By the way, I believe it might be a subject of speculation whether Mr. Simons and his colleagues have found anomalies that they can still exploit as they might be much too big, and there is much too much competition from other humble anomaly seekers. Yes, as Mr. Harry Browne would say, as described by the true believer below, their pantheon of geniuses soars on a much higher level of cognition than myself or any of my colleagues or hundreds of followers - but then again superior intelligence isn't everything. And aside from the profitability of market making, as first enumerated by MFM Osborne, it might be difficult to capture anomalies on a systematic basis that the competitors in St. Louis and other small venues might have missed, no matter their profundity.
Anatoly Veltman writes:
Does this also answer the query as to WHY would Virtu decide to go public?
A true believer writes:
If there is anything whatsoever to the legion of gambling analogies to markets, market ecology and human endeavor then most of the chips will end up in very few hands.
The Medallion Fund represents the very apogee of human brilliance so applied to financial markets.
What is more likely, that there is something rotten in Denmark? Or that the combined work of pure genius including:
The whole 'European Contingent' - I will not list those names here.
Plus a host of mere 'worker ants' cleaning data, programming testing machines and keeping the lights on.
Might just have come up with the single best group of high capacity strategies ever known.
We should all celebrate this achievement. It represents everything this list is about, surely?
Trying to pick holes in something like this is the equivalent of the Barron's columnist bearing bearish for 30 years on U.S. stocks.
My belief and optimism is based on facts, not some idol worship groupie phenomenon.
Is one allowed to agree with both the True Believer and the Chair? What Simons and the others did was pure genius–they used mathematics to identify the consistent anomalies that occur when people buy and sell securities. Those of us who lack their pure brains and mathematical chops marvel at what they have accomplished and have done our best to create a glacially slow mimicry using employment data and their correlation to the business cycle. (They are playing Scarlatti the way Michelangeli did; I am playing chopsticks hitting one key a month.)
But, as Vic notes, the question is whether or not there remain any arbitrage opportunities left now that those anomalies have been examined in such detail for decades by the far greater number of smart people who have come after the folks at Medallion.
Bill Rafter adds:
Like others, I agree with both the Chair and Shane. The question then is "how much juice is left in the fruit?" As Stefan says, he gets one a month.
I would posit that it is a question of time frame. Certainly the HFT opportunities are gone for us simple folk, and maybe much of the day trading. But there are still anomalies if we are willing to accept less certainty and leave our bets on the table a little longer. After all, realize the prop shops do not want their worker bees to have an overnight position. Which means those of us willing to have such a position will have an automatic edge. As an example, compare the Open to Close returns to the Close to Open returns of certain derivatives. There's an edge, less than it used to be, but still there, and the edge favors the overnight holders.
Also, we simple folk cannot expect to outperform by trading only SPY (or perhaps its overleveraged sisters), the most competitive and liquid of assets. The greatest returns have always been in the least liquid of assets.
Shane James replies:
I see no disagreement with the Chair on this thread. As with the Chair, myself, Medallion, DE Shaw, Citadel and all such people interested in trading from all walks of life - we shall continue to look at new angles, different ways of splicing the available information amongst much else. Medallion too will do this. The outcome? Only the shadow knows.
On this next point, the Chair, myself and anyone with half a clue will be in violent agreement - it is always best to be the bookie . The RenTech entity, at the last count when the info was still public, collected 8% management fee and 45% performance fee (I may be off by just a little here).
To use a collection of letters used by my children to describe this: OMG.
It's good the be the king.
Jim Sogi writes:
Much of what they have done is computer science not just math. It also has to do with understanding and moving or changing and understanding and exploiting regulations at the exchanges. In a competitive environment, there will always be an edge available somewhere. They change and move, but there is always opportunity in change, the change in others, the rate of change, the unforeseen effects of changes. I think there is opportunity for the slow and small as well. Computers are stuck with their algos. They leave tracks, patterns, singly and as a group. The markets are complex, and no person or computer knows exactly how it works, though they may find opportunities in complexity. There are always effects of effects of effects, unknown to the actor. Waves spread out from every action.
July 6, 2015 | Leave a Comment
Without in any way attempting to aggrandize myself, “the older we get the better we were” and all that, I had an instructive experience today playing one wall racquetball at the courts on 101 st. I lost 21-4 to a player 10 years older than me. This might not have been expected as when I was 11 I beat the best paddle ball player in the world in a big money game, and I won 4 national paddle ball tournaments, 2 in singles and 2 in doubles, and was ranked in the top 10 in racquetball some 45 years ago. I stayed back, quite afraid of mixing it up in the front court, and I was not very mobile. I hit the ball very hard and tried to blast it through my opponents who were up front and just tweaked the ball back to the front wall and since I was standing back and am not mobile I couldn’t reach the ball. To add humiliation, Aubrey was watching.
It occurs to me that macro traders find the same problem when they go into micro or day trading, and micro traders find the same problem when they go into macro trading. Their techniques are all wrong for the new game they are playing– they are fish out of water. They take long term positions and they are margined out or stopped out by the swings designed to take chips from the poor, or flexionic moves. The micro trader going into macro trading might have lost to me because when I don’t have to be mobile, I can stay back and my strokes, the macro traders fundamentals, and if he works for a bank the unlimited potential that he has to withstand loss makes him an impossible adversary for the micro trader.
One guesses the moral is that the cobbler should stick to his last. And one should always be humble about any past success and realize that things are very different in the modern era.
Michael Munowitz's Knowing: The Nature of Physical Law is a great book. All pairs attract and repulse based on proximity. Very relevant to bond stocks last week while away. A do si do.
Gary Phillips writes:
I was lucky enough to buy spoos/sell bonds Tuesday morning feeling that the principals had traveled far enough apart, and would begin to attract to one another. I subsequently added 20% to my position the following day as their proximity increased and the attraction between them grew stronger. Unfortunately, I only covered a portion of my position on the payrolls number, and then the balance between attraction and repulsion tilted the other way. I hope that that the principals are simply taking a "step back" (covering short bonds due to a less than robust number), and that the attraction will resume next week.
Gary Rogan writes:
Why is it more useful to look at unrelated things being attracted to one another vs. them getting to cheap or too expensive and reverting to some sort of a "mean" which would look like attraction if one is so inclined? Or if the yield on one sort of security is out of whack with respect to another and they equalize over time is this attraction or people buying for yield and selling expensive stuff?
There is a nice passage in Going Solo by Roald Dahl. The Vichy French are their enemies and help to destroy any Englishmen trying to fight the Germans. Dahl's squadron passes over a Vichy airfield trying to neutralize it. Sure enough all the Frenchmen are showing off their aeroplanes to a group of attractive French girls in high heels enjoying some wine. Out of chivalry the British pass off the airfield to allow the women in their high heels to run into the hangars:
"We went round again, but this time we were no longer a surprise and they were ready for us with their ground defense and I am afraid that our chivalry resulted in damage to several of our Hurricanes. But we destroyed five of them on the ground."
Dahl's story contains innumerable examples of British incompetence in the control and direction of the air force in Greece and Egypt and it appears that 90% of the pilots there were killed, mostly unnecessarily. The fog of war and as in markets.
One found this article one of the most revealing I've read in sociology:
Gary Phillips writes:
I've been on the road for the last 8 weeks or so, traveling the eastern seaboard with my wife and 3 of our 6 (call it a partial fill). While I had envisioned a trip worthy of Kerouac or even Kuralt, the eventual reality presented was much more griswoldian. Nevertheless, traveling by car does allow one greater freedom, the opportunity to experience extraordinary scenery, and the ability to capture the charm of small towns and the inherent individuality of its people. It also allows one to step back in time to a place where the only cracks visible are in the sidewalks, and not above the baggy trousers worn by rapper wannabes. And, it serves to remind us of the civility that once was part of the rich heritage of this great nation.
One used to receive a hearty "you're welcome" or "it was my pleasure" when one expressed gratitude. The contemporary response appears to be "no problem", as if your social counterparty was doing you a favor. I once believed the ubiquitous sense of entitlement and 'increasing narcissism" I encountered was and primarily contained among the members of generation z, but was disheartened to discover the casual disregard of manners crossed generational, regional, and cultural boundaries. This phenomenon has been summarily rationalized as the result of the internet's effect on the way people communicate. And indeed, social media may have conditioned individuals to be expert parsers of language, meaning, and authorial intent. Perhaps the brevity of discourse does not allow for a subtext of manners and humility. But is it really anybody's fault? "For a flow system to persist in time (to survive) it must evolve in such a way that it provides easier and easier access to the currents that flow through it". According to constructal theory, a written language evolves to "connect" better to the masses. If the elements that constitute a language are complicated, the language will take too long to write and will be more difficult to remember, and global resistance will increase. On the other hand, if the language elements are too simple, the users of the language will lack precision. The meaning of words will be misconstrued. The natural evolution of written language, then, must head for a balance between the complicated and the simple, and twitter seems to fit the bill. And as with the case with language, technological advances in information technology have caused markets to quickly adapt to anomalies and present traders with less and less opportunities. Nevertheless, one may still find an oasis of civility here and there if one looks hard enough and lucky enough, and the same can still be said for trading opportunities.
I just computed the rate of return of the web mistress's account at Scott. She doesn't know what the p/e is or the balance sheet although she is very smart and she can climb a pole and make more money per hour than most. In any case, it's about 50 percentage points a year higher than mine, (one almost runs into the problem that idiot savants from academia run into where they can't compute a negative p/e and fail to note that an e/p solves the problems but that would denude their results). In any case she had a few 20 baggers, including Netflix and Tesla, Facebook, and Disney. You might think that it's because of a meaningless low denominator, but we're talking 7 figures. One is tempted to stop trading, give all one's meager funds to Toria, and with the underpluss, see if I can negotiate the Medallion fee down to less than 50%.
We're in the swing dance season where anything good for the republicans will be bullish for the stock market, (of course long term bearish for the individualist idea that has gone with the wind), but thank the Good One for the Supremes helping the Republicans by upholding the hateful law that has caused all so much misery, extra expense, and waiting endlessly in line, and filling out paper work rather than seeing your Dr.
Anything that brings clarity to the level of corruption at the top such as important words being clearly interpreted incorrectly in full public view is long term positive. This counteracts the much more common gradual and deliberate shifting of those meanings to the point where everyone accepts them to be very different from what they were a few decades ago. This was an "emperor does have clothes because he clearly meant air to be considered clothes" moment.
Every presidential cycle I break out Fear and Loathing on the Campaign Trail '72 by Hunter S. Thompson. It's like a checklist of how the campaign plays out. Plus, it's really funny. I'll start reading it soon once we know who is really running.
It was "the least factual, most accurate account" of the election, according to Frank Mankiewicz, Mr. McGovern's campaign manager.
I'm a big believer is in Hunter's and others' maxim that the truth is never told between 9-5 and this book just expounds on that.
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.
I haven't read this story because it's in the Times, but it would seem that with all the centrals and internationals hovering about with all their flexionicism in play, and the US backing them, (the agrarian chair from Brooklyn stated there is a contagion effect) to signal where we stand, that somehow a few billion of emoluments will be found, printed, or funded.
I like the part of The Boys in the Boat where the freshman coach pretends that Cal can beat them handily. The necks of Cal swell even further making it even for Washington to cut them off. I followed the same principle in squash, and never admitted that I had a chance to win. I also never admit to a profit in the market for the same reason. It will be interesting to hear what Mr. Rafter has to say about The Boys in the Boat because he has won many national rowing championships. In particular the wisdom and ability of George Peacock, the world's best boat builder, whose materials in wood have now gone with the wind.
David Lillienfeld writes:
The beauty and terror of baseball is that there is no clock; and the second you stop thinking about the next pitch, you are on the way to losing no matter how big a lead you have. What made last year's 7th game so good is that neither team ever once lost that focus; the game score was as close as one can be, but neither team ever for a moment got "tight" thinking about the end result before play was over.
Alston Mabry writes:
Yes, in games like basketball or football or soccer, you can work the clock. But baseball and tennis have that exciting element of the game not being over until it's over.
I have had the pleasure of seeing some true greats in action over extended periods of time in the markets. The only time these guys really lost any money was when they ignored time.
A fixed clock on any speculation in the organized macro markets is vital in my opinion and experience.
Unlike most things we discuss, the addition of fixed clocks (or predetermined holding periods for individual speculations) is actually countable and its efficacy is testable.
June 20, 2015 | Leave a Comment
As I continue on my arduous journey for selecting and also constantly keeping traders at their A-game, I was wondering if Vic, Brett or others on the list have any experience with how Sports Psychology could be used with Traders.
A competing athlete goes through pretty much the same psychological challenges that a trader goes through…and I was wondering if any research had been done on this subject.
Mental training helps athletes perform more consistently, find the zone more often, keep a winning streak alive, and learn how to think well under pressure. Or, as one sports psychologist put it, mental toughness is "the ability to consistently perform toward the upper range of your talent and skill regardless of competitive circumstances." As psychologists debate the roles of genetics, environment, and learned skills in determining mental toughness, they do agree (along with athletes and coaches) that high levels of mental toughness are associated with athletic prowess and success. In fact, mental toughness (or "grit") may be the defining factor between finishing at the front of the pack and not finishing at all.
Any thoughts from Specs would be welcome.
Victor Niederhoffer writes:
One would turn to Galton as one should on most areas involving human faculty. The key to athletics success is the sports gene. A key to trading success is intelligence. I would also look to the circle of friends, colleagues and influencers that a prospective employee has. Is he benevolent or a hoodoo. Beware of the hoodoo, and stay with the ones that create benefits for those associated with them.
John Netto writes:
Sushant. I would read Market Mind Games by Denise Shull. It's excellent and will be a nice resource on your journey. Good luck.
Ability to learn from and then put losses behind them. The inevitable mistakes being made are then analyzed, learned from, improvement sought, and then move on without negative baggage and lament about what could have happened.
Longevity. Injury, early retirement, or large losses do not afford one the ability to succeed.
Independent thought. A Zen like ability to follow one's own methodology and ideas in a non-conformist fashion, yet to balance with the ability to absorb appropriate outside information
Simple hard work. The will to stay out on the field longer than anybody else. Think Jerry Rice, Marcus O'Sullivan, Patrick Kane, Michael Jordan.
Brett Steenbarger writes:
Frankly I think the best writing on the topic is your account of your racquetball career. I agree that mental toughness is important, but all the toughness and repetition in the world won't be helpful if a person is working on the wrong things. I continue to find that good trading makes for good psychology just as often as the reverse.
Larry Williams writes:
The mark of all greats is the ability to come back from behind.
Hernan Avella writes:
From Handbook of Sport Psychology. Gershon et al.
"Personality traits like dispositional self consciousness, reinvestment and trait anxiety have been associated with predictors of performance failure. Research has also demonstrated that giving athletes practice at dealing with the types of attention demands that performance pressure induces can reduce sill failure when the stakes are high. Also, that preventing athletes from acquiring the type of explicit knowledge that pressure may exploit to begin with may also help to quell the negative effects of stress at high levels of performance."
Paul Marino adds:
I had a long discussion today with my father regarding choosing the humble person over the boisterous kind of person in any of of life's dealings, from the dry cleaner or barber to your doctor or broker. I tend to get less agitated around the humble and have an easier time speaking my mind. If my physician was loud I might not tell him as much about my life and habits as I should. It's what works best for you that counts, like in any system, trading or otherwise. "Know thyself" may be the best known and least used maxim of all time.
Ratio used to be a favorite of value investors and is still used to separate growth from value in some metrics, always showing that growth beat value on a prospective basis. The return on capital is a much better metric. As compounding works wonders. P/b has been the standard since 1970, and has caused almost as much mischief and wrongful, hurtful studies as pairs trading.
My current challenge is onboarding approximately 200 new traders in the next three months. While we have built sophisticated tools, systems, risk models etc., I have been becoming a bigger believer of the concept that "Who we are as individuals is how we trade in the markets'. I have compiled some of my own weaknesses and strengths and am trying to build a matrix of self-cognition for other traders to follow. It would be great to get the groups feedback on the thoughts below.
Makes and follows long term business plan
Will ignore long term business plan
Will handle times of market volatility and make smart decisions
Will panic when markets are volatile and make stupid decisions
Strictly follows Stop-Loss rules and Protects Trading Capital
Will not be diligent with Stop losses and will risk trading capital
Handles losses and down times in markets
Gets depressed when facing losses and makes poor decisions
Daily updating charts, indicators, business plans, Economic calendars
•Disorganized Too many charts, irregular updations, too many instruments
Willing to change view on market based on where the market is going
Sticks to own views and will fight the market even if he is wrong
Puts in the hours required for daily research, trading and journaling
Trades based on mood, not bothered with daily research and journaling
Accepts his mistakes made while trading and tries to improve
Does not accept his trading mistakes and blames the market
Understands and acknowledges that every day is different in the markets.
Tries to treat every trading day as same and forces his trading style
Follows a strict daily trading routine based on market hours and economic releases
Irregular with trading hours, does not strictly follow economic calendars
Understands why markets are trading up, down or sideways and trades accordingly
Will focus on personal profit or loss to determine trading strategy
Grounded and humble after making good profits - knows that he can lose it all
Thinks he has 'figured out the market' and feels he can always beat the market
Focuses on personal trading results and how to improve his own trading
Is troubled by the results of other traders and loses focus on improving his own trading
Has the ability to maintain an inner peace and composure during extensive market moves
Is constantly agitated at every up or down move of the market and keeps fighting the market
Keeps trying no matter what happens and does not give up till he starts becoming profitable
Gives up too soon if faced with trading losses and blames the market for his failure
Because he is polite, he can learn from other traders and benefit from expert knowledge
Because he is rude, he is unable to build a network of successful traders and misses out on the learning community
Realizes that he needs to do whatever it takes to support himself and his family and trades systematically
Thinks only of himself and takes rash trading decisions - often willing to gamble it all.
Understands that trading takes time to become profitable and plans his personal expenses accordingly
Is looking to reap profits in trading from day-one and cover living expenses - makes rash decisions
Will only trade based on defined entry and exit rules
Will trade based on mood, greed and fear
Will ensure that he trades less to keep the commissions low
Will overtrade and land up giving up all the profits in commissions
Builds a consistent track record of trading profits and can raise outside funds to manage
Inconsistent track record means no one will give him additional capital to manage
Realizes that all the trading results are of his own making and does not blame markets
Will revenge trade the markets in order to recover losses
Follows all the rules of trading and DOES NOT find excuses for breaking the rules
Willed Breaks trading rules often based on feeling fearful or greedy
Always analyses profits and losses and accepts where he got lucky and where he made a profit based on his strategy
Does not differentiate between getting lucky and making a profit based on trading strategy
Founder and CEO
Brett Steenberger writes:
Interesting! The internal research we did suggests that cognitive variables are more important to profitability than personality variables. Personality variables had a strong relationship to trading style, not necessarily to trading outcomes.
Pitt T. Maner III writes:
You are looking for professionals who respond to what seem to be the characteristics shared by most successful traders. But you can not standardize a trader, it's not a HFT robot.
For example, this morning I found this:
Bridgewater's Ray Dalio Simple Advice For Success: "Think Independently, Stay Humble"
"machine learning is the new wave of investing for the next 20 years and the smart players are focusing on it.
"Bridgewater Is Said to Start Artificial-Intelligence Team"
Sushant Buttan responds:
Thanks for the feedback. Much appreciated.
The responses are interesting and in some cases the qualities of a good trader seem to be diametrically opposite to the qualities in the list I posted…definitely food for thought. Vic, please feel free to post on the Daily Spec…would love to get as much feedback as possible. Thanks.
Victor Niederhoffer writes:
Mr. Buttan's List is a good list for a spouse I think. As to whether they are good for traders' success, one would not know. Some of the best salesman and traders are totally disreputable. I would think that one key thing for Mr. Buttan to do is to do as much of the trading in house as he can, thereby eliminated slippage and bid asked spreads and capturing profits for the house. Indeed if Mr. Buttan were to make his trading floor a central exchange for all Mideast trades, so that he can capture the spread, I think his idea might work. MFM Osborne always wanted to create an automated market making system, and it would be great to see that developed to ones' profit. I have a query for Mr. Buttan. Does he want me to put his list up on daily spec. It's a seemingly useful list, and it might get him some helpful feedback. Galton always said the most important qualities for success were health, persistence, organization and a modicum of ability. One would recommend reading his work on eminence, which Jeff seems to have readily available. A good library would be great as a foundation for his traders.
Brett Steenbarger comments:
Yes, persistence in particular is important. The research on "grit" is relevant in that context. It is not necessarily the case that positive personality traits are associated with successful trading. Some of the highest Sharpe ratio PMs I tested score surprisingly high in negative emotionality. It is their fear/concern with the downside and overall vigilance that helps them achieve good risk-adjusted returns and avoid overconfidence biases. I would think putting the list on the Spec List would indeed generate useful input.
Can one predict with all the trillions swashing around, and the ability to print money, and all the countries meeting to save their perks and flexionism, and the Greek stock market vigilantes down 15% in a week to make sure there is a deal, that a deal will be made. And it will be flimsy one. That as soon as it's made, it will be like the two 8% drops that occurred back to back when the bail out deal first was missed and then was made.
Jeff Watson writes:
Greece's GDP is a little over half the size of the Dallas-Ft Worth Metroplex GDP. As far as the total Eurozone GDP is concerned, the Greek GDP is a metaphorical rounding error. If France and Germany are going to get screwed, they control the ECB and can print some more money. But news and concern about the Greeks suggests that the flexionic cowboys driving the herd this way, then that way, their Border Collies nipping at the heels of the herd.
"When by extraordinary chance, one has gained some great advantage or prize and actually had it in ones possessions and been enjoying it for several days, the idea of losing it becomes insupportable."
Thanks to Richard Owen for augmenting my book collection with My Early Life describing the feelings not of making a speculative coup and fear of giving it back, but of elation at being rescued and fear of capture by secreting oneself on a train.
June 19, 2015 | 1 Comment
A rumour that is interesting .
You’ve Been Warned: Central Bankers Turning Less Market-Friendly " by Simon Kennedy
Anatoly Veltman writes:
I think the point to ponder is WHO planted this rumor on the eve of the fact. And the fact indeed was and is: what actual hike can be contemplated while faced with the emergency of keeping Monetary Union? Absurd. So, again: everything is done to prop the impression that hikes are imminently contemplated, while they are not even possible. Which loops back to the suspicion that articles are planted
This is not a new thought for central banking and other authorities, pre Bernanke’s speech that in part caused the taper tantrum, and the Fed to back off, this was a hot topic within said circles and in part instigated his speech.
I thought it would never happen but it did. One person in this humble trading operation bought at a price, and the other person sold at the same price. Thus, we were guaranteed to lose, and the brokers were guaranteed to win. I suggested that if this were to be a template, we would be guaranteed to go bankrupt and the brokers would become infinitely wealthy. I would ask the brokers to send us a fish dinner to encourage us and reward us for this terrible thing, but I don't think they would get the drift of why it's so great for them.
Russ Herrold writes:
Certainly, IBKR understands and matches quite intentionally 'crosses' in house at once, before ever exposing the net delta in position to an exchange. It is part of their disclosures
In designing my order management system I also set it so that it flags an exception event when short 'trading' positions, would cross against long term 'investments', and offers a simple journal entry to avoid the commissionable 'trip'.
Victor Niederhoffer writes:
To say nothing of their ability to take the other side of trades when their customers are stopped out for margin. According to one list member, they proudly acknowledge this in their conference calls. And one often sees huge bids below the market when the market is down big, and assumes that it is such an entity on the other side. In all fairness, however, I know from others that they give you a warning of 2 seconds or so and you can forestall being stopped out if you get the wire for your new margin to them within that 2 second window albeit, you might have as much as 2 minutes if you receive the margin call in the evening when the banks are closed.
Yes, they might consider handing out copies of "duel momentum" to all of their advisor customers, particularly the ones utilizing portfolio margining.
Stefan Martinek writes:
BTW, momentum made D. Harding (Winton, AUM ~30B; track record) one of the richest guys in the UK. (Harding on momentum) .The other point is that the "dual momentum" = absolute + relative momentum is used by traders since eternity, "discovered" by academics in 70s, and discovered again in 2014 by Mr. Antonacci.
June 15, 2015 | Leave a Comment
"There is no reason why they should not be used by all momentum investors." :"Momentum and Stop Losses"
All traders are invited to the party.
p.s. Don't forget to send a thank-you note.
This guy is making quite a name for himself of late. Book has been well received by Quant community. I had an advisor tell me that he thought Dual Momentum was the most important book ever.
Victor Niederhoffer writes:
There is hope with useful idiots like this.
Ed Stewart writes:
My thoughts exactly. More juice for the sprained ankle trades of all kinds, among other things.
If you look in the mirror often enough, you will actually believe you look good for your age, until you see a photograph of yourself, and realize how much you've aged. This perceptual bias may be the result of the repeated exposure phenomenon. I see myself in the mirror everyday while I brush my teeth, and shave. My glances into the mirror are incidental and repeated on a daily basis. On the other hand, I rarely look at photographs of myself. No facebook, no selfies. The resulting effect is a psychological phenomenon by which people tend to develop a preference for things merely because they are familiar with them. Therefore, I have developed a bias due to the frequency of exposures to my image in the mirror. It has been determined that changes in affect that accompany exposures do not depend on subjective factors such as the subjective impression of familiarity, but on the objective history of exposures, and even more interestingly, when exposures are subliminal they are frequently liked better. It's not difficult to become subliminally seduced if one allows themselves to be exposed to a myriad of mumbo-jumbo.
A turn to the Origin is always good to put the moves of the markets most beautiful and wonderful and often circling back to the beginning according to the fixed laws of gravity, constructalism, and flexionism after a week where SPU begins and ends at the exact same level.
It is interesting to contemplate a tangled bank, clothed with many plants of many kinds, with birds singing on the bushes, with various insects flitting about, and with worms crawling through the damp earth, and to reflect that these elaborately constructed forms, so different from each other, and dependent upon each other in so complex a manner, have all been produced by laws acting around us. These laws, taken in the largest sense, being Growth with reproduction; Inheritance which is almost implied by reproduction; Variability from the indirect and direct action of the conditions of life, and from use and disuse; a Ratio of Increase so high as to lead to a Struggle for Life, and as a consequence to Natural Selection, entailing Divergence of Character and the Extinction of less improved forms. Thus, from the war of nature, from famine and death, the most exalted object which we are capable of conceiving, namely, the production of the higher animals, directly follows. There is grandeur in this view of life, with its several powers, having been originally breathed by the Creator into a few forms or into one; and that, whilst this planet has gone circling on according to the fixed law of gravity, from so simple a beginning endless forms most beautiful and most wonderful have been, and are being evolved.
Stefan Jovanovich writes:
The tangled bank is Darwin's theology; no one, certainly not John Murray (his publisher), forced Darwin to insert and keep the phrase "by the Creator" into the 2nd and subsequent editions. Blaming "popular pressure" is a libel on the pubic which embraced Darwin; the demand from the public is what caused Murray to print another 3000 copies (what would be 300,000 now). The criticism of Darwin's views about God and Nature came entirely from the schoolies.
There is no question Darwin ceased to believe (if he ever did) in the literal truth of Jesus' resurrection. In that regard he was following a hundred years of apostacy going back to George Washington and Voltaire and Hume. What he believed in was the miracle of life itself, what Washington called Almighty Providence. As to the origins of that miracle– as opposed to the laws that governed life's evolution, he declined to offer any opinion and was happy to have his remains left in a church with the memorial markers conventional for that time and place.
One believes that the properties of random numbers with the variance = to the duration times the initial variance is not only why fires have a height equal to the breath but why 99% of observers see trends in time series when they are properties of random numbers.
Not unlike the sandpile. If one randomly drops grains of sand of onto a sandpile, the pile will grow and the slope will build up until the slope exceeds a specific threshold value, at which time the sandpile will begin to collapse.
The surfing grain trader's post brings to mind the fine performance of Guys and Dolls one saw at the goodspeed last Saturday, as well as the sordid life of Titanic Thompson on whom the character of Sky Masterson was developed. And a bit of counting inspired by the surfing grain trader.
Given we were NOT red or NOT green or NOT yellow or NOT blue yesterday,(lets call that a failure ), what is the duration until the next occasion of a success.
Duration to next success after a failure yesterday of 4 colors 2007 to date:
after green 4.7 days
after red 8.4 days
after blue 3.6 days
after yellow 3.0 days
Green is both up, red is both down, blue is bonds up, S&P down, yellow is bonds down, S&P up. The unconditional chances of green, red, yellow, and blue were
respectively, 0.21, 0.12, 0.30, 0.33.
One leaves it to the reader's judgment whether this sort of counting can compare in its utility to that of the surf grain trader.
HK Stocks Retreat as Fever Case Sparks MERS Speculation - News Item
Chinese Stocks Drop for Second Day After MSCI Defers Inclusion - News Item
Many areas of interest in this article: "a woman in China is being tested for fever". And after a 100% rise it's scary that "Chinese stocks drop for a second day".
Andrew Goodwin writes:
The Chinese quickly move to quarantine entire towns as they did in Yumen. When they find an illness, you get trapped if you do not flee on the rumor. The practice of mass quarantines raises the spectre of a panic if rumor gets to too many ears before they perfect the envelopment.
The lords in the Fed have a dilemma. On one hand they wish to keep the agrarians in office. And they know that if they raise rates, the economy will slow. On the other hand, the longer they keep transferring wealth from the “total” to the holders of short term wealth, the greater the ultimate rate of inflation.
A lesson that the worst error you can make in business is to get in over your head. Whenever Tom Wiswell was in a complicated game, he'd say, "I'm in over my head. I better simplify." Tom was undefeated world 3 move champ for 25 years before retiring. I also believe that if you start a business or trade with a flimsy foundation, it will lead to a debacle. I have had experience making both errors frequently.
What brings this to mind is a visit to the Peabody museum where they had a nice exhibit on the life of the Samurai. They tell the story of the 47 ronin very well. I have subsequently read a few books on the story and find that the thing that caused it all was the Shoguns edict to ban killing of any animals, especially dogs. When they died they were buried with honors and transported to their funeral on a Pallatine by loyal servants. This caused widespread famine, and unrest among the samurai. And it led to daimyo Asano getting so disgusted that the Kira insulted him one last time (one story has it the romance was the last straw), he struck Kira with a dagger leading to the whole tragedy.
It should be noted that the loyal retainer, Oishi, planned the revenge when he wouldn't be in over his his head. A good story, some good lessons and a good book by John Allyn.
June 8, 2015 | Leave a Comment
This article on a pairs trade has more mumbo jumbo in it than can fit in a big barn. And it brings to mind the absurdity of pairs trade in the first place, and how much money is lost in trying to implement, and how great it is that almost all the short funds have gone into oblivion, that such funds and ideas still provide us with trillions of dollars more that those who look to the drift can fletcherize. One notes a comparable set of "opportune " articles that the "Dax has entered a bear market today".
Jim Sogi writes:
A Former Fed Governor mentioned in an interview that I think Mr. Chair posted mentioned that there was a shortage of truck drivers in the work pool. Not enough could qualify by having no criminal convictions, sober, commercial license, and the ability to add and subtract.
I have often walked down the moving average street, but I like to look at what number for the average elicits buying so as you get near it, you can hope for a nice change in the distribuion of subsequent changes. I like to stop and stare at the amount that the curent price is above moving averages of different length and look at the expectations that follow various amount above and below. The changes in direction of the moving average have also been of interest. And the first advisory service I ever bought in commodities was called 'the cumulative average'. 60 years ago I bought it.
Ed Stewart writes:
In 2012 I applied a 10 - 20 moving average cross to VIX trading product as an example showing the propensity to trend downwards in those markets, do mostly to the massive contango effects that were even more severe at that time - I also noted that every single MA combination worked in a wide range. A guy has continued to track that simple MA cross in XIV (inverse VIX etn), and it has continued to work, often much better than "sophisticated" multi-factor systems. I have had a great deal of luck trading the VIX futures with a combination curve slope, moving averages, and my preference for getting a period after a (seemingly) failed breakout of elevated volatility.
My thought based on this is that if one has reason to believe a market has a great deal of trend persistence yet timing might still be an issue, the simple MA approach seems like a good or reasonable tool. It's not the tool or technique itself so much but the features of a market that count and define if an idea or tool might work.
On the distance from MA idea, I like to do a similar thing but use mid-point of an X period range or a point like open, close, or other specific time.
Gary Phillips writes:
"It's not the tool or technique itself so much but the features of a market that count and define if an idea or tool might work."
Good point. Any technical information and inferences made from using this or related indicators reflect not a primary but a secondary process that involves compliance of the indicators with fundamentals and/or a cognitive bias. However, indicators that are derivatives of price, track price changes; and, if there is persistence (the future is like the past) they inevitably end up contributing to the myth that they are predictive.
Stefan Martinek writes:
I think the best tools/techniques "learn" from the market and use the data features in some way (e.g. market specific level of noise, noise "memory", etc.). This is why I never use MAs or anything that has MAs inside where we arbitrarily via parameter selection force our views on data. Good techniques are usually adaptive and ask data what parameters are preferred now.
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.
Janine R. Wedel will speak about her book “Unaccountable: How elite power brokers corrupt our finances, freedom, and security.” She is a previous Junto speaker and a Professor in the School of Policy, Government and International Affairs at George Mason University. Meeting starts at 7:30pm, main speaker at 8pm. Location: General Society Library, 20 West 44th St., ground floor, New York City. All Dailyspec readers are invited.
There has been a subtle change in the comovements and contramovements between bonds and SPU during the same day in 2015 from previous years. Given that bonds are down the conditional prob of stocks being up has been 60% in 2015, 80% in 2014, 68% in 2013, 82% in 2012, 79% in 2011. Given that bonds were up, the conditional prob of stocks being up has been 38% in 2015, 48% in 2014, 51% in 2013, 30% in 2012, 31%% in 2011 note that these are movements during the same period, not leading in any way. Assuming perfect knowledge, it would be useful, but it is purely descriptive. However, what the descriptive tab shows, is that comovements , the red and green in our tabs, have been relatively more numerous this year, than in previous years. Indeed there were 39 comovements so far in 2015, and 62 countermovements, giving comovements as 38%. In 2012, and 2011, the comovements were just 26% of the total.
June 2, 2015 | Leave a Comment
Yet another class of bears—- the peg ratio. And a lonely voice of reason—- the discount rate– and Peter Lynch, the man who never read a book or went to the opera.
It's unfair to say he never went to the opera. In fact it was his interest in musical performance that got him fined by the SEC–Twelve musical concerts and many sporting events. He made the mistake of never taking along even one of the execution brokers who provided the freebies he actively pursued.
It's often the company one keeps that determines one's results and one's customers' costs. It makes it impossible to trust Lynch's comments on S&P valuation as meal substance when he misdirects about opera attendance v. football attendance as a validity of one's personal measure.
An excellent book is The Wool Trade in English Medieval History by Eileen Power, the "most interesting woman" of the 1930s. Shows that they counted every aspect of the sheep better than technicians do their counting today. Also shows that the entire English Constitution devolved from the free markets of the pastoral shepherds and the exporters versus the merchants of wool in medieval times.
The wool entrepreneurs developed into the middle class of England from whom the industrial revolution, the constitution,and prosperity evolved. A typical passage:
In these baillifs accounts, the long rond of the shepherd's year unrolls itself like on of those horizontal Chinese scrolls that have taken one from spring to winter by the time the eye has traveled along their length". In the manorial roles sheep were carefully divided into ewes, wethers and yearlings, lambs, and there was set down the number with which the reeve started the year, the numbers added by purchase or natural increase, lost by disease, sold or given in tithes, (the number that disgraced themselves by not giving progeny) and the number left at Christmas when the account was drawn up. Of course every purchase was accounted for, and balanced with the ending sales to wholesales.
A great admirer of Eileen Power to whom I owe the introduction to this great scholar is Tracy Quan whose books and persona are equally scholarly and interesting.
Stefan Jovanovich adds:
Amazon has a free Kindle edition of Power's best seller from the 1920s: "Medieval People"
(Caution: Historical Hobby Horse in Use) Power was a colleague of Norman Angell, Ramsay MacDonald and C. P. Trevelyan in the Union of Democratic Control - the last "pacifist" organization that was not simply a front for the Comintern.
What Angell wrote about the Grand Illusion of Imperialism is still true and is worth considering in light of recent efforts to find a new cause of war in the South China Sea:
"wealth in the economically civilized world is founded upon credit and commercial contract (these being the outgrowth of an economic interdependence due to the increasing division of labour and greatly developed communication). If credit and commercial contract are tampered with in an attempt at confiscation, the credit-dependent wealth is undermined, and its collapse involves that of the conqueror; so that if conquest is not to be self-injurious it must respect the enemy's property, in which case it becomes economically futile. Thus the wealth of conquered territory remains in the hands of the population of such territory. When Germany annexed Alsace, no individual German secured a single mark's worth of Alsatian property as the spoils of war. Conquest in the modern world is a process of multiplying by x, and then obtaining the original figure by dividing by x. For a modern nation to add to its territory no more adds to the wealth of the people of such nation than it would add to the wealth of Londoners if the City of London were to annex the county of Hertford."
Angell was equally prescient about the Balkan Wars and their danger:
"The fundamental causes of this war are economic in the narrower, as well as in the larger sense of the term; in the first because conquest was the Turk's only trade -he desired to live out of taxes wrung from a conquered people, to exploit them as a means of livelihood, and this conception was at the bottom of most of Turkish mis-government…..
"If European statecraft had not been animated by false conceptions, largely economic in origin, based upon a belief in the necessary rivalry of states, the advantages of preponderant force and conquest, the Western nations could have composed their quarrels and ended the abominations of the Balkan peninsula long ago-even in the opinion of the Times. And it is our own false statecraft-that of Great Britain-which has a large part of the responsibility for this failure of European civilization. It has caused us to sustain the Turk in Europe, to fight a great and popular war with that aim (he is referring to Crimea), and led us into treaties which had they been kept, would have obliged us to fight to-day on the side of the Turk against the Balkan States"
June 1, 2015 | Leave a Comment
Many ask me why I don't adjust % wise rather than algebraically. A good reason is that the algebraic volatility of the market has not changed in 20 years. In other words the stand dev of a daily change was 14 in 1996 and is 14 today.
Period ending lvl stand dev
12 30 1995- 12 30 1998 1413 12
12 30 1998 12 30 2001 1144 17
01 30 2001 12 30 2004 1204 11
12 30 2004 -12 30 2007 1356 11
12 30 2007- 12 30 2010 1520 19
12 30 2010 12 30 2013 1801 14
12 30 2014-5 30 2015 2108 14
Another set of mumbo jumbo shibboleths lands in boot hill.
You may have a great point, and no one can force you. Let's hope the market won't either, lol…
My greatest problem with 20 year stats is that they reflected entirely different forces, rules and even psychology (AI is certainly different from humans). Of greatest worry is that cost of money has never been similar to current period, and so all the areas of the business of banking. That calls for changes in investing assumptions, which shouldn't kept static throughout.
Moves in Japan versus China which were down 7% yesterday to 30 day low recalls the story of tortoise and hare.
No need to run. You have to start on time. The story repeats itself.
It is common in athletic events for the sagametricians to say at certain points, things like "the home team has won 87% of their games when ahead by 2 or more run in the seventh inning." Or "the bigs have gone on to win 92% of their 7 game series when they win the first two".
Most of these utterances are completely consistent with randomness. But the question emerges: is there a time in the market when the scales are taken out and Zeus decides whether Achilles or Hector will win the battle based on the calculations from his sexy partners or even his own volition. I would hypothesize that 1:30 pm Eastern Standard is the key hour where the scale is tipped and the market decides whether to head further up or down.
David Hillman comments:
Exactly the hour when our dear departed Ed's 'big boys' return from lunch sated by filet or dover sole and are deciding if they will dine with their sexy partners that evening at Daniel or take them to Nathan's for a full dress dog. No more testing of the hypothesis seems required.
I believe that there is much to this post from the Chair.
Much of the difference in technique required to trade different financial instruments is due to this type of error in my opinion.
These points are open to conjecture but they are certainly thought provoking:
To say something like, "every time the Dow does X then the result has been Y with such and such summary statistics over the past 100 years". Arguably it has some pitfalls in common with the sports analogy, namely, the composition of the stock index (sports team) has not been constant over the entire test period and so one may not be comparing apples with apples. This is mitigated somewhat by phenomena with a relatively larger number of occurrences.
Stretching it a little more, the LA Lakers team of Magic Johnson and Kareem AJ (wow! What an era - do you remember the playoffs against Boston in the 1980s) is different from that of today. The "Y when X" piece may continue but I think it is these type of statistics that end in Black Swan events. With AAPL being in the DOW, the index arguably has different characteristics than when when U.S. Steel ruled the show.
It is my view that analysis of the major currencies does not suffer from any of this as a JPY is a JPY is a JPY. By the same token one should consider theoretically calculated EUR data before its launch as trash and one may need to change analysis if Greece were to depart the single currency. I believe the same is true of commodity futures markets (grades, etc aside).
I read a terrible story about why children are abandoning baseball from Forbes based on a WSJ story of same title.
Stefan Jovanovich comments:
Baseball was never the "default" sport for young children. The ball is damn hard and a good one has always been expensive enough to be worth stealing. It was the sport for "grown-ups" that you could hope to play when you got big enough to keep up. Until then, you would play catch with your family adult (thanks, Mom) and use a tennis or rubber ball to pitch and hit with your neighbor/brother/sister, using the barn/garage for a backstop. It took years of those repetitions before you could even hope to play well enough to keep up with the men and have it actually be baseball. The game flourished in all the places where men played the sport and let children join them. That is why it still flourishes in all the places where men and their children play it together for fun– the American Southeast, the Dominican, Cuba (although that is dying), South Korea, Japan. Little League was baby-sitting and adults pretending to teach the game instead of simply showing how it is done out on the field against each other.
Paul Marino writes:
This story lends no credence to the fact that southern states play baseball year round vs more northern regional leagues and the population disparity between the two. Baseball is a regional sport on all levels, pro on down vs football and basketball which are national sports.
Also, this article makes no reference to global, specifically lat-am baseball which is a religion in places such as Cuba, DR, PR, etc. last I checked Puerto Rico is part of the U.S. Unless they default on their munis. Plus immigration will lead to a generalized balance in players against the author's "the Great Recession no-baby meme" which has had us all feel poor as humans since they state red the meme. I can tell you my family and friends in their 20-30s are having babies, just a little later in life.
The article would have been more relevant to US if distinguishing the lack of African Americans choosing basketball and football over baseball. White kids will always play baseball at one point or another out of love of the sport or parental pressure to do something where you can't get too hurt.
Stefan Jovanovich replies:
If Paul means that baseball is "regional" in the same sense that hunting/shooting is "regional", I agree. But the notion that "white kids" will play baseball at one point or another because of "love" or "parental pressure to do something where you can't get hurt" seems to me very far off the mark. No one in their right mind "loves" baseball; it is so relentlessly demanding that it has minute-by-minute failures. There is no room for the fantasy of "we are the champions" that football (American and world) and basketball allow. The best teams in baseball have won-loss records that would disqualify them from the Champions League or the basketball or football playoffs; and the home-away advantage is trivial (52-48%) while, in the other sports, it is nearly overwhelming. It is like chess; you either have the addiction or you don't see the point.
None of this says anything about the game's popularity as a spectator sport. People now love going to professional baseball games more than at any time in the past because: (1) compared to basketball and football ticket prices, it is still a very cheap date, (2) it is like visiting the old amusement parks like Elich Gardens - you can stuff yourself silly while walking around and you don't really have to watch the game, and (3) unlike almost all the other public spaces in American cities the parks themselves are not dumps. Coors Field in Denver, which is a delightful place to see a game even if the altitude makes the game itself seem like a parody, is the 3rd oldest baseball park in the country. Only Wrigley and Fenway are older.
Paul Marino adds:
I should clarify "love" as in the love a child has for a player and that gets them interested in playing, the other love is the kind I had where I played for 15 years and got into the minutiae of the game over time.
It is regrettable to see Goldman forecasting $45 oil along with concomitant declines in all other commodities. And one wonders what the agenda is for such absurd forecasts and whether it is possible to make money by systematically coppering such self serving things.
Anatoly Veltman writes:
Not sure what they are seeing in other markets, but the supply side of oil remains hard to abruptly turn– thus their reasonable projection. Subdued energy price is also a politically correct position, so not much near term headwind there. But eventually, yes: absurdly low oil was always resolved via war initiative by a foreign power.
1. Germany is a semiconductor that expands energy in other markets in the East and West.
2. The Upside Down Man and the 100 Million Man, formerly his partner before and after Harvard, talk a much better game than they play. The more bearish they are for stocks, the more bullish it is.
3. The more the media feature startling bearish forecasts, the more bullish it is.
4. The cobweb theorem holds for all markets.
5. the low vol in the stock market during recent days can't continue because the public would not lose enough if it continues.
6. Sales growth is much less important for stocks than profit growth.
7. The agrarian reformers at the Central Banks will not allow cattle trading operatives to recede.
8. The leaks in Brussels to hedge funds were rampant and premontory. They will arabesque to other forms now that early release to the media of the transcripts has been curtailed. The good one knows how it plays out in other countries.
This winter in order to stave off the polar vortex II, I joined the USBGF and tuned up a forgotten game, played online and re-read some books. My goal was to play in my first over the board USBGF tourney in the spring here in Cleveland. It was a very difficult yet rewarding. I wound up playing in the intermediate flight, and lost in the semi finals (money match) to a Ben Franklin looking naturalist from the woods of Pennsylvania. He went on to beat the next man and win the section. I hedged with him and as the loser –still won my entry fee back and then some, so I exceeded my expectations as a first timer. I played with professionals and held my own.
Backgammon sharpens the mind, dampens the swinging emotions surrounding wins (highs) and lows (losses). It makes you perform quickly and decisively. The sport seems to be having a slow rebirth. Many backgammon experts went over to the poker tables over the last 15 years. Maybe this is a patch for me to exploit. Everyone there were very friendly. Not many people under 30 at all. Probably 25% women at the tourney. There is a lot of wager money in this game. I played on a $3000 custom board with a dice rolling tower during one game. There is quite a "gambler" mentality there that I felt could be expolited–I avoided a lot of side bets, skipped the drinking and just ground it out. I was exhausted afterward and also satisfied.
In honor of the 36 possible backgammon dice combinations:
Backgammon and Trading Markets
1. Match play is a grind. Every game, like a trade needs to be executed, and evaluated and reexamined roll after roll due to the changing landscape conditions. In an 11 point match, you could wind up playing 21 games.
2. Expect to lose. As in trading, you must minimize drawdown. Losing a game is no big deal during a match, but getting gammoned sometimes or backgammoned will cause you most likely a match.
3. You need to be physically fit. Playing 20 hours of tournament backgammon over the board in two days takes a physical toll. Food and diet usually fall off, sitting and not being in routine makes your body fall out of rhythm. Trading foreign markets comes to mind here. Tourneys usually begin the day's play around 11:00am and end late into the evening. If you are a morning person, you need to change your habits.
4. Fatigue can make one loose with the cube, or willing to take risks with hits or leaving blots. It can also be exploited of your opponent. Your opponent due to fatigue, may just take a risky double. Or you may decide to play a grinding, long slow back-game with complexity in order to really move him into deep water when he is tired.
5. As in trading, don't let a brilliant win go to your head, or an unexpected loss go to one's soul.
6. Backgammon opponents are like different markets. Some are binary, robotic, calculated. Some can be cagey, erratic. Watch your next opponent before you play him or her. Study your intended market before you trade it. Watch out for the delicate little old lady, and pray you don't get paired against the hot looking woman.
7. Be ready for everything to go foul and stay foul. Cut your losses quick, play safe, concede one point games. The dice are not to be blamed–but when your opponent blames the dice agree with him or her that indeed the dice are not good for them today. Kindly reinforce their beliefs. Don't make excuses for your losses.
8. Blitz! Hit loose, blitz in, keep hitting, slot your points and keep it up till it runs out, then double if its correct–especially early if the chance arises. So take that quick hit winning trade, just bank it and move to the next trade.
9. Be ready to be put on a camera under bright lights or in a featured table for live feed against a big star opponent. In trading this may be like a sudden streak of wins when spouse says nice things or maybe when you are called by a friend for your "expert" opinion.
10. Remember, that everyone else may be tired too, or hungry or in discomfort of sorts. You are not the only one
11. Match equity rises and falls for each opponent on each roll of the dice and subsequent move. Each trade has a heartbeat, an ebb and flow, prices change. BG is a pricing game to a degree. You need to know if you are over valued, even, or under all the time.
12. What is the trading plan; what is the game plan? Are you running, priming/blockading or are you playing an intentional back game. You need to review your plan prior to making your move –does your roll help or hinder what you are doing. Did your trade look suddenly different from its planned start?
13. Sometimes too much success leads to failures, multiple doubles in a row tend to get you off to a great start that actually pushes you way past your optimal timing leading to a forced stacked up game. You now find yourself out of position. Don't overtrade, do not double up because you feel bulletproof.
14. In a short length match, seize upon a good starting position and double. Your opponent may shrink and pass since he will judge the risk as too great at this early stage to gamble. You must have a good start and his must be neutral or lagging.
15.Every play is a potential cube turn. Ask yourself if you should be doubling before you roll. In trading, once again–review your plan at each logical turn.
16. Be ready for the quick re-double right back in your face. Now the stakes are way up if you take, funny how your position shrinks up on a redouble? Akin to a whipsaw or a flash crash, the market has just gone 180 degrees from where you were. Where you ready for that?
17. What will my opponent do if I double? What will the market do if I take that offer?
18. I have just been doubled, is it a take, a pass, a redouble or is it quite impossible to judge? Use Woolsey's law then and take the double. As in trading, sometimes its better to take the trade on with insufficient knowledge and then do some analysis rather than pass it up.
19. At Crawford game during match play the doubling cube is not used. It gives the players one game where they must play through without upping the stakes. A trading holiday, a risk off breather is always a good thing once in a while. The Crawford game happens when either opponent is one game away from winning a match. It stops an automatic cube double from the lagging player.
20. If you make it into the money matches in a tournament, it is usually wise to hedge with your opponent so if you lose you don't leave empty handed. Do not be greedy and demand whole hog. Many market examples can be found regarding hubris.
21. What is the pip count? You must be able to size up the score mentally and quickly. Backgammon play is expected to be brisk and in matches slow play is frowned upon. In trading, being aware of the current (daily, hourly) conditions is essential. You can't call a time out in BG, likewise you can't stop the market while you think things through.
22. Leave a blot, but leave it properly, either far away or very close. Leave it so that if it's hit you may be able to recapture. Close out your trades properly.
23. Make points that hinder your opponent's big winners. Block his potentiality. Beware of and block if possible the "miracle" opponent's role, the double threes that get him out of danger and puts you in irons. Set your blots on points that he needs for getting back in. What miracle market move lies in wait to swamp your trade?
24. Again, don't get locked into one type of game, be flexible and take what the dice give you. Take what the market gives, don't hold out for a round number sale.
25. When it's time to run–then Run. Sometimes one gets focused too myopic on trapping and blocking and thus fails to prep for a freeing attempt. In trading, maybe
this is an example of just going with a major momentum swing and forgetting the chop trades.
26. Double hit if possible. Putting two men on the opponent's bar is a powerful move. Keeps him out of the game, for the time being. This gives you leverage. Possible cross over to using derivatives in a trade to maximize an expectation.
27. Hitting a blot takes half your opponent's role away. It is usually wise to hit versus not, yet not always. Automatic action can be seen in some players who always hit no matter what. I like to play against these types. Some markets behave on "autoplay" –use this tendency for planning a trade.
28. The safe move is usually not the best. You need to slot points, fight for the 5 point and be aggressive. Playing safe in the markets may be akin to being long the "favored sectors", last year's winners.
29. Lay out decoy blots. This tactic lures your opponent off his strong point and hopefully gives you compensating re-hit chances, and recycles a man to aid in your timing. Decoy methods and markets are well discussed.
30. Hitting loose is a decision that must be made with a goal in mind–needs to be justified. Taking a market risk that is usually cavalier needs to be justified and quantified. Hitting loose describes hitting a blot when your risk of re-hit is great. Its making the best of bad choices.
31. Know your basics inside and out. 6 x 6 dice table, %chance of rolling any single number, %chance of making a high number versus a low one. Know the percentages faced when getting back in from the bar. Holding a losing trade is not playing the percentages.
32. Aggression is awarded in backgammon in that you need to hit blots, fight for points, and resolve oneself to being hit and thrown back. Its a regenerative cycle and one needs to be able to define the worth/price of the position roll to roll. In trading you need similar levels of mental engagement–how to go for a small victory every venture, yet be ready to turn that into a major winner if the right odds come to the fore.
33. Opening, middle and late game positions, cube decisions during those stages, the match score or cash game level at the time of the stake double. Balance is key –maintain your forces as best as possible under the given dice. Know the landscape when the double arrives. Anticipate your opponent's moves. What is the market telling me at this moment?
34. What is my best move? Why is it that the best moves sometimes are the hardest to do? The best move usually looks risky/naked. Buying when all is lost, when the cane is in your hand is when you are right.
35. Why do I usually win the Crawford game–the game where no doubling is allowed? Why do I win the small trades and lose the bigger ones? Maybe I should be looking over my past trades with a critical eye—do some more work.
36. If I win game one of an odd numbered match, I tend to relax and just grind higher. All I need to do (as in baseball) is win a series. Am I in gammon save mode or gammon-go. Sometimes you need to protect against the double up or go for the double up as your goal when starting a new game. Is the trade a limited one to begin with or an attack strike? Do you realize that each roll can help or hinder that goal and adjustments sometimes need to be made. Or simply waiting is the right answer-
-a move that keeps the position static.
Victor Niederhoffer writes:
To Mr. Drees's excellent post an observation. I have known several dissipate drunk squash players who often asked me to set up a game of backgammon with my wealthy friends including Jim Lorie who paid his way through Cornell with backgammon. The dissipate players were all National Champions at backgammon and hustled for a living. To play against them was ruinous and fortuitously I prevented Jim from playing against my player opponent Claude Beers. One should never play markets against men named doc or those who pretend to be dissipate.
Andrew Goodwin adds:
When I held a seat on the NYFE, there was a trader whose badge number was mine with only the order of two digits varying. We shared an execution broker. The trader's name was doc, and I had to check in with the clearing firm each day because only his losing trades would end up in my account. Not once did I get one of his winners. One can lose to doc in ways other than merely playing against him.
One hypothesizes that prices act to maximize their chances of survival and their volume of activity.
The moves and the announcement during the day and fray are controlled by the prices to create the most successful survival mechanisms.
In bonds did not believe it could reproduce at 15300 at a 3.1 % 30 year rate, and thus demanded that a robot from Euorope would say that they would create liquidity this summer by expanding qe.
Anatoly Veltman writes:
Also, a huge market trace of insider announcement distribution "on need to know basis". Both Stocks and USD ended strongly the day before (a pairing that would be hard to explain, otherwise).
Victor Niederhoffer writes:
In bonds did not believe it could reproduce at 15300 at a 3.1 % 30 year rate, and thus demanded that a robot from Europe would say that they would create liquidity this summer by expanding qe.
Far from the Madding Crowd by Thomas Hardy gives a realistic view of sheep farming in the 1860s in England. Nice market scene where the heroine who has the ability to make 3 men fall in love with her, bargains to get a fair price for her seed. A forerunner of Edna Ferber's novels of strong woman who run a business and a portrait of 2 good men, a wealthy farmer and a competent shepherd. Many lush scenes of sheep and meadows. A forerunner of square romantic novels of the 20th century where 3 men compete for the love of a deserving woman.
Last week This week
mon -1.0 -3.10
tue -0.9 +0.6
wed -1.7 -1.4
thu +1.8 +1.2
fri +0.3 +2.2
Last night I had a drink of plum wine. I subsequently made about 10 errors in trading overnight. Similar things have happened to me before on the rare occasions I drink alcohol going back 50 years when I misread a card in poker and ended up losing my then minimal but very important fortune. I wonder to what extent it is a good rule not to drink alcohol on the days before, during, and after trading.
Rocky Humbert comments:
I think that needs to be tested with a controlled study. I volunteer to be the counterfactual.
Scott Brooks writes:
As a non-drinker, I can confidently say that a fall down drunk Vic or Rocky would handily beat a sober me at trading.
Although I haven't played in over 20 years, I'm pretty confident I could take them both at poker.
But I'm 100% certain that I could take them both at the archery range, even if they were sober.
A drunk Vic would easily take me at squash, racquetball or table tennis.
There are three lessons here:
1. If you are playing "for real", only play the game you can win.
2. If you are playing "for real", only play against people that you are confident you can beat.
3. If you are playing "for real", make sure you are at your peak potential to do. Do nothing to impair your physical and cognitive abilities.
Craig Mee writes:
When dealing with leverage and perceived opportunity one unfortunately can stray due to the slightest of distractions.
1. One wonders to what extent ind stocks that go up when market is way down are bullish in the next relevant periods. Does something comparable for markets exist.
2. Gold and spu both break through round number on same day. Is it non-random.
3. How low do grains have to go before they turn bullish.
4. One reads The Life of a Leaf by Steven Vogel which shows leaves reacting as much to their environment as our markets do to theirs.
4. The absurd moves up in bonds whenever the economy is weak because of expected liquidity from the fed, and more importantly the absurd moves down in them when the announcements are strong, provides opportunity.
5. I own a reasonable quantity of twitter on the sprained ankle theory . Will it suffer the same fate as the blackberry I rode down from 60 to 10.
6. To what extent now do companies that are hit hard in the stock market by revenue shortfalls provide opportunity.
7. One of Wiswell's favorite proverbs was that "checkers is a game of architecture". I believe the same is true of markets, but I am not a good enough architecht to apply all the proper principles.
8. There are more things in heaven and earth. The great great grand nephew of Robert Boyle comes in and tells me the reason that one can't make money trading in stocks is that all the high frequency people use some sort of lock the price then front run to get ahead of you and not violate the rule that the customer has to get the best price.
Larry Williams writes:
Please tell the great, great, grand nephew there are still people making money buying value/momentum stocks and holding for more than a nano-second.
Whenever I hear people decry the market place as to one person, group, etc running the table so we mere mortals "can't" succeed I think it is just a losers lament.
People, lots of them, still win in this game.
Gary Phillips writes:
Everybody needs a "scapegoat" especially the the disenfranchised traders who thinks the market owes them a living.
It is particularly fruitless on that small time scale because any countermeasure you develop that works will be viewed as a criminal act. You either actively lose or you are found guilty of winning–take your pick. Larry's idea is the sensible one.
Victor Niederhoffer replies:
As the EC says about all their countries, "they're one of us. We'll protect them", the grand nephew is one of mine. He worked for me and did a fine job, and is well aware of the drift. His only weakness is that he knows that the other side is a bunch of highway robbers, and like the man who complained about the Australian moves even though he doesn't change it, he's a real trader and knows you can never get an honest deal from the markets.
Over at Business Insider, they carried this graph. It looks pretty scary. I don't think it's possible to sustain current prices in the face of declining inflows, but maybe I'm misinterpreting it.
Larry Williams writes:
Look at the chart! This has happened many times before where the blue line guys got out and the rodeo went on higher. It's not the first rodeo they missed. Who're you going to believe, the chart or a cub reporter?
Steve Ellison adds:
I don't have the data to test this rigorously, but my hypothesis is that "net inflows to mutual funds" is a contrary indicator if it is an indicator at all.
All the studies such as the ones carried out by DALBAR suggest that returns weighted by investor money flows are always worse than time-weighted returns.
There is a movement of people who think that this "behavior gap" can be closed with education or sound advice for all. I find it more likely that it is a necessary feature of markets for the reasons described by Bacon. Some can do better but nothing can work for everyone at once.
Victor Niederhoffer writes:
One would have thought that this post came from Mr. Conrad rather than you, who has been exposed to the drift.
Bud Conrad responds:
Mr. Niederhoffer mentions my name as suggesting I might be bringing negative opinions about the future for the stock market, but I have been relatively quite on this list in that nature in recent years. My base for stock market valuation comes from the view of comparing the potential return from the stock market earnings to that of long term government bonds. For several years and continuing to today, the returns from stocks as measured by dividing earnings by the price (E/P ratio) have far exceeded the returns from fixed income, so I have been a bull on stocks, despite the many worrisome commentaries about the general economy. The Chair and others will recognize this general approach as sometimes called the "Fed Model" for stocks. My summary comment is that "The stock market is the best game in town", sort of like the comment on the dollar compared to other currencies as "The best horse in the glue factory".
I have been bullish stocks for the first half of 2015, but with caution that there are other forces like the Fed raising rates, a slowing GDP for the general economy, a disastrous collapse in the oil and gas fracking that will cost lenders huge sums, and continuing trade and government deficits that make me be more concerned that the outlook for 2016 is possible for a down turn. I'm interested in extending that watch for a turn in stock market optimism as others find quality analysis.
As to the specifics of the flows in the chart from BofA ML, I notice that the 2013 down turn in flows didn't hurt this bull market, so the indicator may not be capturing some of the drivers, like possibly foreigners that are even less enamored with their domestic prospects, who may be finding dollar denominated assets much safer than say those in the declining Euro. As a related note in my local area: Palo Alto is supposedly 20% owned by foreigners, mostly from China. Real estate prices are booming in Silicon Valley, and there is plenty of inflation in asset prices here.
Anatoly Veltman writes:
This was an interesting point, reminding me of a disaster of a trade I had in 2005. Copper, for the first time in history, eclipsed its decades-long resistance of Fibonacci $1.6180 level at the COMEX. It was clearly driven by developing China demand, and I wouldn't stay in its way. I had good luck picking up Longs at the other Fibonacci end around 61.8 cents just six years prior…
But as the 2005 rally progressed beyond the $1.6180 breakout and all the way to the un-phathomable $2.000/lb round - I could hold myself off no longer. My Shorting reason was that throughout the 2005 rally, COMEX Open Interest figures have declined(!) dramatically. Classical technical analysis states that a commodity's prolonged upside run, when accompanied by progressively declining Open Interest - must be Shorted!! The reasoning is very compelling: in zero-sum game, such event can only mean one thing - that the pricing is extremely over-bought, while progressively more-and-more Shorts have already covered!! Thus, as a new Short, you're getting the greatest downside potential in history, while the risk of potential blow-off to the upside is now severely constrained. Well, I'm still a huge believer in this indicator, except…
…2005 happened to be the first year of an unprecedented GEOGRAPHIC shift in Copper inventory. Away from the COMEX in US, and in favor of the LME in London as well as a brand new physical and derivative market born in China and vicinity. While the COMEX Open Interest was going through temporary decline, the pick-up overseas was enough to feed the demand and put further increasing stress on supply. Thank goodness for my catastrophic COMEX stop-loss above $2.0025 - that trend roared unabated straight to the next Fibonacci extension of $3.62!
Some people are going to believe what they want to believe, hear what they want to hear, and avoid information that contradicts what they already think or believe. These are the people who find comfort with a group-think mentality. On the other hand, there are those who love to fade the market, for the sake of being contrarian. These people cannot resist doing the opposite of popular opinion and possess a mindset toward reactive devaluation. This forum strives to operate on a level where useful information is transferred from one reader to another; often times from the extremely knowledgeable (victor, rocky et al) to the less-so (myself included). We all strive to reach independent conclusions based on a reasoned process. We ignore popular opinion, and do not take anything at face value. We keep open minds, organize and filter our ideas to determine what is relevant, yet allow conflicting ideas to generate new conclusions.
In an effort to promote and perpetuate this practice, I still find myself sanguine about the prospects for the market. Real short-term rates are still negative. The fed maybe tightening, but the yield curve is steepening. GDP has averaged 2.25% per year since 2009, and yes, real GDP growth in q1 was weaker than expected; but that may only serve to be a down-tick and not the beginning of a nascent trend, as as was the case last year. Growth is there, but it has been stultified by the Obama administration's policies. If we were to see tax rates and regulatory burdens rolled back with a new administration, we could see a renewal of corporate investment and risk-taking and an acceleration in productivity and growth, and a much higher market yet.
Jeff Watson writes:
Many are overthinking this stock market and are missing out on the move. Trying to fit events into one's belief system can be very costly in the long run. Sometimes, like in surfing, you just gotta catch the wave because it's a groundswell, and the waves are stacked up like corduroy all the way to the horizon. Plenty of opportunities here.
Some good books one is reading after a hurried visit to the Seminary Book Store in Chicago.
The Best of Ed Zern by Ed Zern, a hilarious and deep book by a writer with part Ring Larnder, part Mark Twain, with all the stories relevant to trading.
Somewhere For Me, a bio of Richard Rodgers by Meryle Secrest, a lugubrious account of a great musical composer, great businessman, son of a gun.
Why Capitalism by Allan Meltzer, an excellent update of Free to Choose and Capitalism and Freedom by a monetary economist with many deep thoughts appropriate for introductions to free markets for kids.
Karl Pearson: The Scientific Life in a Statistical Age by Theodore Porter, a bio that shows how philosophy and morality led to the foundation of frequency statistics, a disciple of Galton.
The Roman Market Economy by Peter Temin, some nice charts and diagrams showing the importance of economic variables, prices, labor, land in the history of Rome up to 300 AD.
Modeling Binary Data by D. Collett, everything you'd want to know about how to explain binary data using logistic models and maximum likelihood. The simple dependent variable makes the book a good intro to variables whose magnitudes go all over the map.
Europe by Brendan Simms, a 700 page intro to European history from 1500 to the present emphasizing the importance of Germany with many pithy and seemingly deep summaries.
Magnificent Trees of the the New York Botanical Garden, a beautiful pictorial and descriptive journey through the Bronx Garden we will be visiting September 4 with Adrian Bejan, who says it's replete with constructal trees.
Crony Capitalism by Hunter Lewis, a surprisingly informative view of bribery, double dealing and insider activity in the financial crisis written surprisingly by an agrarian reformer.
Top Dog by Po Bronson and Ashley Merryman, shows how competition, incentives, and motivation effect winning in many psych experiments and sports outcomes.
The Improbability Principle by David Hand, a deep book explaining the reasonable probability of coincidences and extreme events by a profound and erudite scientist, good for the layman and the expert.
Chemistry: Science Double Award by B. Earl and L wilford. A secondary school intro to chemistry about my speed in developing a foundation for this fascinating and useful subject.
Gordon Haave adds:
I wrestle with reading non-fiction and fiction. I have been reading so much non-fiction for work that I have been trying to read fiction when I can to unwind.
Recently I have finished, for the 2nd, time, three of my favorite books:
All three are great. After I read Chronicles in Stone I had to go and visit Girokaster, Albania, where it is set.
Here are the pictures I took. The WW2 items are inside the castle which is the focus of the book (the book takes place under Italian occupation in early WW2).
The above is a public link that everyone should be able to see. There is also a picture of Enver Hoxha's house in there.
David Lillienfeld writes:
I've been reading Supreme City by Donald L. Miller. The book discusses the development of Manhattan during the 1920s. It includes the development of radio networks (Paley vs Sarnoff), the rise of organized crime in the wake of Prohibition, the building of such icons as the Chrysler Building and other buildings, the creation of the Park Avenue residential district (43rd to 96th Streets), and so on. A fun read.
It's been quite a while since I last recommended a book. However, "The Boys in the Boat" by Daniel James Brown deserves consideration. It traces the course of a group of young men attending the University of Washington through their (Depression) years of crewing (eight man) and their quest to represent the U.S. in the 1936 Olympics. We don't produce guys like this anymore– unless you can name a recent college team (any sport) that achieved athletic greatness while all acquired degrees in engineering, science, or law.
I'm really enjoying Conn Iggulden's 5 book series on Genghis Kahn, starting with Ghengis: Birth of an Empire.
A commodity trader is never happy. "Do you know what happened in Australia over night? What a gyp. It opens up 20 big points, ran the stops and then backpedaled and went as much down the other way running those stops. Margin calls abounded and they had just increased intraday by 100% without notice so everyone was hosed. To add insult, commissions are 50 a contract a 5000 item both ways".
"Did you get caught?" I asked.
"No, I don't trade Australia at all".
There goes a true commodity trader, I said as he caught his train. The market is either too fast, too slow, too opaque, too illiquid, too crowded, too controlled by insiders, too far away from value, too random, too heavily arbitraged.
Victor writes to Adrian Bejan, author of Design in Nature: How the Constructal Law Governs Evolution in Biology, Physics, Technology, and Social Organization:
A reader asks if this is related to your work: "Wind Power Without the Mills"
Adrian Bejan responds:
The answer is yes, in the two ways that this flow system behaves and improves itself:
–The natural: the vortices that shed downstream of the pole are constructal designs, the best way to mix the fluid downstream. They are predicted from the constructal law, man cannot change them
–The artificial: the wobbling pole can be designed (fine tuned) to capture and deliver most power to its magnet-power-generation unit at its base. Yet the "efficiency" will be low … this is why the company talk about other attractive features, low cost, easy maintenance, no moving parts, no noise, etc
AdrianAdrian Bejan ( MIT ' 71, ' 72, ' 75 ) J.A. Jones Distinguished Professor Duke University Academy of Europe
On Thu, May 7, 2015 at 6:26 PM, Victor Niederhoffer (MANCHESTER TRADING L) < firstname.lastname@example.org> wrote:
One notes that the 30 year bond has gone down 11 big points in the last 13 days, and this is the largest decline in history. Rational expectations would not have predicted that the long term rate of inflation expected has changed that much.
Wages, energy, and housing are all rising faster than the current rate of core inflation, but perhaps not at a rate that would justify such a precipitous bond move. Bonds may simply be getting back in-line with their German counterparts. US and German rates diverged significantly over the past year or so due to fears of Greek default, deflationary concerns, and divergent monetary policy. Last month ust10y rates traded at ~24X det10y rates with the rate spread hitting an all-time high of 190 bps. The recent 55 bps bounce in 10 year bunds from the 0.05% low on rational expectations for grexit and the stabilization of oil prices, has seen the bond/bund relationship begin to revert to the mean with the spread narrowing to ~162 bps and the ratio trading < 4.00.
At times like this one is reminded of Horatio Nelson's admonition to Aubrey: " Forget the maneuvers and go right at them".
Stefan Jovanovich comments:
But if your men cannot go right at them, your only choices are to avoid engagement either by using the ocean's wide spaces or by staying in port. Pierre-Charles Villeneuve was shrewd enough to know that the only role for the French and Spanish fleets was to be a potential threat but never to actually come out and fight, except in those brief moments when they had overwhelming local superiority. That threat of a "fleet in being" would compel the Admiralty for political reasons to devote most of its energies to patrol duties in the Channel to guard against invasion and to blockading the Atlantic and Mediterranean ports of the enemy. It would maintain a stalemate which would, in fact, be a victory for Napoleon's continental system. But Villeneuve had the bad luck to work for a man who could never sustain a strategy that was working if it contradicted his latest impulse. So, Villeneuve was doomed to be ordered repeatedly to use absolutely the worst of all possible tactics. To this day, the French continue to blame him for the defeat at Trafalgar. They even join the English is questioning the Admiral's character for finally obeying Napoleon's stupid orders when faced with the choice of obedience or execution.
P.S. Nelson's contemporaries had the grace to acknowledge that Villeneuve was a better sailor than Nelson; when he attended the funeral ceremony, his presence was not considered shameful but a further endorsement of Nelson's military greatness.
One has ascertained two regularities highly applicable today for bonds. As of 1030. One has 10 observations 100% up to 1300, the other has 10 observations 100% down to 1300. Magnitudes very similar also. Right out of Gilbert and Sullivan.
May 4, 2015 | 1 Comment
What is the real significance of this? Is the sage that clueless that you can't short something riskless and that treasury bonds the second biggest market in world? Or does it relate to waning support for cattle trading?
Buffett Says He'd Short 30-Year Bond If He Had Easy Way to Do It
By Doni Bloomfield (Bloomberg) — Warren Buffett, the billionaire chairman of Berkshire Hathaway Inc., reiterated his belief that it's not worth buying long-term bonds at current interest rates and said he expects the value of the securities to fall. "If I had an easy way, and a non-risk way, of shorting a whole lot of 20- or 30-year bonds, I'd do it," Buffett said Monday on CNBC. "But that's not my game, and it can't be done in the kind of quantity that would make sense for us. But I think that bonds are very overvalued, I'll put it that way."
"If I had an easy way, and a non-risk way, of shorting a whole lot of 20- or 30-year bonds, I'd do it," Buffett said Monday on CNBC. "But that's not my game, and it can't be done in the kind of quantity that would make sense for us. But I think that bonds are very overvalued, I'll put it that way."
One recalls that his track record included some rather gigantic bets made on the long side in treasury strips.
The notion of not being able to figure it out seems clownish.
A few Monday morning thoughts:
1. Next month will be the 11th anniversary of the beginning of the last Fed tightening cycle. That tightening cycle last 24 months and ended in June 2006. So, it has been 9 years since the last fed rate hike to 5.25%. Do you remember the world before Facebook, Twitter, HFT, ETF's, Barack Obama, Windows 7, and a few other things? Do you realize that Steve Jobs unveiled the iphone to the public on January 9, 2007? Is it imaginable that EVERY iPhone in existence has never experienced a Fed rate hike?
Remember: Plus ca change, plus c'est la meme chose.
2. There was an interesting Bloomberg news story for German bond bears over the weekend — and the unintended consequences of negative nominal interest rates. In a nutshell, if you short German bunds, you receive cash (if you are not leveraged). You then must invest the cash in overnight money markets. But, oops, there are negative interest rates in the cash markets too. So you are paying to hold onto the cash. And if you do the trade in the repo market, you still need to post margin in Euros — and that margin gets paid a negative interest rate. All of these moving parts (eventually) get arb-ed out into the derivative markets — for swaps and esoterics wise-guy trades. The bottom line: If you are good, short/intermediate term trader, you can make money trading bonds/bunds/jgb's etc on the short-side; but unless a central bank is tightening, unless there is a sovereign default fear/currency crisis, setting up structural shorts in fixed income is a very difficult game — due to the negative carry that exists despite negative interest rates. This is probably what Buffett means when he says that there is "no easy way" to short long bonds.
Is one that puts the liar in a somewhat but much reduced negative light while hiding the real gravament of major culpability? A good example is Cole Porter saying that he was a member of the French Legion and that the reason that they took him was that they wanted an American to be in it for public relations. But he really wasn't in it at all as he had gone to France to avoid the Draft. And Gross's upside down thing that the secular in stocks and bonds, is over is an example of that perfect lie, although one would guess that he is not aware he is lying and just would not ever say anything good about stocks because that would hurt allocations to his fixed income activities. And he's been calling for the end of the rally in stocks since Dow 1000 or so.
Stefan Jovanovich writes:
"In July of 1917, he set out for Paris and war-engulfed Europe. Paris was a place Cole flourished socially and managed to be in the best of all possible worlds. He lied to the American press about his military involvement and made up stories about working with the French Foreign Legion and the French army. This allowed him to live his days and nights as a wealthy American in Paris, a socialite with climbing status, and still be considered a "war hero" back home, an 'official' story he encouraged throughout the rest of his life."
Draft registration began June 5, 1917.
To justify the enslavement of American citizens, the Supreme Court looked not to the Constitution but to "the law of nations" - i.e. what the Europeans had always done.
1. Are there any idiosyncratic moves for 4 trading day weeks that are not around on other weeks?
2. Hammerstein liked to sit with his back to the audience and listen to the ruffling of programs, and the number of coughs to tell if the audience was responding well to his shows. This is similar to Galton's method of counting the number of fidgets. Are similar indirect measures indicative in market moves?
3. When will someone make a good study of the expected moves of individual stocks when they break through round numbers such as 100?
4. Is one of the major causes of the decline of the Roman Empire the hatred and contumele aimed at the rich and the lack of banking during the centuries surrounding the C. E causing a lack of growth, and the need to extract resources by military conquest and slave labor? The book The Invention of Enterprise by David Landes makes this case.
5. To what extent do Hong Kong, Japan, and the US equity markets move in a feedback relation with each other, and is it predictive for any of them?
6. What does the inordinate rise in us stock/us bond and us stocks/dax in the last several weeks foretoken?
7. One is asked frequently why one doesn't trade the 10 year bond versus the 30 year bond because the former is 15 times as liquid as the latter. One notes that the 30 year had a 6 point range last week, and the 10 year a 1 pt range. Ending up down 1/2 a pt or so. Versus 3.5 pts for the 30 year. The answer is that the rake, the vig, is too high on the 10 year.
8. Everything that should have worked last year in predicting the crude is working this year as is generally the case.
9. Are the equity moves bullish in year 5, and bearish for year 7 predictive in any sense?
10. To what extent will Centrals, and plunge protection teams or their counterparts shield major declines in the market during election years?
Stefan Jovanovich writes:
Quibbles re #4:
We moderns see the fall of the Italian half of the empire as "the decline" because Rome is where the Pope lives; for Gibbon and his readers, the important decline and fall was the loss of the wealth of the East - Egypt and Damascus and Constantinople.
There was no decline in banking around the C.E. That was the period of its tremendous growth, which continued in the East until Gibbon's villain–Christianity–had succeeded in converting the Mediterranean world as a whole into believing that the very notions of profit and interest were sins (of which the Jews were, of course, particularly guilty).
Slavery was always at the root of all economic systems in that world; acquiring slaves was, as they became in the American South, the primary means for an ordinary (sic) person to save and invest. (The first investment a successful free black or Indian made was to acquire his own slaves.) Productive land was already owned by the established families–just as it is in our American West–and you needed a lot of it. That was beyond the means of any "entrepreneur". But slaves could be acquired one at a time; they were fungible and they could be rented out to the landowners as seasonal or long-term workers. ("Rome" (the TV serial drama) gets this right. Vorenus plans to retire from the legion by saving up the rewards from his military service–i.e. the slaves.)
The fiction of an independent libertarian-believing yeomanry of Roman citizens electing a representative government is just that–a fiction. The appeals to the mob began generations before the Republic "fell"; and every successful "middle class" (sic) Roman was a slaveholder.
If one could imagine a band of brothers on the spec-list seeing the coming dynamism of Apple, and investing in it, like the Rothschilds did in Italy and Austria and Germany with the railroads and other industries they financed, and profiting from their close ties with the agrarians and the republicans, and flexions of all kinds, and lending them money personally when they needed it and had to disguise themselves to hide from the authorities, all the while doing this with the utmost of integrity, one would get a picture of the Rothschild's during the 19th century.
Except that they missed out on the US, though the reasons remain controversial.
In reading the book The Rise of the House of Rothschild, by E.C. Corti (which focuses on the Frankfurt, Vienna branches of the family) I was amazed that the business of the continental Rothschilds consisted almost entirely of arranging large state loans. There is never any mention of any financing to the private sector, at least in this book (perhaps due to some bias by the author, I don't know). Even when they make a personal loan, it is always to some prince or prime minister, never to an entrepreneur. In the beginning of course they financed international trade via bills of exchange etc., but in this business they competed against many others and it seems (again according to this book) to have faded in importance as time went on. During the time of the industrial revolution, they seem to have done no industrial financing and not to have participated in the financial innovations (e.g. the large quoted company) of the era.
All hades broke loose in Europe in 1846, and the Rothschilds played the same role, begging favors, and granting pocket money to the politicians, and financing debt that their modern counterpart of faith and Flexionicism played in 2007-2008, albeit none of them officially received a post in the cabinet. However, despite the revolutions in Germany, France, and Italy, the Rothschilds' offer to take down Austrian debt at 4 3/8% was only 1/4 % higher than the going rate prior to the Hades.
It was interesting to learn how openly the Rothschilds influenced the rates with well timed purchases to help their changing political alliances along. Natah proudly told Metternich "I raised the rates very easily yesterday by buying Mettelligique". In those days a rise in the stock market was good for raising confidence and lowering rates.
The general impression from reading the history of the Rothschilds in this period was that their influence was quite similar to their modern counterparts in Treasury but their grand balls and mansions seemed to the observer from the grandstand to be of a much more ostentatious scale. Hopefully, the great historian Stefan will correct and sharpen these observations.
Stefan Jovanovich comments:
There were two differences: (1) the Rothschild brothers had to raise the money they lent and paid for their trades. They could not print it or engage in a perpetual swap of one debt instrument for another. They had to have customers believe in their resources and also have the actual specie reserves to back up that belief. Their personal displays of wealth were important as theater and necessary as investments in private accommodations in an age when important visitors became house guests, not hotel customers. (2) they never indulged in national policy. Being permanent outsiders as Jews allowed them to avoid the corruptions of patriotism. They were accused of being guilty of caring only about self-interest and at the same time trusted because no other interest would supersede. They would act in a way that benefited themselves and their clients but never at the expense of their reputation with others. It is impossible to imagine their advising any of their sovereign clients to choose devaluation at the expense of their trading partners.
David Lillienfeld adds:
The Rothschilds did not earn their money from banking. They worked for sovereigns, too, as when they ran the funds for the British government to Wellington's army in Spain. Supposedly, no one else was willing to do it and the Nathan and company earned a nice fee for their troubles. That was supposedly not an unusual undertaking.
Stefan Jovanovich comments:
Er, not quite. The Rothschilds were merchant bankers; if you can imagine a band of brothers of Larry, Watsurf, the Zachar et. al. dealing in everything from cotton bales to consols, you have a picture of who they were and what they did. They took deposits, underwrote loans and also dealt in used furniture, as the Maturin saga notes.
The story about Wellington's Army has been retailed for over a century; the Sharpe books (and the TV serial made from them) have an episode with Nathan pretending to be a Quaker (or Baptist? this part is entirely from recollection) woman missionary riding in a coach through Spain so he can smuggle a letter of credit to Wellington. It makes - I suppose - good fiction; but absolutely none of it is true.
With Wellington paper would have been more than useless; the French were paying their allies in script. If Wellington and his allies were to win what was the first modern Spanish Civil War, they had to pay in gold. This is where Nathan and his brothers came in; they dealt in bullion. The Rothschilds were sensible enough never to stray very far from their security; Wellington's gold was delivered to John Charles Herries in London. He and the Royal Navy had the responsibility of getting it to Lisbon.
April 20, 2015 | 1 Comment
One of Hammerstein's rules was that the second half of a show must always be half as long as the first half and twice as good. I wonder if this has any significance for markets.
Russ Sears writes:
The dramatic tension of a recession is swift and deep. But the purpose is the opposite: to lose the audience by the ending, yet maintain the drift. Thus, the first part must be twice as good and the shake-down half as bad.
Rocky Humbert writes:
Firstly, without minimizing the contributions of Rogers and Hammerstein, one notes the traditional forms of drama go back to the Greeks (if not earlier), and R&H borrowed heavily from many genre's including classical opera.
Secondly, one should not underestimate the importance of looking beyond one's nose. Reading between the lines. Much like the hidden messages in the Beatle's White Album, one should consider whether there might be more information in the intermission than in the drama.
After all, the drama is staged and repeats at every performance. But what happens in the theatre during each intermission is unique. Or is it?
Working Paper #2015-912A
The Effect of Personal Voiding and Market Liquidity
R.U Clogitzibich PhD I. Suram, MD, MPH Department of Applied Biostatistics University of Antwerp
We establish in this study a network structure of the global plumbing markets and the relationship between sewage flow rates and stock market liquidity using a minimum spanning tree through the correlation matrix. Based on this analysis, it is found that the US stock market forms clusters of liquidity and illiquidity that are statistically significant and which correlates with the peaks and troughs of participant sewer usage. (p=.002).
1. Wait for the assessment of the first half +, -, and by how much. And of course relative to the expectations which could be said to be the open or something like it.
2. If it is strong we pay attention to the intermission for aberrations as rocky somewhat suggested, and make sure to note the location of the theater staff.
3. If all looks good we sneak in for the brief final half
Definitely rings a bell with strategies I have utilized to create less than the usual viewing displeasure. Kind of like how my son skips the first part of star wars and starts in on the final scenes where Luke explodes the death star and then gets the medal Princess Leia. Though sometimes I've found waiting for the very final scene creates its own set of issues that thwart the expected enjoyment.
I wonder if R&H shouldn't be looked at from a willingness to take on risk—and reaping the rewards associated with doing so.
Here is another one that I don't know if Hammerstein utilized or not. Sometimes there is a mini-sequence within the first half itself
-An opening hook to get attention
-ending the first half on a cliff-hanger to get people back after the intermission
Those who like suspense might enjoy sneaking in for the cliff-hanger, for good entertainment per unit of time.
I haven't read the paper that apparently says that trend following at certain times in the past made profits. However, I have read many trend following papers, including one from 5 mathematicians in France that came up with a significant to based on millions of observations. And I pointed out that the funds that follow trend following are tracked by many services and they have inferior performance unless they somehow gravitate into buy and hold in stocks.
The reasons trend following doesn't work are myriad including ever changing cycles transactions costs, and bid asked spreads, the opportunity to game the system against them, and the ease of triggering mechanical rules and the fact that markets are homeostatic, and supply curves change as prices move up or down.
Ed Stewart writes:
In my opinion, part of it is that people who mostly trade their own money look at IRR or "cash on cash" returns, and thus see issues of gains and losses more clearly vs. those who only look at marketing documents and time-based returns of recently hot funds.
Larry Williams writes:
Trend following does not work on just one (or 2, 3, or 4) instrument. Trend followers have to have a large basket of 'bets' on the assumption that someplace in the world a market will trend and that one massive trend—think CL this year and last—pays off the other bets.
It's like betting on all the numbers in Roulette one number pays big odds. Trend followers say they cannot predict which number will show or market will trend, but with enough numbers bet, one will win.
Stefan Martinek writes:
Larry, you make a great point. TF is more risk/exposure management on a basket than trading. Argument that benefits of diversification end after ~20 markets is such a nonsense (my teacher said that too together with other corporate finance theories; they probably never tested anything outside of equities).
Diversification across groups, styles, markets, and time frames improves risk adjusted returns in a long run. Of course in a short run concentration is great - let's bet all on Apple. TF has a nice barrier of entry which is good: First, some money is needed; second, most operators cannot run 2 years without rewards if necessary. They quit. Philosophically it is somewhere between "systematic macro" and "private equity". In PE you expect that most bets will be a crap unless you are in LBOs and other later stage deals. You expect that some areas will be in slumps maybe for years. Patience is such a great thing if one can afford it.
Orson Terrill adds:
Well if I hadn't unnecessarily deleted all of my old code I would just spit out some examples… I wrote several functions that tested trend following, and mostly what was observed was that the number of intervals (days, weeks, whatever) in which a trade would be open generally follows an exponential distribution.
For those that do not know what that implies: Lets say trend "A" has been going for 5 days, the probability that the next day will be the end of trend "A" is roughly the same as if trend "A" were 1 day old, or 20 days old. The next day the probability of "A" ending is generally the same, regardless of its age (like a Poisson process for the arrival of the end). The general notion that longer trends are more, or less likely to end, due to their age, is not backed up.
Just because a run is multiple days old/young does not mean it was profitable. In many markets nearly half of the period's range is traded through during the next period, on average (I think this is true on almost all scales in the EUR/USD, but its been a while). This means getting in on momentum greatly increases the likelihood that a trade is entered at such a point where near term downside is slightly more likely than near term upside (assuming its a long equity position).
There were marginal improvements through adding responses to measures of volatility(mostly changes in absolute ranges), rates of change of price medians from multiple length of time intervals, and most significantly in the general case: reversing intra-trend can garner a couple tenths of 1%. Specifically applying those while using several time series which switch regimes in the sharing of strength of running correlations in percentage changes like SPY, TLT, and GLD, might have some interesting results (I eat what I kill, so I had to leave it there).
April 14, 2015 | Leave a Comment
In the US, coal is on the ropes for several reasons. First, the strong dollar is making exporting coal [and LNG] relatively uneconomic.
Second, coal has become uneconomic. Coal burners are turning to lower-cost natural gas or renewable energy. In fact, no US utility is seriously considering building a new coal-fired power plant. To make matters worse, most utilities who own coal-burning assets are seeking exit plans.
Then, there's this:
The article describes declining mining activity in WVA. They report that 2,596 WVA miners lost their jobs in the first quarter. It should not be a surprise. What they do not say is more jobs will be lost in 2015 as dozens of uneconomic power plants exit from the nation's deregulated power markets.
The article is exaggerating when it suggests the root cause of WVA's mining woes is a federal war on coal. There's no federal war on coal. There is federal [and state] war on carbon.
Just ask the natural gas burners. Ask oil burners. Ask nuclear burners. Ask state regulators. But, don't ask the media. And, for heaven sakes, don't ask a politician.
Victor Niederhoffer asks:
If all this supply is coming off the market, isn't that bullish?
Carder Dimitroff writes:
Interesting question. The answer is not simple.
Coal mining will struggle. Coal transportation will struggle. Gas boilers will struggle. Manufacturers supporting these types of assets will also struggle.
Turbine manufacturers are gaining. General Electric, Siemens and other turbine manufacturers are seeing growth in high technology turbine sales (combined cycle gas turbines). They offer turbines that are 60 percent fuel-efficient (coal burners are approximately 20 to 30 percent fuel-efficient). The combination of high fuel efficiency, low fuel costs and low labor costs offers buyers a significant competitive advantage.
Energy prices are unlikely to improve. Market-clearing prices for wholesale power are challenged as low-cost gas turbines enter the market. Ohio alone expects six new gas turbines (the equivalent of four new nuclear power plants). These turbines will likely lower average market-clearing prices by displacing less competitive sources (coal).
Energy prices are also challenged as renewables and energy efficiency programs take hold and grow. As California demonstrates, it only takes a small amount of renewable energy (or energy efficiency and demand-response) to shave off average market-clearing prices.
Nuclear power is winning on the carbon war argument. The State of Illinois recently passed a carbon bill, which helps existing nuclear power plants (Exelon) and renewable energy sources.
While existing nuclear power is a winner, new nuclear plants are losers. It appears no new nuclear plants will be built for a long, long time. Yes, there are nuclear construction projects underway. Yes, nuclear power displaces carbon and other air pollutants. However, it's not enough. After watching TVA, SCG and SO struggle with spiraling nuclear construction costs, it's unlikely other utilities [or state regulators] will repeat their mistakes. In fact, it appears most other applicants have put their nuclear ambitions on the shelf.
Capacity markets are improving. Old and inefficient plants cannot compete. Some assets are failing to clear auctions. As such, it shouldn't be a surprise that the market's losers are forced into permanent retirement. They can blame the "war on coal" if they want, but it's mostly operating economics that are driving retirement decisions. Those decisions are also capturing other types of plants; not just coal plants.
In the spirit of markets, there appears to be clear winners at the expense of losers.
Stefan Jovanovich writes:
Thanks to another part of my misspent youth, when the U.S. Navy wasted its money teaching me about marine propulsion systems, turbines continue to fascinate me. So, any pretense of knowledge here is restricted to that subject only. The inefficiency of what Carder calls "coal burners" comes from the fuel, not the gas that moves the turbine blades. Steam is actually slighty more efficient than natural gas in its isentropic efficiency because it is easier to capture the residual heat energy from steam after it passes through the first (and second) turbines. (Note: "isentropic efficiency" is the ratio of a turbine's actual power output to those of theoretical turbine with perfect physics with the same inlet conditions and discharge pressures. Or, to put it in engineering speak - actual enthalpy drop divided by the isentropic enthalpy drop).
So, "coal burners" - i.e. plants that burn coal to generate steam - are "inefficient" only because coal has a much lower energy density than other fuels. (This why the British Navy switched from coal to bunker oil; the same ships could go much farther without refueling using the same fuel storage spaces.)
As to how prices for fuels will arbitrage the energy density differentials, beats me; but List members should not take the relative electrical generating efficiency numbers to be a statement about the obsolescence of steam turbines. This is not a repeat of the fate of the railroad steam engine.
The Sound of Their Music, a bio of Rodgers and Hammerstein, by Frederick Nolan, has many layers of interest for the speculator and others, especially considering that Nolan seems to know nothing about the technicalities of music such as harmony or rhythm, and he seems to be uninterested in the personal lives of one of his heroes. Here are some of the interesting layers.
1. It describes the life and career of the greatest musical duo in history
2. It gives a birds eye picture of the evolution and creation of each musical
3. It gives a glimpse of every great popular composer of the 20th century, up to and Lloyd Webber as the duo collaborated with every one of them including Gershwin and Romberg and Sondheim
4. It gives the financial details of raising money in those days for each musical, e.g. 75,000 to put on Oklahoma
5. It provides a great snap shot of what life in the 20th century was like for the middle classes who loved music in the days when there were 150 American piano manufacturers versus 2 or 3 today.
6. It has great pictures of all the stars and directors of the day
7. It contains a great picture of the dynamics of a beautiful 2 person partnership (R and Hammmerstein) and a terrible one (R and Hart)
8. It contains nice details about the significant family events and deaths of each character.
9. It shows by indirection the techniques that built up a billion dollar business in the field masterminded by Rogers.
10. It shows how many musicians including the duo were able to overcome great neurosis and bounce back to do great work.
A great example of boom and bust was between 1924 and 1929 there were 26 new theaters built in NY, and these would house a total of 225 new shows a year. Similarly in 1929, the Hollywood studies produced about 250 talking musicals, but by 1934, hardly none at all and movie theaters would have to place a sign on their marquees: "there is no music in this show".
I was also interested in some of the lessons for speculators and great anecdotes contained. Here are some of my favorites. When the cynical critics came to vet the duo's musicals in tryouts they often said as Mike Todd did about Oklahoma: "no leg, no jokes, no tits, no chance." They said the same thing about The Sound of Music. And Hammerstein in a typical quote (he was a saint) said: "the cynics hate to see a kid playing, a blushing bride, and a happy family."
Oscar's father and grandfather were impresarios in the business, and one of the rules that Hammerstein emphasized was "there is no limit to the number of people who would stay away from a bad show." Rogers said something similar in "the smartest people to judge a musical are the audience". And he was always willing to change a tune or cut if the audience didn't like it.
The musicals all needed road shows and tryouts to become good. They started out 4 1/2 hours long, and they changed enormously by the end based on what the audience and the critics liked. Hammerstein would have been a lawyer and Rogers, an underwear salesman if they had listened to their family and tried to get a steady job as they were urged. Both fathers were absentee fathers who spent little time with their kids as they were too involved in business. Many chance meetings let to the great shows. Hammerstein collaborated with Kern on showboat because they met at a Victor Herbert funeral. Kern was able to convince Ferber to let them use the book because he met her at a how with Woolcott and interrupted his conversation with a pretty lady saying "you have to introduce me to Ferber at the Circle" and Woolcott said "I think that could be arranged. The one you rudely interrupted is she".
After the success of Oklahoma, Hammerstein took out an ad in Variety saying "Here are my recent failures. Very warm for May, ball at the Savoy, three sisters, free for all the gang's all here, east wind, and gentlemen unafraid. I've done it before, and I can do it again". The latter thought is something that all speculators should perhaps plaster to their walls.
David Lillienfeld comments:
It's interesting that it was during the mid 1920s that Park Avenue above 42nd Street took on its current characteristics as a major residential street. By 1928, 10% of all the millionaires in the US had a Park Avenue residence. Emery Roth designed many of those buildings (leading to perhaps the greatest irony in NYC real estate). This was also the time that the Vanderbilt mansions on 5th Avenue began to fall and multistory co-ops replaced them.
That there would a number of musicals appearing on Broadway makes sense given the wealth then accruing in NYC.
What I find curious is that when I think of a movie musical, I think of MGM. MGM practically minted money during the 1930s. Louis B. Mayer was rumored to have a $500K (some suggest it was as high as $1 million) annual salary during the Great Depression. So how is it that there were no musicals made?
April 13, 2015 | Leave a Comment
The rises in Asia and Shell's cash infusion had o go somewhere, and Israel shows it best as always.
By Shoshanna Solomon and Sarmad Khan (Bloomberg)
Israeli stocks are poised for the steepest increase since January 2013 after drugmaker Mylan NV offered to buy Perrigo Co. Shares in Dubai advanced.
The TA-25 Index climbed 2 percent at 11:56 a.m. in Tel Aviv, to a record high of 1,683.26. Global health-care supplier Perrigo, which has the biggest weighting on the index, surged 21 percent to an all-time high of 784.50 shekels. Dubai's DFM General Index rose 1 percent to 3,790.29.
Mylan NV offered to buy Perrigo for $28.9 billion, or $205 a share in cash and stock, according to a statement on Wednesday. The offer represents a premium of about 25 percent over Perrigo's closing price for its U.S.-traded shares on April 7, which rose 18 percent on April 8 and closed at $198.55 on April 10. The Tel-Aviv Stock Exchange was closed April 9 for the Jewish holiday of Passover.
"Today's rally is all about the Perrigo buyout offer," Saar Golan, a trader at Bank of Jerusalem Ltd. in Tel Aviv, said by e-mail. "Mylan's $205 bid is likely not the end of the story as rival bids may appear and Mylan may need to improve its bid."
Before Mylan announced its pursuit of Perrigo Wednesday, it had seemed to be a likely merger partner for Teva Pharmaceutical Industries Ltd. Mylan's offer is raising questions about whether Teva will seek a transaction with either company or look elsewhere. Shares in the Petach Tikva, Israel-based company added 3.9 percent to a record 264 shekels.
I'm holding a snap contest with a $ 1,500 reward. I ran a piece called "What is a Trader" about terrible and typical things in our ken. I'll give a 1500 reward to the best augmentation to this by the end of next week. Award to be determined by open vote. Send your entries to me here on Dailyspeculations or to my twitter @VicNiederhoffer .
A trader at the Grand Bazaar in Istanbul where gold trading has been going continuously for 550 years, amid shouts of 10 whole ones for chocolate tomorrow, a trader in sweats and a wool cap notices my screen, and says "Gold? That's what we love to deal." "Yes," I say, "and stocks and bonds, and oil and grain". "Ah, that's what we love," he says. "Tell us about market trading in the States. What's it like?". I start to tell him but… [where to begin?…]
At 4 am in the morning, a sleepy trader wakes up and finds that prices are climbing. He's short. He looks at the screen and notes they're up 5 points. Thank goodness, he says he saw the price of the stock market on his screen, and it wasn't the bonds he's short… The bond price was a mistake. But then he looks again, and the bonds have risen 6 points. He learns later that day that the minutes of the Open Market Committee were released secretly to 100 politicians and bank officials, on a "need to know" basis and that they were acting on it 10 hours before the release.
The stock market opens down 200 Dow Points, and you buy a line. It quickly goes down another 100 in the first 5 minutes. And you're down a few big. A news flashes across the screen that Janet Yellen just gave a talk to selected Democrats at a closed door meeting, and the market spikes up so you have a 2 tick profit of a grand or two. You quickly get out, thanking your lucky stars that you're not broke, and indeed you have a profit. The market continues to go up, and ends up 400 down on the day, and if you had just held your position you would have been able to retire and pay for the education of all your kids.
You stay at your screen for 48 hours straight, nursing a losing position that's being hammered by instability in Europe. The market is very thin, and you need a big move and big news to get out. Finally after waiting without sleep or food, you go to the refrigerator to get a coffee for 30 seconds, and in that time an announcement that the ECB is stepping in comes out and the market rises to where you would have had a profit, but by the time you get back there's only 2 contracts bid for, and by the time you find enough liquidity to get out, your loss is gigantic.
You're sick in the hospital bed, all wired up with tubes and lines but they're on rollers. A mentor comes from California to visit you to see and comfort the family. You have a big position, and have to trade it. But your ashamed to be looking at at the prices, while he's here to see if you're alive. So you go to the bathroom trailing your lines behind you, and your friend says to your wife, "I guess the kidneys are in desperate shape".
You have a big position in gold, and it's gone against you 100 bucks. You pick up your terminal and you find that Goldman had issued a bearish report on the metal the previous night. Their next report: "As predicted, gold has plummeted to 600. Our prediction was right on target. But we said sell at 800 and it only reached 795 overnight so we missed 5 bucks of the move."
A lot of people have asked me why so many hundreds of thousands trade short term in America. Almost all of them lose. Almost all of them base their trades on mumbo jumbo things that are completely random. The only constant is the vig they pay to the house, which is often 25% of their average gain or loss on the trade. The chances they'll end up a winner is less than the parts in a warehouse spontaneously assembling themselves into a beautiful girl.
I asked an eminent psychologist who has written many books on the market about it. And he said there is a feeling here that no pastime is good unless it causes pain. Most of the traders feel guilt about their childhood, and what horses asses they were and what evil thoughts they had. They wish to atone through trading where the pain of a loss is infinitely greater than the rare occasions that they make a comparable profit. I don't know enough about psychology to know if he's right, but as I suffer through the trading year, and take our small profits on every big move in my favor, but lose it all in the few big moves against, and the little woman says, "when are you going to learn to cut your positions by 90%", I think he may be on to something.
A trader from South Africa comes to your office, and says he's been following your blog for years, and you're the one person in the world that can appreciate his methods. He says he has an IQ of 190 and was on the Olympic handball team. He has the ability to predict the exact range of the day in every market. But his marketing firm won't let him trade unless they execute the trades for him and he wants you to back him. You tell him that being able to predict the range is useless for making profits as far as you're concerned. He leaves the office, curses you out and says he'll be throwing mud on your well deserved and soon to be utilized grave.
A weather forecaster is introduced to you at a party by a friend. He informs you that he's been able to forecast correctly a month in advance the last 7 major droughts in the Midwest. He wants you to subscribe. You ask him why he doesn't just make a killing on these things himself. He informs you he would but he was caught big in one of his forays and lost his stake.
An expansive trader who knows stocks and bonds but knows nothing about the grains decides to take a position in soybeans. He buys a few hundred contracts at the market before the open, and it opens limit up and closes limit down. He finds that he didn't get out before the delivery notice, and his broker informs him that he's now storing 10 big train loads of soybeans in a warehouse at a charge of 10,000 a day + interest.
A trader opens a position in a short put spread selling 20,000 of premium. It goes in his favor for a few days, and it's 15% away from his higher strike price and potential loss. He checks with his broker on the margin and finds that he has 1,000 of premium left but the required margin is 1.5 million. He calls up to find if it's a mistake. "No, that's correct, during the last 3 days before expiration, we assume 10 scenarios, and take the worst which in this case was an immediate 30% decline in price. Furthermore, we're charging you 5,000 a day in Exposure Fees, to compensate for our extra risk. And yes, we just doubled our charges, because we got hit for a 300 big loss on Swiss franc positions, so don't complain."
The lone trader does his analysis and doesn't worry about being taken because he is just one guy trying to make a few trades. And then his setup happens and he takes his position…and the market does exactly the thing that will cause him the biggest loss. How can this be? he thinks. He is just one clown trying to clip a few ticks or points, here and there, not worthy of being a target. But he starts to suspect that maybe he is just one of a thousand clowns, or ten thousand, who are all doing exactly the same analysis at precisely the same time and taking the same positions, which are exploited by a better algo in a co-located box somewhere with huge backing. This "thousandth clown theory" starts to gnaw at him, makes him doubt.
Orson Terrill adds:
An investment bank with operations in Houston hires an MBA from one of the most prominent business schools in California, he's also the son of the CEO of one of the largest banks in Latin America, and surely there will be huge deal flow for them. They put him on with great access and freedom. Instead of putting on a bad trade of several hundred thousand, he's able to executes several hundred million, accidentally, and loses several million in the first day. He ends up being a high paid restaurant manager, for his financial acumen and pedigree, and he sets the place on fire.
Steve Stigler, in discussing regularities relating to the height IQ correlation proposed a rule of his father "the correlation between the intelligence of economics and their height is 0.99 with the exclusion of Milton Friedman and John Galbraith (6'8'')".
Andrew Goodwin writes:
The idea I heard pitched once in Harvard Anthro classes was that it was the body size to cranial capacity ratio that had greater correlation with intelligence. Dolphins are supposed to rank highest in this ratio among the mammals. Dolphins probably have greater intellect than the humans looking at such simple and deterministic measures.
April 7, 2015 | Leave a Comment
The book Fundamentals of Modern Statistical Methods by Rand Wilcox describes many situations where slight departures from normality create large distortions in the usual methods of statistical analysis. It recommends more robust procedures such as using the median, the trimmed median, bootstrap simulation, absolute deviations, running correlations, likelihoods, and something I hadn't seen before, M-estimators, to overcome what seem like trivial departures from normality like mixed normal distributions rather than single such.
The book is self contained and doesn't require a high level of previous mathematical or statistical background. It contains summaries of each chapter in five easy steps. It's a good primer and spark for improved methods of looking at data.
Franklynn Phan writes:
Dear Mr. Niederhoffer,
Thank you again for the "What Is A Trader" challenge. I thoroughly enjoyed reading the varied submissions.
Recently, I was listening to a radio show from the CBC that reminded me of "The Education Of A Speculator". The broadcast (Wire Tap - Forgotten History) describes a Brighton Beach/Coney Island environ as vivid as the one that you describe. I have taken the liberty of attaching a link, not only because I think that you might enjoy it, but also as a thank you for the many eclectic show tune classic that you post (the most recent one being a fav).
(It starts at 3:26)
Victor Niederhoffer replies:
Thanks for those resonant memories. Now I'll tell you one.
Joseph Heller was born in Coney Island and always went to steeplechase where the clown blew up the skirts. You got a 50 ticket card for 25 cents there. As you went through the rides the 50 holes were punched. Joseph couldn't afford the 25 cents but it was no problem. They'd wait for the old men to come out, and then say, "mister can I have your ticket." The old men would give it to him, usually with 40 holes left and the kids could enjoy the rest of steeple chase for free. About 50 years later in '64 right before steeple chase was closing, as a blast, to recap the old, Heller brought Puzo and Mailer to steeplechase. They bought the tickets, but when Puzo when through the roller, he fell, being somewhat rotund (by the way Puzo never met a mafioso but did the whole thing on library research). Okay, the three of them sat on a bench and cursed their agents, and talked about the declining sale of hard back, and the problems with their royalties et al for the rest of the day. As they got up to leave at 4 pm, some kids approached them: " Mr., Can I have your ticket". They looked at their tickets 49 left on each of them.
1. The book Captain Cook by Vanessa Collingridge tells the story of the rise and cannibalization of the greatest explorer in English history, and the discovery of Australia, and the attempt by a nobleman illustrator to take away his renown by showing that a Portuguese actually discovered Australia, and is a great travelogue of an intrepid modern day explorer geographer in Vanessa Collingridge, a cousin, and contains much material of salience for Aubrey lovers, e.g. Joseph Banks the naturalist rode with Cook and had a Maturinesque relation with Cook similar to Maturin's with Aubrey. But for me the highlite of the book was the story of 10 disparate random things, terrible coincidences that led to Cook's death at the hand of the Maori's in Hawaii. First, Cook had to create hostility with random killings by his rebellious officers on the previous visit, then he had to be turned back by icebergs when he left trying to find a northern route bak home, then he had to choose to go bak to the Maoris, then a Maori chief had to steal the tiller and carpenter's tools, then they had to have a miscommunication as they decided to blockade the harbor but Cook went out alone to catch the culprit, then the chief was ready to come aboard as a hostage, but at the last minute the wife intervened to beg him to stay, then one of his officers on the other side of the island had to kill a native, then the marines and Cook failed to watch their back not believing that a deity like Cook could be in danger. All had to happen for the fatal clubbing behind his back to kill Cook. It's like what happens with a bad trade that is not properly thought out that leads to disaster. Brett Steenbarger is rite that a few minutes of delay and thought before pulling the plug can save the Kingdom.
2. The round numbers are becoming particularly attractive all over.
3. The more I study chemistry, the more convinced I am that all the quantum and whole number states and jumps between wavelengths as in climbing up a ladder and angles between the atoms of the molecules have direct and useful implications in our field.
4. LoBagola is living in many markets with moves up and down the ladder occurring with inordinate frequency.
5. The Japanese baseball is a perfect model for how all traders should be prepared in our field, and it would be useful for all to see a Tokyo Giants game. An added bonus is that there are beautiful songs for each player.
6. The books about Rothschild show that he played the same role in financing the railroads at the start of the Industrial Revolution in Europe that the venture capital firms in Silicon Valley play today.
7 The best sushi restaurant in the world is in Awaji Island (outdoor scene restaurant the food ),the shellfish capital of the world. The beauty of eating non-frozen sushi just off the boats, and having abalone in abundance rite out of the shells is unrivaled.The price of a comparable meal in NY at Masa or Nobu would be 10 times as high, and 1/2 as good.
8. I know of many kids of Commodity Traders who are as independent as their fathers and often turn that independence into rebellion
9. Crude oil goes up and down with Mideast hostilities but like all commodity markets ultimately moves as Sushil points out to telescope future supply at lower prices and moves to balance today what future prices will transpire when the supply at current prices is reduced. In other words, the cobweb theorem still holds and trumps Russian and Yemeni and Saudi moves.
10. The elderly agrarian at the Fed seems intent on bulling up the economy when it will help our agrarian counterparts in the legislative branch.
Speed Traders Make Peanuts in Profits From Economic Data Plays - Bloomberg News Item
Excellent academic paper with many fascinating facts, e.g. the human reaction time is 200 ms. vic
Paolo Pezzutti adds:
It is called:
"Do High Frequency Traders Need to be Regulated? Evidence from Algorithmic Trading on Macro News" by Tarun Chordia, T. Clifton Green, and Badrinath Kottimukkalur
http://www.bus.emory.edu/cgreen/docs/Chordia,Green,Kottimukkalur_WP2015.pdf [38 page pdf]
Burgess Humbert comments:
Taking the paper at face value, and Ceteris Paribus, the elimination of excess profit down to a 'utility' rate of return is a natural phenomenon in a field whose technological advance has resembled an arms race of late.
Unfortunately - ( and this does not denigrate the thrust of the paper or its authors ) - a call to ex colleagues in the field just now led to them falling off their chairs laughing at the idea that the marginal returns are ( or are beginning to ) decline.
As to the other part of the paper about the need for regulations etc. Let me answer this way -
Execution via High Frequency execution has both improved and decimated 'liquidity'. ( Here , I refer exclusively to spot FX, commodity futures, long end interest rate futures and stock index futures )
It has improved liquidity for transacting small parcels that are small enough to be executed within the first two levels of the bid/offer depth order book. I find the improvement stunning - particularly FX.
In terms of dealing in size - well, just a year ago, one could call a counterparty and get a stunning bid and or offer in say 75 mio GBP/ USD Spot FX. No more…. a combination of regulatory change and HFT execution has worsened fills by about 0.00015 in this amount. ( please let's not even start with discussion about using market maker provided execution 'algorithms'…. )
A real life example to put some meat on the table ; The last time I sold 50 mio GBP USD the rate going in was 1.4987/89… the following 'fill profile' is typical of a market order of this size nowadays-
Worse case fill at 86 when dealing with senior professionals just a year ago.
There are ways to improve on this, but I wanted to demonstrate how HFT has both improved and decimated liquidity at the same time.
Andrew Goodwin is skeptical:
What is the cost to every resting limit order in every correlated asset? Think of all assets including options, stocks, futures and derivatives or combos. Isn't is a fool's errand to look at profit from S&P 500 futures to generate the conclusion that HFT does not make much money on news breaks?
Burgess Humbert agrees:
Indeed. Let's call it 30 billion a year with a Sharpe of something approaching infinity.
The real problems with HFT are the rules and how they protect the manipulators
See "Direct vs SIP Data Feed" http://www.nanex.net/aqck2/4599.html
Burgess Humbert adds:
There are indeed some very nasty yet very legal order types. The description of some of the orders extends to 20 pages ( yes twenty pages ).
But, there are ways to minimise and work with it some of the time.
I encourage all to regularly read;
One particularly amusing story on that site ( that caused a change in Federal Reserve data release policy !!!!) is called something like '… Einstein and the great Fed robbery …'
Look it up- it will change your world.
Surely a candidate to be made into a film one day.
March 27, 2015 | 2 Comments
Larry is treated as a God in Japan. He started the whole industry of technical trading in Japan and about 1000 of his students were in attendance. He believes in conveying specific tested trades to his audience, and he has many students that he has been teaching for 20 years. One of his students handed me his card, and he was the Richard Branson of Japan owning 15 businesses including one involving the cruise ship outside our hotel . Larry concentrated on specific trades, and I concentrated on principles. We were a great tag team. But we both felt that we didn't get the universal respect we are entitled to. We decided at a great sushi dinner the nite before to rectify the situation. The only way to get universal respect in America, guaranteed fawning from the media is to come out of the closet. So we announced that we were coming out of the closet at our Sunday afternoon presentation, and we were greeted with appropriate plaudits, and Tokyo tv which followed us around and video'd the whole program was suitably appreciative. The highlite of the tirp for Larry and me aside from seeing all his fans was our trip to the Tokyo Giants suggested by Larry. I got there at 3 pm to see the 4 hour warmup. The best part was the 80 year old manager leading his team in calisthenics, all the time berating the laggards for not doing it expeditiously enuf. I used that scenario in my talk about the importance of preparation and wa. vic
The trading contest entries were fantastically good,and I compliment all of the entrants on great ideas and spirit. The Prize was 2250. The winnner is # 59 . The second and third place are 18 and 37. The prize will will be split 1500 to the winner and 400 each to the second and third place. Some of the entries were so good that they deserve to be rewarded . I am just back from Japan but will review all the entries and send canes to a number of the great entries that were not winners. The canes can be used as you know for hobbling down with your overplus to wall street during period of panic. Winners kindly send your address to Lap@mantr.com and a check will be sent. Thanks for your heroic and valuable efforts. Sincerely, Victor
ps. The contest went so well that another contest will shortly be held. vic
One comes back from a trip to Japan with yet another mumbo concept to inspire fear. This one is that 26 days have gone by without the market showing 2 rises in a row. Indeed the last time the S&P 500 went up 2 days in a row was 2 17 when it moved 2076 on 2 12 to 2086 on 2 13 to 2088 on 2 17. This supposedly is bearish showing that the market can't put a sustained rise together. The song "Let's Misbehave" comes to mind. But does it ever occur to anyone to test it? That's what we're here for. "Er, have you tested that" is the motto of some parts of the spec list. Indeed there have been 6 occasions since 2007 when the market went 25 or more days without two consecutive rises. And indeed 5 of 6 of them were up an average of 2%, three days later.
Much more important, the stock bond ratio at 2053 to 164. or 12.45 is at a big, 28 day minimum and what are the alternatives to stocks, for investors, centrals, and pension. Same holds true for Japan and I predicted a new high there 3 to 5 years from now.
One notes the advanced computer technology in all of Japan and one was particularly pleased to buy two tickets on the bullet train to Kobe. And there were 50 sets of 3 seats on the car. The computer left only one vacancy and it was next to us two Gaijin . It was good to see that the computer is programmed to espouse Japanese values. And good to be back.
Just for fun a music video: Let's misbehave .
Anatoly Veltman replies:
The video trumps the test, by far. I thoroughly enjoyed the flick; but the test idea - not nearly as much. The moment I saw 2086 to 2088, I immediately thought to myself: this can't be serious. I've always questioned the idea of day's + or -, which at the same time didn't differentiate between a substantial and a randomly minuscule. So test results and expectations would differ if some day's delta was -2.00 as opposed to +2.00 with the subject value of 2,086.00? Something tells me the idea should be refined before a test. Great to have u back.
March 18, 2015 | 4 Comments
As there have been many excellent contributions to the "What is a Trader" contest recently, we will extend the deadline for votes for the best until Friday, the 20th. We will pay interest and augment the prize to $2,250. Good luck.
Kindly vote for the best entry to "what is a trader" contest. The entries are numbered. Just tell us the number of entry you think is best. We'll announce winners at end of week. I would also say that the entries are well worth reading as they constitute the best writing on what trading is about that I have ever seen. Vic
March 16, 2015 | Leave a Comment
Here is a nice more recent study of life expectancy with statistics on intervention showing a 20% reduction in the hazard rate.
A surprising number of SPU 500 stocks are between 95 and 100 having fallen recently below the round. JNJ, MCD, AON, GPC, GILD, HSY, ITW, NKE, PVH, PEP, PNC, R, SWK, PLC, SBUX, INTU, CME, MCO, MJN, it will be interesting to see how many of them and in what duration climb above 100 and whether this is non-random or not.
Jeff Watson writes:
Corn and beans went through their round. Wheat is hovering above it…for now.— keep looking »
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