious competition, lower prices, and leaps of innovation.
The iPhone may be a leap of innovation. Of course others will adapt and prices will fall. What is uncertain is how much innovation and cost will trickle down to the sedan market of cell phones. Perhaps that equation, how the mass market accepts it and is willing to pay for the new bells and whistles, will set the pricing and production of future iPhones. Will the iPhone be a sporty two-seater high performance vehicle or just another used sedan at 50% off current retail in five years?
Barry Gitarts writes:
I think your questions apply to the smart phones which have been on the market for years from companies like RIMM or PALM and the iPhone is the answer.
To paraphrase Steve Jobs, people are used to thinking that something is wrong with them, when the real problem is the phone they are using. But Apple is not an iPod or iPhone story, it is a Steve Jobs story. Just look at how Apple did when Jobs was at the helm and then when he left and then when he came back. Is there any doubt he is the man responsible for the value creation reflected in Apple stock?
When I watch Jobs talk about his products, his passion and dedication reminds me of Howard Hughes and Airliners as portrayed in The Aviator. While there is no doubt that new technology will come out that will give the old technology a run for its money, how does one know the new technology will not be developed by those who developed the old one?
J.P. Highland writes:
It won't be about someone producing a better phone, but someone being capable of delivering a cooler phone. The IPod might not be the best mp3 player in the market, but there's something irrational about it. People love it and will keep buying unless the meme fades. But so far people are in love with Apple and the success of the IPod has permeated to the iPhone and the PowerBooks are doing well.
I have been researching on the web how to teach children to dream. What is left out is how to develop a passion for life when dreams fail to develop. I suspect their father's example is the best teacher.
John Floyd writes:
I am looking for recommendations for children’s books. I would like to include the right mix of education, capitalism, logic, reason, imagination, and individuality among other things. A few books and stories that I have found, and the kids enjoy: Jonathan Livingston Seagull, Thidwick the Big Hearted Moose, An Airplane is Born, and The Little Prince.
Scott Brooks adds:
As much as we push education in our home, we've had a dickens of time getting our children to read outside of school. Finally last year, my oldest daughter got into reading the Goose Bumps series. She loves them and needs no prodding to read up on them.
My youngest son somehow got into reading the Star Wars books. He doesn't read them religiously, but will read outside of class if given a little reminder. Interestingly, I bought him a book on bullets at the Quality Deer Management Association national convention in Chattanooga last week and he's been perusing it almost everyday. He's 8 years old and it's way above his level, but he seems fascinated by it. He had his home school teacher read it with him and explain the more difficult parts to him.
For my 12-year-old, we've had to use a different tactic. He doesn't read unless we push him to do it. However, he's really into the markets and learning about investing. So he reads stuff on the net about companies he's thinking of buying and watches and reads investing information.
I guess the key is to immerse your kids in reading and let them find what they like. When I was kid, I'd read one or two Hardy Boys book's a week. I tried to get my kids into them, but to no avail. Keep searching to help your kids find something that they like. There have been a lot of good books recommended here (and I'm saving this thread for future reference for my kids and their home school).
Many of these books are important and are one's that I'll have the kids read as part of their school work assignments (whether they want to or not). But the biggest thing that I've searched for is, how do I instill in them a love for reading a thirst for knowledge? I can't do that by forcing books on them. Sure, I can help them to learn important lessons by requiring that they read certain books. But what I really want to see is them sitting down curled up with a book reading it because they want to. I believe that should be goal!
From Bill Humbert:
One of my children was a reading-avoider. My goal was to get the kid reading and I happened to see the movie League of Their Own in which the Madonna character teaches the non-literate character to read by using trashy novels. I believe the quote was something like, Who cares? She’s reading isn’t she? It’s a scene we always laugh at.
Well, I didn’t use trashy novels, but I did use comic books. We started with the superhero genre and then I gradually slipped in the newer version of the old Classic Comics. For certain works I also acquired Books on Tape, which is more useful than listening to the radio in the car and it gave the child a general understanding of the work.
Since the brain stores different types of input in different locations, this child had an advantage over the children who only had read say Homer’s Odyssey. The child had the pictures from the Classic Comics, the audio from Books on Tape and the printed word itself. After a while the child started to excel in those classes. And only then did the overall desire to read take over. I think it was like a pump that needed to be primed.
Get the child reading. "What" does not matter. If the child finds that useful and desired knowledge comes from reading, eventually that child will take to the books. But you have to prime the pump by starting with something that they want to read, which is not always what we want them to read.
Larry Williams adds:
When I wanted my kids to read a book I was reading I told them they probably should not read it — that it was too adult for them. A cheap trick, I know, but they pick up those books like a brown trout seeing a grasshopper in August.
Nat Stewart writes:
My parents did much to foster my love of reading. In early grade school I would go with my mother to the local library, where I was allowed to pick any books I wanted for that week. I quickly fell in love with the selection of children's books that focused on biographies of America's great heroes. My particular favorites where books on:
1. Thomas Jefferson
2. Thomas Edison
3. George Washington
4. Paul Revere
5. John Paul Jones
6. George Washington
7. Davey Crockett
8. Henry Ford
9. Daniel Boone
10. the Wright brothers
I loved these books! The children's books focus on a narrative of struggle, adventure, and heroism, ingenuity, and are often historically accurate enough to prove very educational. I remember reading them late into the night, hoping no one notice that I had my light on long past the official bed time.
My parents also spent a good deal of time reading to me. My favorites included books about King Author and Nights of the Round Table, "Little House on the Prairie" books, and The Chronicles of Narnia.
Let a kid explore the library and pick favorites. Provide enough options so that reading can become an adventure rather than a chore. Spend some time reading to them over summer vacation.
From Bill Rafter:
We all remember our trips to the library. However that cannot be replicated today. The libraries simply cannot compete with television and the Internet either with content or "wow" factor. The answer to the problem will be in using the new technology not avoiding it. Television, even the good stuff like National Geographic or Ken Burn's "Civil War", is still second-rate because it's passive. The Internet is active, and thus has more potential as a learning tool.
Games can be very helpful. One that had particularly helped me (both myself and subsequently my children) was Scrabble. After a street game of "boxball" we would dig out the Scrabble board while we cooled down. Those games got very competitive to the extent that several of us kids started doing research on words by randomly reading the dictionary. Scrabble also required you use arithmetic to keep score.
My favorite Scrabble word was "ennui," as it cleaned out your collection of accumulated poor-value tiles. It also led to challenges, which led to another turn and more points. While researching through the dictionary I stumbled upon the word "eunuch", which also had good Scrabble possibilities. Being in 6th grade, I didn't care what it meant, but kept a mental file for future use.
Well somehow I got into a name-calling event in the schoolyard with a girl and called her a eunuch. She had no idea what it meant, but the teacher Sister Mary Hatchetface was in earshot and she most certainly knew. The next thing that happened was that I was in the principal's office (Sister Jane Battleaxe). My father was summoned. He was a Philadelphia policeman, and he happened to be in uniform.
So there I was in the Holy of Holies with the two nuns in their penguin uniforms and Dad in his, trying to learn what trashy literature I was reading. The revelation that it was the dictionary left them with no solution.
Ahhh, the ability to stick it to authority…priceless.
It is notable that today the largest equity index decliner is not China but Peru, which at the moment is down 9.44%. The index is weighted heavily toward commodity shares, particularly industrial commodities.
A large part of today's move is generated by one particular stock, SMCV PE. Nonetheless, I think these sorts of developments should be watched as having potential implications for other similar and correlated markets. Specifically, does this say anything about what has been a seemingly endless demand for commodity-related assets, stocks, currencies, physicals, etc.? What implications might this have for particular countries, both pro and con, that both export and import these products, such as Australia, Chile, and South Africa, etc?
From Luca Coloso:
The Peruvian index has done +168% last year and today's fall included +41%. This is catching the attention of the locals who are speculating mindlessly. My wife is Peruvian and was telling me that one of her aunts, who has never invested in the stock market before, just last week was recommending strongly to her daughter to get a loan from the bank and invest in the market.
I don't think this needs further comment apart from the public's need to lose more than necessary, the system's upkeep, and the perils of a heavily "commoditized" market.
Remarkably, each of the four days this week the S&P Index has traded above its previous all time high close of 1527.9, but then failed to set a new closing record.
Note the artful way that the market was able to be down on the week by a hair, as of Wednesday, setting up the longs to increase their positions, only to decline 25 fast points the following day. It would take a Rommel or a Stonewall Jackson to duplicate such cunning.
Thursday had the highest single day range since March 21st; it was up seven by 10 a.m., but then down 18 by 3.40 p.m. (NY time). This is about two and a half times the average range of last year, and shows the usual ability of the market to do the unusual.
Finally, there have been four serious down afternoons, and these are presumably related to the fake Drs. feelings about China … let us hope he visits there for a second time soon, as the first time he was only there for a day (with Paulsen, just 1 year ago).
From John Floyd:
I think other contributing factors to the market's retreat are also tied to the cycling of rate expectations, economic data, and "carry trades." The beginning of yesterday's sell-off started not soon after the stronger U.S. economic data and coincided with a sell-off in interest rates and carry.
In addition to the Dr.'s comments, who does seem to be losing some of his "mojo," the directive of the latest comments were towards China and the market has disregarded the comments and moved to new highs since them. The overnight price action in carry and Japanese inflation data continuing to border on deflation should make today interesting.
Also of note, combined with other indicators, is that gold last Memorial Day was at roughly the same level and subsequently fell sharply.
From James Sogi:
Why three times? It's like the old knock, knock joke. Who's there? Always three times of course. Three is the minimum number to create a pattern. "Knock, knock. Who's there? Orange you glad I didn't say banana?" The three tops were also the three-mountaintop candlestick pattern. Seems like the market likes threes. "On your mark, get set, go!" Seems like something deeper, but what? But it's something to ponder over a three-day weekend.
Speaking of weekends, here's a favorite barbecue: Yakitori.
It's great for sitting on the deck because you can eat holding the little stick and still have a free hand for the beverage and you can gesticulate with the little stick to make your points more emphatic. Serve rice of course, or better yet Musubi. Here's how to make Musibi.
From Dylan Distasio:
If you're in the NYC area, check out Yakitori Totto on the West side for awesome organic yakitori and a great sake selection. They actually have an East side location also. My wife and I have eaten at both fairly often, and the food is delicious. They cook most of it over the long slim charcoal grill on skewers, and you can order any piece of a chicken you can imagine (and then some). It's fun to just order an assortment of small skewers and drink some sake. There's a great atmosphere also. I've never been to Japan but it seems pretty authentic. We're often one of the few Caucasians in there; the rest are usually all Japanese-speaking, including the entire staff. I'd highly recommend it.
John Floyd adds:
Actually if you want sake and good food the other place to try is Sakagura on East 43rd street, in the basement of an office building. There are several hundred of types of sake to choose from, anywhere from a few dollars to a hundred dollars for a masu (traditional wooden box cup).
Real time substitutions are taking place in commodities due to NYC Mayor Bloomberg's schedule for all NYC taxis to be hybrids by 2012, and also the increased presence and use of other energy sources such as solar and wind. I wonder about the dire predictions of $100 per barrel oil.
I also heard today the suggestion that if U.S. drivers switched to the equivalent European models, one year's consumption Chinese oil would be saved. I wonder about countries such as Venezuela and Russia, which are heavily oil-dependent and moving in non-market friendly directions.
Henry Gifford replies:
Yes, things are changing a little. Many NYC taxis are already hybrids, the jeep looking ones. As they are driven more than other vehicles, the payback is more attractive, with drivers reporting huge savings, especially when the air conditioning is off. Looked at another way, a non-taxi hybrid sits idle most of 24 hours, yielding no payback.
Yesterday I heard about a New York State agency paying about 2/3 of the purchase cost of a solar system that has a 94-year payback. Solar is nice, but expensive.
Wind in urban areas is mostly for show, as velocities close to the earth's surface are lower than a few dozen meters, and it is hard to harvest energy from the turbulent wind currents near buildings.
This all strikes me as two examples of the government using our money for things that don't pay well. That is unless the systems installed result in property tax increases exceeding the value of the energy saved. This isn't unheard of. It would be one example of the government partly taking credit for a change already in progress, and perhaps slowing the change down in the process, by encouraging taxi owners to wait for the government to set up the plan to pay them for what some are already doing.
One of the giveaways of imposters is their use of highly technical terms, as if they are on a loftier plane of understanding higher math than you and I. For instance, the Fake Doctor said today "at the moment, I still say as I said before, by algebraic implications, the odds are 2 to 1 we won't have a recession," referring to some probabilities from Fed researchers about the odds of a business slowdown, when the yield curve is inverted or when the expansion has run X quarters or more.
There are so many problems with such "algebraic" implications, starting with changing cycles, retrospection, multiple comparisons, the part-whole fallacy, and the general impossibility of predicting from retrospective small numbers of observations. But it brings up the general subject of key semantic indicators of poseurs and imposters. What key words do CEOs, advisers, et al, use when attempting to appear rigorous and profound and smart? Words that should act as a leading indicator of staying away and avoiding such poseurs? To start off, I would propose lognormal and neural networks as two other key semantic posings.
Martin Lindkvist adds:
Greenspan has been all over the media today, but I saw the headline yesterday evening, so perhaps some people got frightened and used it as a reason to sell. He now says there is "a 2 to 1 chance that the US avoids a recession." But he said something like "a 1 in 3 risk of a recession" in February. Is he trying to be funny? Or maybe he just wants to avoid being called a pessimist? Why is it that he always is in the headlines talking about recession as soon as the market goes down? Does he miss the limelight?
Victor Niederhoffer remarks:
Yes. I believe he suffers from the old lion displaced from the pride syndrome that so many other old men suffer from. It is limned in grotesque detail in the indie movie, Little Miss Sunshine.
George Zachar adds:
Another old lion scandalized by youth:
May 16 (Bloomberg) — Nothing in John Whitehead's 37-year career at Goldman Sachs Group Inc. prepared him for the excesses of today's Wall Street. "I'm appalled at the salaries," the retired co-chairman of the securities industry's most profitable firm said in an interview this week. At Goldman, which paid Chairman and Chief Executive Officer Lloyd Blankfein $54 million last year, compensation levels are "shocking,'' Whitehead said. "They're the leaders in this outrageous increase.''
From Gordon Haave:
I have always thought the #1 way to spot a fraud would be based on the percentage of falsifiable statements per total words spoken/written. The issue you raise, i.e., speaking on a plane above others, would count to total words but not towards falsifiable statements. The general point of such statements is "until you have my level of education on this subject, you are unqualified to falsify my statements". Of course, one can't attain that level of education, because part of the education would be agreeing with them.
An example in the world of trading would be a discussion of Elliot wave theory. The Elliot wave folks defend themselves by taking it deeper and deeper into the theory to a level that you can't attain without spending years studying it. If you study it with an open mind, you will quit studying it after a few weeks. If you push on, you will have a heavy bias towards believing it in order to justify the amount of time you put in.
This is also very prevalent in academia. The most useless of all professors tend to just make up entire new words, and speak in the most complicated of matters solely to keep you from pointing out that the emperor has no clothes.
Now, you ask how to quantify and test? I have given a shot at quantifying, but you can't test. That is the whole point. They prevent you from testing because the statements are always non-falsifiable.
From Sushil Kedia:
Regarding the Chair's posting, focusing back upon CEOs and their ilk operating or claiming to operate at a higher plane:
1. Descriptive handles: for example when on CN*C market analysts / advisors start describing market as a tough animal, as G_d etc., etc., and not answering to the point, that is, where do they think the analysis is going.
2. Deflective handles: words like in spite of, despite, even after, in the face of a hostile, or for example a Chairman's report / comment in corporate annual reports saying that despite competitive challenges your company has done well.
3. Picking the Fly: secondary variables of valuation like market share, cost management, planning. An example is,"We have chosen to push for a continued growth in market share and are certain that in the long run this would continue to accrue value to our shareholders." [Oh I thought returns in excess of the cost of funds created value, unless you believe in today's age and times you would one day become a monopoly while continuing to feed the expansion of your ego.]
4. Shifting in Time: that brings to mind another key handle called, "In the long run". Would a bad trade qualify to become a good investment? Oh, often it would if you are in the presence of an advisor. In the long run, none of them have died.
John Floyd writes:
This may get off the track of the question's intent but I think there are a number of facets of this to explore that are of use in vetting imposters, as well as helping to find profitable trading opportunities. There is choice of words, clothes, cars, etc. that all give clues.
Beyond the actual word choices and phrases, I think one should look at the number of times certain words are used and word choices changed. The currency markets, for example, have had a fixation on Trichet of the ECB's use of the words "strong vigilance". Another example would be the number of times certain words such as "slower" are used in U.S. Fed comments. The degrees to which these words are expected and unexpected by markets as well as the shifts in language often expose opportunities. Yesterday for example the fact that the market had become calloused to "strong vigilance" yielded no reaction and the Euro actually weakened in part on the comments.
Steven Pinker has done some interesting work on linguistics and cognition. I have also heard that both Mark Frank and Paul Ekman have done some worthwhile work on non-verbal communication. Marc Salem, while some of his work is clearly of the "fun" and non-scientific variety, is entertaining and I would recommend his live shows when he is in town.
I had in mind terms such as "Pareto distribution" and "infinite variance" and "closed-form solutions" or attempts to absorb prestige from academic institutions like Stanford, Caltech, MIT, or Princeton, through their "luster" and "close encounters" thereto, a la the magician who can bend keys and spoons at will.
From Easan Katir:
There was a certain bond trader in London who was horrible at trading, but could talk such a good story he was able to move from one high-paying desk to another. He was head of trading for a Japanese Bank, last I checked. Anyway, his favorite word to throw into a conversation was "hypersclericity". I don't know how to test prospectively, but retrospectively, when the secret account where he hid his losses came to light, it was game over.
Vincent Andres writes:
As a programmer working with algorithms, I must say that I'm a bit distressed seeing algorithms often blamed as faulty rather than the users. Every morning I use my razor. Yet in the hand of a baby, a razor would clearly be horrible. Should I throw my razor away?
It's exactly the same thing with algorithms, though this is not to say that there aren't bad algorithms. Hundreds are invented every day (mainly rococo useless constructions). But generally those algorithms don't reach the news.
Jason Ruspini remarks:
For many people, even "bootstrapping methods" is buzzwording. It does come back to the user/context. "Correlation" can be a buzzword, and often is. Count the unnecessary syllables. On Friday's 8pm show a CEO cited a "one hundred basis point" improvement in margins.
Vic comments again:
Part of the pseudo-math is using a terms when one does not know the first thing about what it means. The idea that the frequency distribution of some aspect of market prices or paths more closely fits a normal distribution than a log-normal distribution, and that this explains long tails/isn't properly priced, is so complicated that it would take the most competent of practicing statisticians to unravel it.
When the person who has never had a statistics course uses it, and pretends that he has the same understanding as great 'mathletes' such as the mediaval liberal fund, or the Harvard opera fundist, or the math arbitragers from Columbia use it — why that's transference and flimflammery squared.
It amazes me that it is so easy to fool so many with these high sounding words. The other aspect of course, is that those who know math and use the words properly often lack the wisdom to consider why such exact and precise and computationally intensive methods are completely useless except as a marketing tool, due to such things as the law of simplicity, the principle of ever changing cycles, and multiple comparisons.
These numbers have not been tested yet but recent moves in break even inflation expectations as measured by TIPS and nominals, industrial and commodity metals like gold and copper, and inflation as measured by the Bureau of Labor statistics turning lower (and likely to continue to do so given a host of things including rents, etc.) may portend the turn in the U.S. dollar to higher levels particularly versus the European currency pairs. There is a host of other factors that seemingly should support this that would make capital flow to the U.S. versus Europe.
Rather than watch the paint dry on my screens, I am going to burn some calories at the gym, and return to watch the post-FOMC spasm. I'm sharing this seemingly pointless anecdote as a roundabout segue into my Fed meeting thoughts.
Like countless other bond geeks, I went over the last meeting's statement with a highlighter and pencil, ticking off the key Talmudic phrases.
I can see no reason they can't reissue identical wording this time around. Naturally, any change will be hyper-scrutinized, and there's always the possibility they'll be panicked/stampeded by the overwhelming doomsterism in the media.
But we get two more rounds of inflation data, and another jobs print, before the end-of-June two-day Fed confab, plus another round of data before the July Bernanke testimony on Capitol Hill.
Today, there's certainly no reason for them to do or say anything other than "adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information."
John Floyd adds:
Of the economic data released in the last month, eight indicators have been below consensus expectations, eight have been above expectations, and the rest have been on expectations. Financial market indicators such as stocks, the dollar, and spreads have been stimulating.
Since the last meeting on March 21, March 08 Eurodollars have moved from a 4.600 yield to 4.915 yield (this is just price change, doesn't include curve roll-down). Some subtle shifts in the growth and inflation tradeoff, but given the differences in Greenspan's and Bernanke's approaches, I would concur the probability of any changes seems low.
James Tar remarks:
Early in the tenure of the current Fed Chair, I was critical of his public discussion of inflation, interest rates, the dollar and the economy. And we all know of his gaffe with CNBC's poster girl.
Over the course of the last 12 months, I have become an adoring fan. Not once has he made a mistake in discussions and forecasts regarding the overall progress of the economy. He has not been wrong. Not once.
What we should all pay attention to in today's statement is the Fed's forecast for a continuation and recycling of strength in economic activity in the later part of this year. If GDP progress is going to continue, corporate profits can only go much further beyond present market expectations.
The book Denali chronicles the history of climbing Denali, tallest mountain in North America. Severe storms can set in with little warning and can trap climbers for days with winds of up to two hundred miles per hour or blow them right off the mountain. The deaths occur when unprepared climbers are caught near the peaks in a storm in temperatures down to 100 below zero with wind chill, and high altitude dehydration, and the accompanying errors in judgment that start to pile up. Small slips can lead to a fall and death.
A classic error is waiting too long when the opportunity presents itself. When near the top or the bottom when good weather presents itself, it is imperative to make progress immediately. Waiting, wasting good weather can result in getting caught later in a bad storm. By waiting, the odds of getting caught in storm increase. When caught, the climbers get stuck in a position where they can neither go up nor down. Bad situation.
In markets it is easy to let opportunity on high peaks slip by for one reason or another, be it bad judgment, bodysnatcheritis, fear, busy with something, lack of attention, a million reasons or faulty reasoning. Once the good weather slips by one is running behind. The odds of getting stuck in a bad place increase. Getting stuck, too late to enter, too late to reverse, can't go forward, can't go backwards. Stuck. Not a good situation, and all arising from the initial failure to take advantage of the good conditions.
From John Floyd:
On a related note I remember a quote that Ed Viesturs once told me. "Getting to the top is optional, getting down is not." Ed has the ability not only to summit numerous peaks but to do so while treading the fine line of pushing limits while always remembering survival is the paramount goal.
Likewise, I have found in trading it is important to know when to push the limits of risk. In fact, without pushing the limits it will be impossible to earn high rates of return over time. On the other hand, those limits need to be put to the test in conjunction with a full focus on survival. If we lose our bankroll getting back into the game will be that much more difficult.
Alan Milhone writes:
Aside from scaling the heights of mountains there are those who scale financial heights and lose their head when at the pinnacle.
I think about the tirade that ensued between Donald Trump and Rosie O'Donnell. Mr. Trump is at the top of his mountain (though he constantly looks for higher peaks to conquer in the financial world). However I feel he should not lower himself to trade barbs with Ms. O'Donnell and a man of his caliber should keep himself well above the fray. Did he verbally attack her for ratings? I am sure the 'haircut' bet with Vince McMahon was 100% over ratings and money.
As a billionaire I am sure Mr. Trump has a gigantic ego to feed. I like what the Chair says about being humble in what we say and do. I admire Mr. Trump for his successes and am sure he does a lot of behind the scenes donations for various charities. So when climbing the financial mountains one should maintain humility and civility in what is said and done; many are watching every move.
The situation in Spain puts the US housing market into perspective. There is plenty of sub-prime lending plus steep sales taxes (6% plus) which would exacerbate any problems if they have an economic downturn.
"The chill winds of the home loan crisis in the US are having a sobering effect in Spain, where mortgage lending and house prices have risen faster than anywhere else in continental Europe.
"As with the US, low interest rates and a buoyant job market have made home ownership affordable to lower income groups in Spain. Fierce competition has driven some Spanish banks into the riskier segments of the market. In particular, Spain's 4m-strong immigrant population - young, low-skilled and with no credit history in Spain - have proved to be too large and tempting a group to ignore. Mortgage brokers who specialise in arranging loans for immigrants are doing a roaring trade."
John Floyd writes:
Spain has gotten itself in a difficult situation now that requires a lot to maintain current stability. The Spanish economy is roughly $1 trillion versus Germany at roughly $ 2.7 trillion. Spain's current account deficit is running around 8% of GDP and the country has lost about 35% in competitiveness to Germany over the past few years. The funding on the capital account side has come in part from direct investments and debt as the sovereign and corporate are in many cases highly rated and bought by pension funds despite tight spreads. The government fiscal accounts are in good shape with a surplus of 2%.
The fact the Spain is somewhat pinned by monetary, fiscal, and currency policy constraints makes this a difficult predicament.
The market currently has a very benign scenario priced with Spanish sovereign credit in the 5 and 10 year trading about 5 basis points over Germany. The heavily bank weighted stock index has also been doing well.
It is unclear what the trigger is but the sustainability of the situation seems tenuous at best. The likely sequence of events may be a weakening economy leads to strains on the fiscal accounts that lead to downgrades of the debt and political noise.
Opportunities to investigate seem to be the stocks that may be heavily levered to the housing market and credit spread widening.
On the day, the U.S. dollar is trading generally better versus the majority of currencies after the initial weakness posted by the FOMC. I am wondering whether the expected return profile augurs for a more significant strengthening in the U.S. dollar in the days and weeks going forward.
While not significant on its own, it is interesting to note that there are several examples in the past six years where the Euro has made a new high or very close to it, failed, and then had a period of notable weakness. See below for a rough outline. In combination with other factors such as: what seems like a universal bearish U.S. dollar sentiment; likely improving U.S. balance of payments as the trade account improves with the slowing U.S. economy and the capital account remaining strong; and future interest rate expectations in the respective countries already pricing a wide divergence in rate paths.
One clear major risk is an all out liquidation of U.S. assets. And with that the capital account would deteriorate more than the improvement in the current account, leading to a weakening in the U.S. dollar.
July 19 2002 1.0199
September 20 2002 .9613
March 14 2003 1.1083
March 21 2003 1.0504
May 30 2003 1.1933
September 5 2003 1.0764
October 10 2003 1.1860
November 7 2003 1.1377
February 20 2004 1.2926
April 30 2005 1.1761
December 31 2004 1.3666
Februay 11 2005 1.2732
March 11 2004 1.3482
July 8 2005 1.1868
September 2 2 1.2589
November 8 2005 1.1640
June 9 200 1.2979
July 21 2006 1.2458
December 8 2006 1.3367
January 12 2007 1.2868
It is interesting to note that the Yen is stronger overnight with JGB yields higher. There have been some marginally better Japanese data of late (land prices, etc.). Predictively, I wonder if this portends some consolidation/correction in carry/assets after recent runups.
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