I saw a sign reading "abandon all hope" in the SPU on Tuesday and crude yesterday. What other markets leave ye hopeless and without funds before torturing ye by taking a path to all time highs. How can this be quantified.
Vince Fulco writes:
Only caught it on the periphery through news stories (thankfully). Cattle was a house of pain the last 2 weeks.
In Codes of the Underworld: How Criminals Communicate, he mentions that since criminals find it very hard to communicate directly they often take their signals from vivid events and happenings like in The Godfather which is their favorite (by the way, Puzo had never met a gangster and wrote the book completely from transcripts). They adopt the language and the styles and the activities.
The top feeders in our field have a similar problem. They can't communicate their actions directly as they would be front run and also the public would not be able to weaken and succumb to give them good fills. So they wait for vivid events like today to do their stuff, first clearing the action to make sure there are no others around to intercept their messages. The horse's head was yesterday, but today FOMC was the massacre of bears.
Ralph Vince writes:
The best bridge is played before the first trick is.
Orson Terrill comments:
What about the ECB signaling that next year is when they'll stimulate. Was that a "FOMC, we know you're tightening to some degree soon, and this time we want to lag behind in the interest rate cycle, to get a relatively weaker currency"?
December 15, 2014 | Leave a Comment
December 15, 2014 | 1 Comment
In looking for major lessons for a lifetime beyond the day I thought of how the moves in gold and grains up, even bonds preceded the debacle in stocks and oil. I found this version of the predictive power of the quantity theory relatively accessible and also good for separating out the long term and short term properties of the growth of money supply. It could be simplified for reasonable short term predictivity.
December 14, 2014 | 2 Comments
Suppose we consider prices as a building whose purpose is to reach a certain goal as do architects when they are building a skyscraper or some such. What form does the price have to take in order for it to reach its goal? What attributes must it take on the way up, and what backing and filling must it take in order for the building to have a proper stability?
Jonathan Bower writes:
In my early days on the exchange floor I was intrigued by Market Profile (sample) which is the accumulation and "stacking" of ohlc bars. Several companies allowed one to aggregate on different time frames other than the original 30 minutes. While I never became interested in the "analysis" of profiles, I always thought they were useful in viewing the market from another perspective. Maybe it's worth going back and doing some quantifying.
Paolo Pezzutti writes:
One interesting characteristic on the way up is the continued occurrence of false breakouts to the downside on the various time frames as bad news hit the market. Regardless the efforts of the "jinx of the day" prices move down just to hit the tight stops incautiously positioned by traders and regularly move up and squeeze the few shorts left in the market.
One industry analyst with which I had frequent contact (he covered the metals and mining industries) used to assert that whenever a company senior exec is about to retire, you can be pretty sure that his incentive options will be nicely in the money.
Stefan Martinek comments:
Victor, I would argue proper stability is not needed, as those with stability i.e routine retests of previous highs on a break out, are just as susceptible to fail over time as a market which trades parabolic. It is just the problem that these markets, like usdjpy recently, give you few constructed setups re: risk reward–to get on, when they start moving.
Victor Niederhoffer responds:
But this must be quantified, Mr. Martinek. Regrettably Mandelbrot was not able to program or count. See Roberts work on 1950 showing the similarities and impossibility of differentiating all the "scaling" and "regularities among the irregularities" of Mandelbrot and random charts.
Stefan Martinek adds:
From B. Mandelbrots The(Mis)Behavior of Markets:
There are too many very big and very small changes, not enough medium-sized ones. And the changes appear to scale with time: The proportion of bigger to smaller price-moves follows a regular pattern as you look at monthly, weekly, or daily charts. […] The size of the price changes clearly cluster together. Big changes often come together in rapid succession, like a fusillade of cannon fire; then come long stretches of minor changes, like the pop of toy guns. There is scaling here, too: If you zoom in on an individual cluster of big changes, you find it is made up of smaller clusters. Zoom again, and you find even finer clusters. It is a fractal structure. Nor is it just the price changes of interest; at times, the price levels also exhibit some kind of irregular regularity. The charts sometimes rise or fall in long waves, or with small waves superimposed on bigger waves. But none of these phenomena—clusters of volatility, or irregular trends—resemble any of the cycles, waves, or other patterns that characterize those aspects of nature controlled through well-established science.
Craig Mee comments:
"But none of these phenomena—clusters of volatility, or irregular trends—resemble any of the cycles, waves, or other patterns that characterize those aspects of nature controlled through well-established science."
I'm not so sure about that statement. Irregular trends and phenomena = what he discussed = do not resemble other patterns of nature controlled through well established science. Price does not have to equal nature all of the time. Just some of the time. Pick your battle.
An unusual lobogola. Usually the elephants are diffuse as to time but this time, they were like the crocodile. The exact time, and the exact announcement. The all important inventories of natural gas at 1020.
With the price of oil down from 120 a few months ago to 66 today, what do the energy boys on this site think about the prospects for oil and oil industry in the future, near and middle. I am interested in a forecast for the next 3 months particularly.
Gordon Haave writes:
Mine is that oil will continue to collapse. The whole boom was a creation of the commodities index industry and it is starting to unwind and also nobody gives a shit anymore about the Americas and Israel's wars.
Orson Terrill writes:
Sorry about the delay, quite busy, we're planning to take advantage of a slow down.
Saudi Arabia is the Fed in oil. Don't fight them. They said 50% of production in TX would be effected about a month ago. That was a promise not a description. The models I've used suggest we are getting close to that.
It is not far fetched that TX WTI production is showing signs of leveling off in 3 months.
Crude rough models (double entendre) for TX suggest that WTI Production should be down by at least 25% or more in 18 months given current prices, the initial production curves in TX relative to the price of WTI, the decline rate, and the total cost completing a well. I can go back and find the work I did on that, if someone wanted to take my back of envelope work more seriously.
Re-pressurizing presents a threat to that drop in production, but there is some evidence that zipper fracturing is reducing the returns to re-pressurizing wells, which is an expensive process. They can merely stabilize the well, pack up and come back later.
Given that most tools and equipment are leased, the land is leased, the well is drilled by contractors, and it can be done in 30 days…. The short run price elasticity of supply for land based shale plays is very high; they can just send everything and everyone one home, and wait.
The larger companies own rigs; EOG owns about 22 rigs in the Eagle Ford (I use EOG as a yardstick to measure others with).
That is what might catch people by surprise. Just how fast they can and will stop, and how quickly the production comes down to the extremely high decline rates (45%-90% in the first year, roughly 50% in the second, and 30% in the third).
FACT: drilling is slowing down already. FACT: The two merged companies are demanding less of certain services related to drilling. FACT: EOG is one of the, if not the best company in TX at drilling in these complicated shale formations; at these prices many of their wells will not be profitable. I know that is true. FACT: CHK wanted to unwind their aggressive push towards gas under the last CEO, and has been pushing hard in TX for Oil…. The wells they developed in the summer were more expensive than EOG's in the summer. EOG averaging about 6.7 million a well in total cost, it looked like CHK was closer to 8. They need to get initial production rates of twice the average to make sure they are doing better than breaking even. FACT: Saudi Arabia said they believe about 50% of production will be affected by the current price. On Speculation: I advised that was as a promise, not a description of the price at the time… and sure enough OPEC, on Thanksgiving, was not good for TX.
SPEC: I think that its just the beginning for the oil field services companies, because there are some planning and services that go into drilling a well, cementing, fracturing, re-pressurizing, plugging and abandoning.
SPEC: The oil field services that have heavy equipment which is rented out will suffer proportionately.
SPEC: Some E&Ps may generate huge cash flow as they substantially reduces CAPEX on new wells,relative to the next year of flowing oil…
The next meeting of the Junto this Thursday, December 4th, will feature GMU economics professor Donald J. Boudreaux whose blog is CafeHayek.Com. Meeting begins at 7:30pm, main speaker at 8:00pm. It is free and all Dailyspeculations.Com readers are invited. It will be in NYC at the General Society Library, 20 West 44 Street, between 5th and 6th Avenues.
An important connection. Bill Gross, the former Upside Down Man, in his quest to find out the disseminator of the missing emails, his insistence on firing the others, his calling himself Secretariat rather than "The Dalai Lama" or "Eagle" as Foxcatcher insisted on being called. He was called "The Manchurian Candidate" in his own firm. His largesse in sponsoring the trip to Alaska rivals Foxcatcher's in starting the natatorium as well as the wrestling facility. While he shared Foxcatcher's interest in philately, as far as I know he was not interested in conchology. I have Foxcatcher's book on the volutes in my library and share the conchologists interest in classifying and observing them.
December 2, 2014 | 3 Comments
Here's a very educational article on why forecasts based on trend lines are always biased to look disturbing with some nice references, allusions, and diagrams from this list's favorite statistician, (also the namer of this humble old shaver's first child).
Gyve Bones adds:
Trend lines, no matter how they are drawn, whether projecting rays into the future from price extremes, or drawing a least square fit line, or doing a polynomial curve fit line, or a moving average… One simply must understand how the line is calculated and take pains not to delude yourself by drawing a line into the past which contains information which would not have been available at that point in the past. A common way this is done is by drawing a trnedline through two lows, and extending that line leftwards from the first of the two lows. Most charting software does this by default, and it tricks the eye and the mind in a subtle way.
The problem with the original chart Larry posted was not the regression line per se, but in the lane below where an indicator was calculated showing how far above or below the regression line the price is. Here is where the contamination of the analysis happens. The indicator first calculates the regression line for the entire data set from alpha to omega. Then for every time interval between alpha and omega it measures where price is relative to that line and normalizes that value to some scale. then it looks at points in between where there was a high, like 1929 before the crash and says ah, the level of the indicator is 74, so anytime we get to a level of 74 we are in danger of a crash. But that number, 74 has encoded into it knowledge of the future. If one had calculated the same indicator in 1929, it would not have been 74 on that same date. The indicator is time-unstable.
The regression indicator posted in a subsequent post is time stable because it doesn't use information from the future, only information from the last to produce the value. This is a better way of using the tool, according to me.
I don't think we can generalize and say either trend lines are good or trend lines are bad. They can be used well or badly. He key is finding a way that will work logically and reasonably and that works for you. If you can make money using trend lines drawn on charts, then it is a good thing, subjectively. The only thing we can say objectively about the methods is that they can be dangerously deceptive if one doesn't understand how the lines are constructed, and one unconsciously is creating a tool that uses next week's Wall Street Journal as a source. That would be building a foundation for market analysis on sand.
To the extent trendlines are useful the ideas surrounding how to "trade" them can be simplified. For example buying at a trend line support level is just a visual way of buying a dip in a rising market. There are simpler ways without the ambiguity to define this event that will most likely generate more events as well - making the underlying idea easier to evaluate. At the same time if one has evaluated millions of variations of a basic idea that tends to work or have some merit, what is the harm in trading that basic idea off of a visual cue? Perhaps the failure to scale well and movement toward mental laziness.
Sam Marx comments:
This can be said about many TA tools and indicators. For example, you cut a piece of data from alpha to omega, today is omega, calculate a mean and volatility for the sample, and then you may find that volatility at omega is extremely low which can lead to certain things. No one cries that somewhere before omega we measured volatility relative to mean which took into consideration the whole interval alpha-omega. All signals are usually generated for the period omega +1. I think the core weakness of these studies is that we can prove whatever we wish almost regardless of tools by simple selection of look back in these rolling derivatives of price.
In honor of our new spec and Larry, I hypothesize that like Pascal's Law, that a small move in a big market will cause probabilistically, a large move in a smaller market. I'll give 1,000 bucks to the personage that comes up with the best predictive relation on that theme.
Mr. Isomorphisms replies:
I would start looking in smaller markets that are dependent on the larger one. Eg, look at a town where >50% of the workers are employed at one company. The decline of various parts of Detroit's supply chain could fit this story. Or Iceland/Scotland with their large banking sectors relative to within-country wealth.
Steve Ellison writes:
Chair: "I hypothesize that like pascal's law, that a small move in a big market will cause probabilistically, a large move in a smaller market."
Let us first get an idea of which markets are big and small. Glancing at the futures contract listings in the newspaper, here are some rough estimates of open interest:
3-month Eurodollar 10,000,000
S&P 500 e-mini 3,100,000
10-year US Treasury 3,000,000
Crude oil 1,300,000
Next, I would like to introduce the bullwhip effect. Most goods have a "supply chain" that begins with raw materials, progresses to components and finished goods, and may include warehouses and stores. The bullwhip effect posits that, the farther "back" in the supply chain an operation is (farther away from the end customer), the greater the swings in production and inventory will be in response to fluctuations in end customer demand. Here is an article on the subject.
During the dot-com crash in October 2000, stocks briefly rallied on a glowing earnings report by JDS Uniphase. The CNBC screamer correctly noted that JDSU was a component supplier, farther back in the supply chain, and its record sales had probably just bloated the inventories of companies such as Cisco Systems that had already reduced forward guidance.
From this perspective, lumber seems a good candidate for a Pascal's Law study. It is a raw material that must go through additional processing before reaching most customers, and its futures market is very small. The S&P 500 is a large market that theoretically is based on the whole economy and should be more sensitive to final sales.
Using 3 months as a rough rule of thumb for total lead time in a typical supply chain, I compared quarterly net changes in the S&P 500 with net changes one quarter later in the lumber price.
LUMBER S&P 500
Adjusted Net Adjusted Net
Date Close change Date Close change
12/30/11 291.1 12/30/11 1180.75 132.25
03/30/12 283.0 -8.1 03/30/12 1337.50 156.75
06/29/12 294.8 11.8 06/29/12 1297.50 -40.00
09/28/12 311.3 16.5 09/28/12 1382.00 84.50
12/31/12 391.4 80.1 12/31/12 1373.75 -8.25
03/29/13 407.6 16.2 03/28/13 1521.50 147.75
06/28/13 310.2 -97.4 06/28/13 1563.75 42.25
09/30/14 355.7 45.5 09/30/13 1645.50 81.75
12/31/13 365.7 10.0 12/31/13 1818.75 173.25
03/31/14 334.4 -31.3 03/31/14 1849.25 30.50
06/30/14 340.3 5.9 06/30/14 1944.50 95.25
09/30/14 338.0 -2.3 09/30/14 1965.50 21.00
There were only 11 data points since 2012, not enough for significance. In a regression, the t score was -1.55, and the R squared was 0.21.
The quarterly changes in lumber were a little larger in percentage terms (about 8% mean absolute change) than in the S&P 500 (about 6% mean absolute change).
Victor Niederhoffer writes:
Excellent. You win the prize. Everything a report should be. (A little weak on the predictivity but not your fault.) If it was easy, we would all be wealthy men.
A disturbing chart: "This is Probably the Second Worst Time in History to Own Stocks"
Bill Rafter writes:
The trouble with the chart is that the regression fit was done cumulatively, resulting in older data being subject to look-ahead bias. Thus only the current values are useful, and one wonders exactly how useful. As Steve has commented, the way to foil that is to use a moving regression fit in which the values are static over time, always taking the last point in the fit. Thus all data, past and current are relevant and can then be used in statistical studies.
The question that then comes up is which lookback period do you use. Wherever possible all lookback periods should be adaptive, the question then being to what input. In shorter term price data the market will tell you the relevant lookback period. I have never tried determining lookbacks for longer term data because (a) I don't expect to live long enough to take advantage of it, and (b) too many things can happen in the short run to screw up a good plan. Most people don't marry someone in their 20s based on the supposition that (s)he will look good in their 70s.
I also question the use of any equity or debt data prior to 1972. If you don't know why, ask Stefan. **That's one of the great things about the list; there are sources for just about everything.
Several moving functions you should consider:
Moving linear (i.e., regression) fits and their slopes.
Moving parabolic fits and their slopes. Since most economic and price data are parabolic, this is the better of the two. There is also something to be gained in the difference between a parabolic fit and a linear fit. Fitting parabolas is quite tricky, and it took us a while to code it. If you try to do so and want a check on your efforts, try fitting a parabola to a straight line. If the result is ludicrous, try a different method.
Moving correlations are particularly interesting between markets that might be alternatives to one another. Moving correlations between stocks and bonds (levels to levels) are something we have used for years and continue to do so. I thank Gibbons for his comment that Colby & Myers recommended them, as I had not been aware of that. (I'm not a fan of C&M.)
Gyve Bones responds:
Colby and Myers didn't recommend the linear regression study per se… the empirical analysis simply showed that study to perform best with a fixed loopback parameter over NYSE index returns data over a long period of time compared to other trend following signal generators. This book was an early attempt to quantify different approaches to see how they performed trying as best as can be done to compare apples to apples. In the mid-to-late 80s, it was the best thing that had been done like that since Dunn & Hargitt's study using punch card futures data in the late 1960s (which found that the Donchian Four Week system was best, the system which launched a thousand CTA, including the Dennis Turtles and their spawn.) Another similar study was done in the 90s by Jack Schwager and another fellow whose name escapes me at the moment which was well done.
Larry Williams adds:
A question: when was the regression line fit? Today? 20 years ago? 50 years ago? The slope will change based on your starting and end points. How overbought or sold is a function of this. A more careful analysis would either apply this same "method" every year with a set of rules (i.e sell above x% overbought) or would do the same thing on a rolling window basis. It's an interesting chart nonetheless and gives one pause, but I would suggest it lacks a certain amount of rigor.
Gibbons Burke writes:
It seems to me that this is a flawed chart to look at historically to make rules from because the trend line drawn into the past contains information about the future. The line is drawn using the linear regression of the entire data set so, for example, the line segment covering 1998-1999 "knows" about what happened in 2014. Very deceptive and misleading to make a rule based on the relationship of the data to the trend line.
Victor Niederhoffer comments:
The disturbing chart is a case study of why charting is so misleading because of the regression bias and also at the variance of a sum is the sum of the variances.
Steve Ellison says:
Here is the way to solve the problem of the regression line incorporating future data. Attached is a graph of a "moving regression", as Dr. Rafter calls it. For each date, the red point is the last point of a 30-year regression of the S&P 500 as of that date (the graph is from 2010).
December 2, 2014 | Leave a Comment
An all seeing eye could write a novel about what happened today. Some lessons seem to cry out. Buy on the announcement of the bad news. Gold lost the vote in the mountains, and oil lost the OPEC meeting amid talk of 40 buck oil. They both sent up 10% or so from low. The first day of the month is the most bullish day. Great. Too many people know it. Great time to sell when it don't open the right way. Bonds, nas, and dax finally went down after 12 or 13 of the last 15 up. Nothing goes up forever even stocks and bonds. Gold's price up 50 bucks from its overnight low has nothing to do with deflation. It's beautiful, useful, and a hedge against evil. When the battleship is leaking, that's the time to buy. Commodities all around at 5 year low. They're up 3 or 5% today.
What other things do you see that the all seeing eye should note?
The sneak attack has to come at night, on a holiday, when the Americans, and only the Americans, are eating turkey and on holiday, stuck in airports.
Ken Drees comments:
The grains at the end of the summer–indeed.
Gary Rogan writes:
Something needs to be done to avoid the supposed "government shutdown" by Dec. 11. Talking about it could provide some mild market-related entertainment.
Steve Ellison writes:
Silver made both a 20-day low and a 20-day high on Monday. Going back to 2006, I find no previous occurrences of such an event.
Craig Mee comments:
It would appear the commodity turn around was a function of a Friday Monday suicide run created by combined single factors and then astute cover, not by a function of any meaningful low being in and a return to global meaningful growth.
Duncan Coker writes:
March Chicago wheat had a robust move to the upside almost at limit on Monday, which in this case was not mimicked by the other grains, in other words grain spreads got a lot wider.
Jeff Watson comments:
Yesterday, the spread between beans and wheat narrowed, and is still narrowing, while the spread widened with corn. Spreads in wheat stayed pretty much in line. Due to arcane exchange rules for the delivery in grains, there is much gamesmanship in the front month that's ready to expire. The gamesmanship comes from the cash side of the business.
"When all you do is hope for the best, things have a way of turning out for the worst." Greg Satell in Forbes about crazy John du Pont who killed Dave Schultz. The movie Foxcatcher is highly recommended. And the quote is very applicable to those nursing bad positions in markets.
Paolo Pezzutti adds his thoughts:
When you start hoping to get even with a losing trade it is time to close it. It means there is no rationale to keep it open. It is your ego that won't accept defeat and you'll only make things worse keeping the trade going. The problem is that many times hope works and you actually manage to exit your losing trade decently. It is just that one time out of 100 when prices do not come back that they bite your jugular and kill you.
Foxcatcher for me was highly thought provoking and educational on many levels.
1. It records the decadence of one man John Du Pont who was born to wealth, once his interests in ornithology, philately, and conchology receded.
2. It shows once again the violence that people without opposite sex partners are prone to. (apparently he killed Dave as a birthday present to a rival wrestler).
3. It shows the great composure, and consciousness, as Brett would call it, of Dave Schultze who never lost his cool during all his aggressive bouts winning the Olympic gold and world gold while maintaining a truly benevolent attitude towards his life and students.
4. It shows the athleticism and sports genes of a truly great athlete in Mark Schultze who was always in the brother's shadow even though amassing the same golds, and adding an ultimate world to his laurels.
5. Once again the seed of the problem was the the Wrestling association like all official bodies tends to impoverish it's customers while enriching themselves thereby leading to the poverty of Mark that made him bend to the will of a crazy man as the only way to make a living while training to compete with the state sponsored athletes.
6. It reminds me of what the USSRA was like when I was in a similar situation to Mark, the best with no money and the USSRA watching me like a hawk to see that no prize with the rise in the price of gold amounted to more than $150.
7. It shows what good actors can do under the stewardship of a good director, the actors being Steve Carell, Channing Tatum, and Mark Ruffalo. They had to work out strenuously for 7 months to perform all the wrestling scenes in verisimilitude and live action.
8. It shows the subtlety of Bennett Miller who directed Moneyball and is obviously a fellow traveler in leaving the output of the movie to the viewer without knocking him on the head with hateful depictions of the rich, albeit to insure good reviews he had to make Du Pont look like an idiot for his patriotism.
9. It has real wrestlers and real footage to carry the story along.
10. the one thing left out to me was the strange case of why the security head who accompanied John on his fatal shooting didn't try to stop the shooting. Also, why Dave stayed with John for 7 years after the brother was ostracized. The humiliating spectacle of Mark staying on living rent free after being fired but being paid shows how money is so important in shaping a destiny. It's a highly recommended sports film.
Victor Niederhoffer adds:
Here is some good skinny on the deranged man with money who was able to buy the wrestler's loyalty. There are many Jewish proverbs about this: a rich mans jokes are always funny; if you have money, men think you are wise, and handsome and sing like a bird.
Ed Stewart writes:
The idea that the "amateur" restrictions on money making opens a window for freaks and weirdos to get leverage that they don't deserve is a good one. I have though that to some extent the same process occurs in political funding. The amount of leverage that, say, $25m can get is astonishingly out of proportion to what seems logical.
Another thought: can accommodating nutty behaviors or antics actually accelerate or provoke the insanity? I think so, I think I have seen it. And there is a clear line between expressions of individuality and self-destructive antics of a pending madman.
Some behaviors cry out so loudly to be corrected, it is almost as if the person in the downward spiral is dying for someone to set a limit for their antics. If there is no pain or reaction, (the real world) the aberrant behavior grows unchecked. In that sense humoring such a person might ultimately be a very cruel act.
Hernan Avella writes:
One aspect of the movie that is touched only tangentially is the decline of the sport of wrestling. These great athletes compete at the highest levels in their twenties and then it's all over and the best thing they can aspire is to be a coach in a reputable college wrestling program. The final scene shows Mark in a cage fight. He participated in the Ultimate Fighting Championship #6 and won his fight and $50K. Capitalism has open a window for wrestlers to transition into a profitable business or continue their careers through Mixed Martial Arts. It's a truly barbaric sport, but the consumer likes it. I have the utmost respect for cage fighters, who not only have to be highly proficient in wrestling, but also Brazilian jiu jitsu, boxing, Muay Thai, and many more arts. Thanks for the recommendation. Great movie.
There have been big moves, 2.5% or more in a day recently, which at 15 times leverage makes for a reasonable day's work, recently in many markets, Bonds, Nikkei, SPU, European stock markets, Gold, Hang Seng, Oil. Yes, they are cascading because of the potential energy released by the realization that the CB's can buy assets and avoid the 1/10% returns of bills. Where do you see it heading next, and without falling into the t- (hopefully he won't take offense as he threatens so many others for posting negative things about him, as free speech is out of fashion these days), sornettian trap of focusing on only one small part of the distribution of returns), where do you think it will fall next?
I knew Vic for 50 years. He was kind and generous off the court and totally bitter and hostile on the court. We won the National Doubles when he was 49 and me 25 and got to the finals of the NY State Mens Doubles in 1976. The strange thing was that he was better in both sports in doubles than me. He played a very aggressive game, and whenever I missed a shot he'd either throw the racket or glare at me. He was not like that off the court at all.
He invested in some of my first funds and loaned me money when I was a student at Chicago. He painted abstract watercolors that I collected and were published in a beautiful book. He also played a very excellent piano, and sponsored many musical groups.
He played doubles with and against my father in handball. In the 1930s, he won the National Doubles Handball Championship with Mortie Alexander. He continued playing squash well into his 90s, with the stipulation that you had to hit the ball over the service line on his side of the court. He won a highly competitive pro-am at the age of 81.
He met his wife of 70 years, Sono Osato at one of her performances at the Ballet Russe in Chicago. She subsequently starred in the initial production on Broadway of On the Town in the lead role of Lily, Miss Subway. Subsequently she worked out dancing each day with Baryshinikov.
He built some of the first squash clubs in New York, and sponsored the only 4 glass walled doubles court now in Toronto. In business he converted many big office buildings in wall street into condominiums and also developed the World Wide Financial Center, amassing many hundreds of millions of office and residential space.
He was an accomplished architect and designed many of the buildings he developed. He was an ardent supportor or Adlai Stevenson during his presidential race in 1970 as well as other intellectual politicians.
He had 3 sons, all of whom were active in the business. And took great pride in their athletic, business, and literary accomplishments.
Thus, he was an architect, artist, athlete, businessman, husband, father, pianist and philanthropist. He lived a long and fruitful life in full, and I will always cherish our friendship and adventures together.
"Dear, why are you getting up, you've told me a million times that you can't make money over night. Do your patterns show anything?"
"I have a hunch today. The centrals are all going to follow Japan and bull things up. There's much potential energy out there. I have a little position in China."
"How many times have you told me that you won't trade Asia again after what they did to you in (she looks around 3 times), Thailand."
3 hours pass. China lowers its rates. The European, US, and Asian markets have one of the 3 or 4 biggest rises ever.
"Honey, they're way up."
"But they were at a high yesterday. You're not short are you?"
"No, this time is different, they gave us a break for once."
"In that case you should take some chips off the table and send it to me for a rainy day."
"I knew you'd say that Susan. It's going to be a very happy black Friday and Christmas out there. The wealth effect et al".
"From the gleeful tone in your voice, I know that you better call it a day today and take a cold shower. Santa's going to have some black coals for your stocking unless you send that wire to me".
Anatoly Veltman comments:
Should the announcement be viewed as a very temporary factor? Or is it a policy turn?
Jim Sogi writes:
Seems a lot of the action has been happening at night. Not sure if its the Asians, or the Europeans or both pushing things around when things are thin and sleepy. Then the day session comes around and its like molasses sets in or the freeze slowing everything down. I remember some studies Brent and others did a while back that showed most of the market gains came from the overnight session. c-o vs o-c. Recently it seems like there are more violent moves, which are reversed during the day.
Anatoly Veltman writes:
I have one guess to venture. See, preponderance of participation during Asia and Europe is of good old directional nature: only those who are willing to stick their neck out place orders through out those hours. Alas, during the U.S. hours participation is dominated by U.S.-domiciled penny-pinching algos, who remain market-flat.
David Lillienfeld asks:
Naive thought: Could folks in China be using the Shanghai-HK link to buy shares there and then try to sell the corresponding ADRs in the US or Europe?
You have to admire the diplomacy, sagacity, and self interest of the Saudis. All that's missing is that they're trying to increase their profits to "save the environment and prevent climate change".
Saudi Arabia Will Support Stability in Oil Markets: Crown Prince
By Wael Mahdi Nov. 15 (Bloomberg)
– Saudi Arabia will continue its balanced policy and positive role to support stability in international petroleum markets, Crown Prince Salman bin Abdulaziz Al Saud says at G-20 Summit in Brisbane, according to state-run Saudi Press Agency.
* Says Saudi Arabia will take into consideration the interests of producing and consuming nations
* Saudi Arabia invested in spare capacity to support stability in global energy markets therefore supporting global economy growth
* NOTE: Oil-Price Rout Seen Deepening by IEA as Pressure on OPEC Mounts
* NOTE: Saudis Reject Talk of OPEC Market Share War as Crude Tumbles
* NOTE: OPEC Diplomacy Picks Up From Iraq to Libya Amid Oil Plunge
Anatoly Veltman comments:
Anyone privy to a study of how each oil-producing nation has or has not invested in spare capacity in the years of $100 windfall prices? Why windfall? Well, yes, if the world operated decades at $ 20-30, then of course recent decade of $ 70-140 should have been viewed a windfall. I wonder if similar study has been done on gold producers, who until 2000 managed to stay in business at $ 300-400 but then reduced/abandoned their hedging programs as price jumped over $ 500 and all the way to $ 1,900…Silver producers who lived on $ 4-5.50, but didn't all duly appreciate the windfall of $ 18-49…Copper producers, who lived most of their lives below $ 1.00, but then treated $ 3-4 as a new normal.
A Wiswellian proverb: "Unless you are prepared to expect the unexpected, be prepared to expect the unexpected defeat".
As usual the unusual in the market. Every day one tries to find a few instances somewhat similar to the current market activity in the last 5 years. Hardly ever does one expect. The market mistress is infinitely creative. And she never throws you an easy problem—- unless it is to fool you.
Tom Wiswell wrote all his proverbs so that they'd be true in board games, life, and markets. Since the board games are models and teachers about life in many respects, he didn't have to stretch too far, to make the life and markets part work. Here's one:
"If I hadn't gone there", "if I hadn't made that capture," "if I hadn't sacrificed a piece". If it were not for the "ifs", we'd all be champions."
Okay. Here's mine. "If she hadn't spoken at the conference", "If I had woke up 1 hour later", "If my limit had been filled", "if the announcement had come one day earlier", "if it hadn't had the weak close the previous day", "if the auction results had been announced in the morning", "if the margin call had not come", "if my friend hadn't been bearish also", "if the earnings report had been issued before the close", "if the public were not so stupid to think that these ephemeral numbers like consumer confidence and philly fed, had deep significance", "if the Fed governor had spoken up just one hour earlier", "if they only realized that the tapering is deflationary", "if the planes had landed just two hours earlier"… I would be a wealthy maann.
What would you add to that one?
Anatoly Veltman writes:
A revolutionary thought crossed my mind. We entered the new millennium knowing two investments that couldn't go wrong: stocks and real estate. So the Central authorities created conditions for real estate to go wrong by 2007. More recently, the Central authorities had made stocks the only game in town, and made government borrowing so desperately desirable that citizens pay for the privilege of financing the activity. May there be something "unexpected" in the wings for centuries long history of investing?
November 19, 2014 | Leave a Comment
Another source of potential energy in the market one hypothesizes is this. The 3 trillion in the Pimco bond funds… the investors must be totally disgusted with the whole bunch of them. 600 million in bonuses to the upside down man and the former Harvard manager. A plague on both? Why get 2% in bonds when you give a billion to those feuding ducks. How about following the Japanese or the Norwegians and putting that money in ETFs???
November 19, 2014 | Leave a Comment
Some good advice from the President of the Old Duck Hunters Club for duck hunters and traders.
From "A Duck Looks Different to Another Duck" by Robert Ruark:
The rush of the wings was all around me. (Mallards were coming after a day of cold, careful preparation).
"How long before—-" I started to say to the president, and he cut me off.
"Might as well learn not to talk so much in a duck blind" the president said. "Maybe it don't make much difference, but it takes your mind off watching. And four fifths of shooting ducks is watching. Shhh. Sun's beginning to come out a little now. It'll be shooting light in a minute."
How many times does one read about this market or the other entering a "bear market". And how many unfortunates liquidate without impunity based on the terrible words hastening themselves to their underplus.
Anatoly Veltman comments:
This sure is true about selling into profound weakness, like a straight drop of 10% or 20% or 30% or whatever %. But selling into a straight three-fold five-year rise may be justified. Every price will be seen twice (?).
Kora Reddy comments:
Every price will be seen twice (?) -> ain't it applicable only for upside prices in S&P 500 Index, not for the downside prices and/or Japan…
For example, since 1980, on closing basis, the S&P 500 index had hit 599 All Time High's (ATH) out of 8798 trading days. Of those 599 ATHs, 25 ATH closes (including the three readings in this month) were never revisited. The previous ATH breakout, so far, and that was never seen again was on 17th Oct 2013 $SPX close of 1733.15 below the ATH closings that were never seen again…
Date SPX Future Lowest Close
7-Nov-14 2031.92 2038.25
6-Nov-14 2031.21 2031.92
5-Nov-14 2023.57 2031.21
17-Oct-13 1733.15 1741.89
29-Jan-96 624.22 626.65
15-Nov-95 593.96 596.85
12-Sep-95 576.51 576.72
11-Sep-95 573.91 576.51
8-Sep-95 572.68 573.91
7-Sep-95 570.29 572.68
6-Sep-95 570.17 570.29
5-Sep-95 569.17 570.17
16-Jun-95 539.83 542.43
15-Jun-95 537.12 539.83
14-Jun-95 536.47 537.12
13-Jun-95 536.05 536.47
2-May-95 514.86 519.19
27-Apr-95 513.55 514.26
13-Mar-95 490.05 491.88
10-Mar-95 489.57 490.05
24-Nov-92 427.59 429.05
13-Feb-86 217.4 219.76
7-Feb-86 214.56 215.92
22-Jan-85 175.48 176.53
21-Jan-85 175.23 175.48
Bold were just some big rounds. Apart from that, nothing special about them.
There have been so many highways and byways in markets recently as they rushed from official or almost bear markets three weeks ago to staggering new highs with much reversions and opportunities of a lifetime to garner and lose, that one searches for a rudder, a foundation. The best way I know to search for one is to turn to the proverbs of Tom Wiswell in such a situation. Tom prepared a set of 10,000 proverbs, 20 a week for 10 years at his weekly board meeting in my office, and thought that this would make the best of the 23 books he wrote. Tom always wore his thinking cap, and was equally knowledgeable about baseball and the theater as he was at checkers. Not to mix the mundane with the sublime, I will add my thoughts in parentheses after each:
1. The unexamined game: "Little errors left untended ,I've discovered too often have a way of turning into big ones". (Do close out your mistakes rather than hoping them along.)
2. Unity and strength: "It is important to keep your forces together yet flexible, ready to attack or defend as the game develops. Any general will tell you that a divided army is hardly headed for victory. " (Too often we are too expansive in what we put on, especially after a lucky win or two.)
3. The handwriting on the wall: "Often by the time the opening is over, what is going to happen in the ending, is already happening, and cannot be reversed." (A corollary is that he who doesn't hesitate is lost.)
4. Big game: "Remember, when you are out hunting dragons, sometimes the dragon wins." (After those big tremendous declines , beware that a few more mite come.)
5. The Wise Skipper: "Start your game with a plan, but always be ready to change your plan". (Tom approaches the principle of ever changing cycles from a different perspective than Bacon.)
6. Hills and Valleys: "After a winning streak you'll probably lose several games." (This must be tested after rises and declines. But remember the Australian fisherman who never fishes in the same place twice as the crocodile never forgets. Humans are just as smart as crocodiles I think).
Wiswell wrote all his proverbs so that they'd be true in board games, life, and markets . Since the board games are models and teachers about life in many respects, he didn't have to stretch too far, to make the life and markets part work. Here's one:
7. 'If I hadn't gone there,", " if I hadn't made that capture, " if I hadn't sacrificed a piece". "If it were not for the ' ifs', we'd all be champions" (Okay. Here's mine. " If she hadn't spoken at the conference", If I had woke up 1 hour later, "If my limit had been filled"," if the announcement had come one day earlier ", " if it hadn't had the weak close the previous day", "if the auction results had been announced in the morning" , " if the margin call had not come ", "if my friend hadn't been bearish also ", "if the earnings report had been issued before the close", "if the public were not so stupid to think that these ephemeral numbers like consumer confidence and Philly Fed, had deep significance, " if the Fed governor had spoken up just one hour earlier", " if they only realized that the tapering is deflationary, " if the planes had landed just two hours earlier ", … I would be a weaaalthy maaan") (What would you add to that one?)
8. "Unless your are prepared to expect the unexpected, be prepared to expect the unexpected defeat". (As usual the unusual in the market. Every day one tries to find a few instances somewhat similar to the current market activity in the last 5 years. Hardly ever does it do what one expects. The market mistress is infinitely creative. And she never throws you an easy problem, —- unless it is to fool you.)
Lately in the news they like to say that "the market will not stop falling until the last optimist, the last bull, goes belly up". Abelson said that that continuously in his columns for about 50 years. (I don't have the 25,000 columns of his I had to read before writing that he had never been bullish once during the 50 years of his columns before proving that the gist of what I said was true). No one except me would say that the market will not stop its incessant 70,000 fold gain from 1890 until the last short selling fund and chronic bears cries uncle.
Vince Fulco writes:
The canary in the coal mine will be when Elliott Wave folks shutter the shop.
Fred Rickey writes:
50 years of articulate skepticism is worthy of respect! Given the trail of blood from exuberant or reckless bulls exiting the arena of which he wrote, there is a cautionary value to such skepticism. For goodness sakes, the man is dead!
Actually, given the guest columnists and mechanical nature of the columns, if started to wonder, towards the end, if he had become a nom de plume for the editorial board.
Kora Reddy writes:
My blog posts with all sorts of title headings get about 600 page views. The ones with bullish headings get a slightly lower amount of views, around 550. The ones with bearish headings average around 750 or so. I guess Alan Abelson was a smart man (in his defense) to figure this out a long long way's back, and give the readers what they want to read.
The reason the NY sports teams perform so much worse than their inflated salaries would predict is that they suffer from the diffuse and variegated nature of culture in NY, so that other things besides sports can take center stage, the way sports do in smaller cities. All the best soccer teams tend to come from midsized industrial cities where the only activities that holds everyone together is the sports team. And players come there knowing they will be lionized. On another front, the big cities demand high visible stars as an offset to all the other things they can idolize. And the owners have to give the fans what they want by hiring stars in their 30s, in the declining years of their ability, to give the fans a rise, and that decimates their bottom line and ability to field good teams. It's related to a line of studies now being bruited in the academic literature that shows that the size of the chairman's signature in the annual report is inversely related to performance.
Anatoly Veltman writes:
I wonder if the gold market reflected that phenomenon last week. First came the news of record Bank of Russia purchases in September that catapulted them into the world fifth size of ownership among the sovereign Central Banks. The gold market promptly plunged to a new four year low on the news. Then on Friday, their Chair said they might sell some gold to defend the rouble–and the gold market erupted higher to score its best rally of the year.
Strategy: A Smorgasbord
The right strategy must come to mind in the worst scenario – losing, tired, hometown ref, and nowhere else to turn but inside.
1. Always change a losing game; never change a winning game.
2. Always have a plan going into a match, and a backup plan.
3. Always have a surprise to pull out all the stops.
4. Reconnoiter your opponent before the match for his strengths and weaknesses.
5. Have a general strategy against all power players, and another against all control players.
6. Analyze every match – how would you play it differently next time.
7. Keep a log of your strategies, and of the opponents.
8. Always have a customized strategy against each opponent, if possible.
9. Call a timeout whenever you skip two straight shots, or the opponent runs three straight points.
10. Keep a coach in the crowd for a second opinion.
11. Have an offensive second serve, such as the jam or Z.
12. Save your upset serve, for example a crack ace, for game winning points.
13. Have a no-fail strategy that kicks in in the worst case scenario.
14. Define your strengths and weaknesses between tournaments, and drill the latter.
15. Set a goal, and time increments to achieve it.
16. Resist the norm – The way to the top is almost always a way no one else has tried.
17. Don't share your personal original strategies during your competitive career.
18. Find one edge against an opponent, or the field, and repeat it over and over.
19. Make your backhand as strong as your forehand.
20. Know the counters to all your strategies.
21. If an opponent throws something at you during a match that you can't handle, hit the same at him next point to know how to respond.
22. Use a slow game pace against a rabbit, and a fast pace against a sloth.
23. Always volley the ball when possible.
24. Always take the most aggressive shot possible during a rally.
25. Be able to hit five perfect consecutive ceiling balls as a fallback.
26. Match your physical attributes with your strategies, for example condition, age, grace. Elephant tusks cannot grow out of a dog's mouth.
27. Pick an overall strategy that is fun to play.
28. Strategy evolves on the sweaty hardwood, not in ivory towers, so think as you play practice matches.
29. Agree with your practice partner to pause after each game to dissect each other's play.
30. Ask every instructor or pro you meet for his best secret strategy.
31. Ask better players to critique your strategies.
32. The best place to glean strategic tidbits is by watching good players, or at a pro stop.
33. Unclutter the Clutter. Stop the mechanism. Have a sure-fire mantra or method to calm down instantly.
34. Develop a 'Muehleisen's Rheostat' at will of being able to crank up or down your intensity of play by 10%.
35. Fight first and save thoughts of victory for later.
36. The highest form of generalship is to conquer the gamesman by a stratagem.
37. At the beginner level a defensive strategy wins, but at an advanced level the most offensive strategy always wins.
38. Have one strategy for a slow ball and another for a fast ball.
39. The best general strategy is serve and shoot.
40. Go to the ceiling if the rival runs a string of points.
41. Go for the jugular with aces and cracks when you have momentum.
42. The shot to practice the most is the kill, because it's the only stepping stone.
43. The serve to practice the most is the drive, as it's the most forceful in an aggressive game.
44. Save your best strategy for the ripest time - pick the flower when it is ready to be picked.
45. When you go up to the mountain often, you will eventually encounter the tiger, so be ready.
46. During a reconnoiter find a tiny edge. A tiny is the best soldier that quickly becomes an army.
47. Strategy is about setting yourself apart from the competition: it's a matter of being different at what you do.
48. Always have a backup service strategy.
49. The greatest tactic is to be able to execute at the worst times.
50. To win by strategy is no less the role of a general.
51. Practice the weakest link in the chain of each of your last performances.
52. Have a short term goal and a long term goal at all times.
53. Use glass to your advantage with serves and shot selection.
54. Shot selection is the most common trait of a win, and flaw of a lose.
55. Have pre-designed strategies for every game style.
56. The greatest strategy is to commit no mental or physical errors in a match.
57. If you're losing a match, is it because your strategy is failing or because of faulty execution of strategy?
58. Use a new strategy a hundred times in practice before taking it to a tournament.
59. When in doubt grab the bull by the horns.
60. Nothing is more beautiful in sport than a well-conceived plan that's executed flawlessly against a superior opponent for a win.
61. Study strategy over the years to achieve the spirit of the warrior.
Victor Niederhoffer writes:
Good for any activity one thinks.
In thinking about the fantastic rises from the dead of gold, crude, and bonds last week, one hypothesizes that the time things are most bullish is when it takes the most courage to go against the tide. For example, before the employment number, especially after 4 standard deviation declines in such markets before recent vivid events like last Friday.
November 4, 2014 | 1 Comment
A most compelling talking of one's book, by a collectivist.
By Mary Childs Nov. 3 (Bloomberg) — Bill Gross, in his second investment outlook since joining Janus Capital Group Inc., said deflation is a "growing possibility" as governments worldwide are struggling to create inflation and stimulate growth. Central banks around the world have made "a damn fine attempt" at fueling inflation, yet their efforts have pushed up financial assets, rather than prices in the real economy, Gross wrote in his outlook titled "The Trouble with Porosity"…
Gary Rogan writes:
"Balanced budgets are increasingly in vogue". What universe is he living in? And has anyone ever explained to him that when you have deflation you gain wealth without earning a dime?
November 3, 2014 | 1 Comment
Here are some lessons learned from the last week (2014/10/24 to 2014/10/31):
1. Potential energy is very great for a rise in stocks. Any big central bank, any big pension fund, any big asset allocator can raise the proportion of its mix of bonds and stocks by a little, and the market can jump 3 or 5% just on the thought.
2. It's easier for a market to go up 10% from a low, then to go down 10% from a high. And improvements and much more likely than falls.
3. All my people know how to make money after the market is going down, but none of them know how to make money after the market has gone up. It's just as bullish after the latter as the former.
4. The worse the news, the better it is for the market as weak hands have got out.
5. When you are way down on a position and it goes to a point of manageable loss or worse yet break even, it's a great time to double up rather than get out.
6. Markets like to go to a round number. Crude broke 80 and gold broke 1200. And SPU broke 2,000 among others. The rub is what will they do when they get to the construals. In two cases they broke right through, in the crude case, they went right back up.
7. If you put in positions of size over night, you are a goner. Either you'll make a small profit, or you'll be wiped out, so you have to stay awake the whole time, for 24-7 which is impossible.
8. When the market refuses to hit your limit for a very long time but touches it the way my bond positions from the long side did often last week, prepare for a big loss.
9. The ratio of stocks to bonds is bounded on one side but not on the other.
10. The unexplained strength in the market on Thursday, was a precurse to Japanese activity on Friday.
11. After a streak of wins you are likely to lose if you try the same thing over and over again.
12. Having positions in many different markets is very dangerous as they all can go against you, especially temporarily in an effort to force you into oblivion. The markets often have a theme and if you play the theme in many different markets, they'll kill you in an ensemble when they go against.
13. The gold bulls, the doomsday crowd, with all their bravado is more pusillanimous then a mouse as witness a 6% decline in gold in a week.
14. Ephemeral things like protests in Hong Kong are opportunities to buy.
15. The favorite thing for market commentators to do before an election is to say that the market does better when the agrarian reformers win rather than the enterprises. Yes, that's true, when an agrarian is going to win, the market will go down 10% in the weeks before, and when an enterpriser is going to win, it will go up 10% in the weeks before.
Great points Victor, maybe add:
Have something in your arsenal for markets that are trading not in your preferred setup mode, (mean reversal, say, or breakout) but are exactly where your fundamental bias lies. A good example this week was dollar yen for me after FOMC. It was effectively the strongest recent currency against the weakest but nothing was done on the long side here as my trading tool arsenal was too rigid and zero opportunity presented itself. The rocket took off and the trail is still burning.
Gary Rogan writes:
Up until about 2009 I have been a great stock picker, but since then my record has not been too good. But my mental commitment to never sell other than to balance the gains imposed on me by buyouts has been a pretty good strategy. Most of the winners from way back when are still with me and they don't know any better, they just keep rising. Unless Alan Abelson is proven right posthumously I expect the latter to continue.
The rises in markets last week, bringing many of them to within 2% of their all time high, has left the pessimists wringing their hands in disbelief saying that nothing has changed from the Corrections of the previous week. Of course, aside from shaking the weak out of their positions, the Corrections with such reasons as the beheadings, the viruses, the Rooshans, all with the stock markets at their lowest level to bonds in 2 years, nothing did change. That's the point. However, we need a new word for the almost 10% rises that many of these markets have achieved to counter and symmetrize with the word Correction. I would suggest as a starter the word Improvement or Elevation, or Enhancement.
After an overdue "Correction" to overbought conditions, the market has undergone during the last week, a "Re-engagement"– advancing it close to its previous position in price. In other news…
Alston Mabry writes:
You had a Drop, followed by a Pop. They ran all the Stops.
So if the real purpose of the market is to transfer wealth from those who use stops to those who don't, why are stops still popular?
Ed Stewart writes:
I don't think it has to technically be the use of stop orders, it is more the movement of prices to remove potential energy - forcing the weak side of the market out of the position, maximizing volume and order flow - If I recall a dynamic described very well in Practical Speculations in the chapter that wrote about potential energy.
However the technical use of stop orders is very important too. It allows the system to offer 20-1 or more leverage while minimizing the risk to brokers and clearing firms. The high leverage plus stops minimizes the number of says it takes the average customer's account to end up as part of the brokers revenue statement and other various transaction fees. The last thing a broker wants is a customer who takes a few all or nothing fliers, as it generates limited revenue and maximizes their risk.
I did think of a few names for the type of "rise" the market has had from the low point but they were a bit… inappropriate for mixed company.
A good offensive player will always drive to his opponents weakness, and cheat to his strength on defense. the peremptory strength of the bull is often underestimated. given the inherent drift, inflation, and the asymmetric buying power, one should should always play for that tendency.
Jim Sogi writes:
It is as if the market came back from the dead..so in honor of Halloween, how about calling it reincarnation, or zombie mash, or thriller. Like a zombie, even though dead, still has a lot of big moves.
That's it. Resuscitation. It's the literal meaning of the Japanese kanji of my name as well…resuscitated tree.
Steve Ellison writes:
There is a premise in the use of this term that the "correct" price is lower, a premise that has been proven false most of the time in history. Why should the move back up not also be a correction, more likely to be "correct" than the move down?
October 30, 2014 | Leave a Comment
The best obituary I've read recently was of Kerry Packer the Australian news magnate and consummate gambler, who makes the sage and the palindrome look like angels, whose private plane was purposely grounded with "mechanical failure" for two hours after he won 10 big at bacarat, with Wynn knowing that Kerry would rush back to the casino to play some more and lose the 10 in the two hours et al.
Kerry was downed in a polo game and was clinically dead for 8 minutes, and revived. When he woke up he said, "the one thing I can tell you for sure is there is no Devil below".
October 30, 2014 | Leave a Comment
One notes the consumer confidence was 94.5% with an October 15th cutoff date by Nielsen. Usually it's 100% correlated with the stock market. One would hypothesize that they use questionnaires and that the real date of response was October 8 when it was at a maximorum. For some reason the number was very bearish for bonds– for a second or two. Another example of an ephemeral number leading to non-skillful or noise traders contributing to the firmament.
"For others who did make it to the major leagues it took 5 and even 10 years longer to grow to the necessary maturity and capability. That was what the industrial and minor leagues were for; it is what college baseball now does."
George Brett, who is in the Baseball Hall of Fame and owns the highest season batting average in post WW-II baseball, has a career batting average of .305. He ranks 16th among baseball players of all time in career hits.
But, in his four years in the minor leagues, he never once hit above .300.
He needed the time to grow up to become great.
P.S. I still want the Giants to win (once a Giants fan, always) but I do love the Kansas City team; I hope it goes 7 and Tim Hudson gets his ring before he retires.
Victor Niederhoffer writes:
Are there any companies like that which become good buys after 5 years of mediocrity?
Gary Rogan writes:
It's rare, but if it does happen it's only when there is a new CEO. Analogous change doesn't seem possible with individual human beings.
The difficulty of describing the barks of trees with their fissures, geophysical orientation, (long versus lat), smoothness, spacing, strength, age, et al— experts agree that a new language to describe bark is in order.
Such a language should be used to describe market charts. The observation was inspired by a visit to the Bronx Botanical Gardens Friday with Dick Button, John Floyd, Ken Roman, and the collab. It was inspiring to see the fall plumage, and the naked parts of the trees, and the open and knowledgeable personas of the various experts that guided our tours. One always feels that a new look at one's mojo is appropriate after a walk in the woods, especially after a visit to the 125 year old native forest, now restored. Highly recommended.
One notes that Lloyds bank is 25% owned by the English as is Royal Bank of Scotland. And one wonders if government owned companies in general including AIG and GM and so many of the US banks, perform better than counterparts considering they have unlimited funding, they have the government put not to go bankrupt, and presumably would be the source of flexionic emoluments. One believes its worth a study.
Mr. Isomorphisms writes:
It was seen in 2008 that banks need not be state-owned to benefit from the government put.
Victor Niederhoffer writes:
It would be seen that whatever anti says would be very sententious as he manages 1.5 trillion or so in Norwegian. His book is a good compendium of research by others. We can't figure out here if he says that bond futures have a drift or not because of liquidity preference. But its impossible to dispute the Dimson stuff that stocks return about 6 percentage per year higher than bonds. That can add up over 100 years.
Richard Owen writes:
Did someone at the Norges Bank fund publish a Dimson-type book (favouring bonds)? The Norweigian surplus seems to be invested in a fairly Dimsonian manner.
While it may appear that they have an unfair advantage, one must consider that Government subsidy cannot outpace the real economy forever without a collapse of the Government or the subsidized. It does not matter if the subsidy is direct or indirect off the backs of profitable real producers by changing the channels of money flow from real producers to the TBTF banks. Otherwise government TBTF banks would own everything. As the flexions get this status by already being big enough to crush the economy by their collapse. One wonders how many years such unfair advantage can continue.
While I would agree a study on those with NEW quasi government guarantees are in order.
I would argue that in the Dimson long run one must consider the following end scenarios:
1. Banks become so regulated that they are like utilities. That is they cannot fail, but they are only allowed to grew based on the "demand" for money. like Utilities grow with the demand for them.
2. Banks truly do rule the government, and they growth continues unabated and out paces the economy until there is revolution.
3. The Government tires of extortion and decides to break them up or kicks in their going out of business plan by charging them with crimes the banks deserved or railroaded.
I would not bet on the bread and circus acts for the TBTF banks to continue forever, as this is a bet against the USA.
My friend Laszlo Birinyi becomes a friend of The Upside Down Man by writing that "some people believe that stocks beat bonds. They don't" and that's not how he became the wall street wizard beating everyone else 5 to 1 by following money flows. Well, everyone has a chink in the armour and hopefully he will read The Triumph of the Optimists by Dimson, Marsh and Staunton, by far the best research on returns ever made.
The wrongness of the sage's idea that you can just buy a company, a brand, and keep it forever is shown by these examples. A study in Soccernomics shows that of the 50 biggest companies in 1970 or some such, almost half of them were no longer in existence by 2010. Of course all these studies fail to consider being acquired. But the return of these 50 biggest companies have to be tremendously lower than the average. Mr. Jovanovich has the one major secret to the Sage's high returns, and it has to do with a service strategy that I don't understand. But next to the service strategy, and the affair with the owner of the paper, he is the consummate mooch always creating the public face of saying that everyone else should give more to the government, and service payments from everyone else should be higher, thereby defusing attention from all the handouts he gets from the government for being the public face of the idea that has the world in its grip, i.e. sacrifice is what we were all born for.
Ed Stewart writes:
All of Buffetts's cash cows that have stumbled are big on buyback plans, particularly IBM. With interest rates so low the share buyback plans seems like a no-brainer. The problem is competition. A relatively free market does not want to allow competitors to have copious cash flow and return on investment. Right when these companies think it is time to "milk the cow" the reality is it might be time to reinvent the business model. I have read for example, that Kodak was very good with its alternative investments while its cash cow was killed by the market. The extreme buyback formula might work best in highly regulated industries where competition is restricted.
Rocky's Heir writes:
The title of Mr. Niederhoffer’s piece is “The Wrongness” but this noun could better be applied to Mr. Niederhoffer’s characterization that Mr. Buffett keeps his investments “forever.”
Admittedly, Mr. Buffett’s stated favorite holding period is “forever.” One can demonstrate that this is the analytically optimal strategy for both deferring capital gains taxes and harvesting the implicit call option in all companies that grow earnings at a faster rate than the index. However, there are numerous examples of Mr. Buffett and Berkshire Hathaway selling the stocks of companies whose characteristics, he believes have deteriorated. The current headline example is Tesco, which he acknowledges as a huge mistake http://www.cnbc.com/id/102092816 . Less recently, he substantially reduced his position in Moody’s (MCO) after the financial crisis, which in hindsight was a mistake, since Moody’s stock is now trading at an all-time high. Whether IBM joins the list of his winners or losers remains to be seen, but if it turns out to be the latter, then expect Mr. Buffett to eventually sell, harvest the capital loss, and not ride the stock to zero.
Notably also, during 2014, BRK sold holdings in NOV, PSX, DTV, LMCA, COP, GHC, STRZA — although these were comparatively small holdings.
If one finds the methodology of Soccernomics to be laudable, then the same analytical rigor should be used to examine the portfolio strategies of someone who will surely be remembered as among the greatest stock investors of the past 100 years. Confusing political biases with incorrect generalizations is just plain “wrong”.
Stefan Jovanovich adds:
There are 3 events in American financial history that changed everything that went before them: (1) the Constitutional Amendment that enabled both Federal and State income taxes, (2) the rise of 50%+ estate taxation on great wealth, and (3) the abandonment of the gold standard. It is no coincidence that all 3 came in the same decade - the 1910s - that also brought government absolutism (of course, we can conscript you into the Army even though the Declaration of Independence promises "life" and "liberty"). The Oregano has been the master of working all 3 of the wrinkles and the government absolutism that came with them (of course ownership of liability insurance should be compulsory).
His avoidance of paying dividends is a direct lift from Henry Singleton. It is now obvious but in the 1950s it was not; if you pay out cash under (1), it gets taxed twice at the highest possible rates when the same flow could be taxed only once. The reason the Oregano's pilot fish (mixed vegetable/aquatic metaphor) is so consistently dismissive of HS is that it pains him that they had to copy the idea from someone.
His acquisitions of private companies - Marmon being the latest American example - are all enabled by (2). Since he works the tax system and knows it in a way that is absolutely foreign to CEOs, he is the acquirer of choice for any holders like the Pritzkers who are facing enormous potential tax bills if the sale is "normally" structured.
The "moat" around his successful companies - Coke, insurance - is the one built by (3); in an age of steady inflation unmoderated by any shortages of legal tender - prices can be ratcheted above costs for generations.
There is a fourth advantage that BH has for which I think the Oregano himself deserves the credit; he figured out how, as Ed Stewart and the paper he cited both note, insurance companies can provide an investment leverage that is "safe" from any call risk. In this area other people copied him - specifically, John Templeton and the Lazard folks with their bets on Japanese insurance companies in the late 50s, early 60
It was only 17 months ago when Alan Abelson passed away on May 09 and moved to bear heaven after writing his "Heard on the Street" column for 53 years, during which after reading every one of his columns the collab and I concluded that he had not once been bullish. After the October 19th, 1987 crash, for example, he concluded that with the Dow at 2000 that the decline of 25% was just a (hopeful) start.
I stand by the comments made in Practical Speculation that he did more harm than anyone else in the history of markets by his consistently bearish views while the average stock rose some 15 fold. He was so persuasive and so many followed his bearish views and stayed out of stocks because of them. Thereby decimating the alternative path of their wealth. Furthermore, to add insult to injury he was much too gallant with the collab when she interviewed him in 1999, a predilection which one is told was not limited to attractive former Bloomberg stock market columnist heads.
Since he passed away, there has not been much that he would have enjoyed until this week. As the Dow has advanced fairly steadily from 15000 to 17200 in a typical 10% a year rise. However, almost a correct of 9.5% from high to low occurred this week, and if the Good One could arrange it, the wordful commentator would have been dancing on his grave.
However, I was pleased to see that his spirit lives on in Barrons with some very sonorous and seemingly sagacious commentary in the 10- 20-2014 issue of Barrons. Randall W. Forsyth refers to the Fed "running out of basis points". You see "so called quantitative easing seemed spent… Leveraged speculators, hedge funds as they are called in polite company were hemorrhaging losses on bad bets… that was the setup for nothing short of a paroxysms on Wed morning in the treasury market… in a manner reminiscent of the infamous flash crash of May, 2010… the collapse in bond yields far from being a rally had all the earmarks of a panic - in the opposite direction. Two presidents of Fed banks, from cities on opposite sides of baseball's national league championship series said the Fed might reduce the timing of tightening. A 'bullard bounce' ensued. The new media seems to have adopted the motto of never letting the facts getting in the way of a good story at least in the reporting of Ebola: 'the backdrop remains geopolitical and epidemiological' ".
In other columns Kim Forrest opines "the market is getting to be like a daily soap opera" as Vito Racanelli quotes in The Trader. "It was a low but I'm not sure that it was the low," Forrest says. Other articles pointed to $75 oil and in Market Watch, the lead advisory opinion noted the correctness of previous bearish forecasts and the similarity to the 1997 action. With a Dow 1738 low being a logical target.
There is much of interest in Barrons and they had many articles pointing to bargains galore among the hard hit stocks. However, whenever the market suffers a near Correction (down 9.5% from a high), we must remember the futile efforts of the former wordsmith Alan Abelson who never bought individual stocks, and think how happy he would be with the decline, and how he would remind readers of how happy he has been with his previous and undiminished bearishness.
Anatoly Veltman writes:
Has a study ever been performed on the extent to which his multi-decade biz had proven profitable? If his biz results proved consistent (over a very lengthy period, spanning changing regimes no less), would that of itself be fruit for thought?
Even though one hardly listens to brokers, mine predicted this move beautifully. The market will do what it takes to hurt most. It will get the weak hands to sell in panic and won't let those waiting on the sidelines participate in the bull market. How will the market achieve this? It will go down hard few days in a row, flushing the weak hands out. Those waiting on the sidelines have their bids at 10% off the highs. The market will go down just short of the 10% and will move right back up. The weak hands are out and the sideline wise asses won't get a chance to jump in. By the way, Mr. Saad, did you notice that the best performing account you have is the margin account you forgot all about over the last 6 years. Think about that for a second…
Steve Ellison writes:
One suspects many permabears have successful advisory businesses because they satisfy some deeper longing in their clients than to invest profitably.
It would be good to have the distribution of swings up and down after moves of x % from a "previous" low or high in markets the same way they now do in rebounds in basketball.
Ed Stewart writes:
One thing I wonder about measuring swings is if static points in time (such as the close x days later) are best to measure swings. Measuring static points seem to miss allot of the intra-period variability that might be useful to know about and understand. I sometimes look at the expected value to a point and then the max and min excursion within the period. I'm wondering what better ways there might be to measure a swing that takes into account the variability within the measurement period.
October 20, 2014 | 1 Comment
Up in the Pantheon of the top 10 pillars who have done the most harm to the wealth of the average person would be Shiller with his average of the p/e of the last 10 years as a predictor of excess. That would be bearish theoretically and empirically about 60% of the time, and would have led to being short during the 1960s and the 80s. Almost as bad is the Tobin q who should be perhaps number 3 in the Pantheon of evil influences on wealth.
One read the biography Caesar by Christian Meir and finds many parallels between the breakdown of the social, political, and economic order in his time and the attempt of the great man to arrest it, which led to his assassination, and our current day break down.
One thing I had never seen before was the fact that "why is it always romance?". Brutus was the key link to the go ahead for the assassination plot. His mother was Caesar's favorite mistress. And it was said that Caesar was Brutus's uncle. She must have been very jealous of Caesar's plan to go to Egypt with Cleopatra et al.
One of my favorite analyses by Meir with relevance to markets is: "When Caesar declared the the republic was lost it was still in existence. When Augustus said it was restored it had come to an end. Yet it is typical of periods of decline that nothing is so predictable as the paradoxical: at such times one must expect the unexpected".
October 20, 2014 | 1 Comment
I've got to give the Fed kudos (even though I'm not a fan of the tactics). But it should be said that the reasons for the panics were even more ephemeral and contrived.
A whole lot of panic cessation with a few choice words and that's all they were. Good weekend all.
Vince Fulco writes:
Very true, a nefarious thought popped in to my head mid-week that the street would enjoy an injection of supercharged vol just to shake up the players a bit before year's end. Supporting it was a friend at Merrill who indicated the firm widely disseminated a piece on global pandemics two weeks prior. Always plenty of conspiracies on the street of dreams.
We entered a "correction" in Nasdaq: down 10.3 % from high at yesterday's low of 3691. What a great opportunity!
October 16, 2014 | 2 Comments
Soccer is the biggest entertainment sector dwarfing US movies and football by 2 or 3 to 1 and is diffusing to all parts of the world. The average fan spend a few cents in China versus $30 bucks per capita in Singapore so there is much room for growth. While I loathe the game, because of its emphasis on heading as a key to victory, and its low scoring nature, I thought that as the world's most popular sport, I should learn something about it.
An ideal first introduction to it is the book Soccernomics by Simon Kuper and Stefan Szymansky. They apply regression analysis and game theory to analyzing all the nitty gritty of the game, its customers, its coaches, and its starts. It's a Freakonomics for soccer and has many valuable lessons for all market and sports people.
The authors are a soccer writer and an award winning soccer writer and economist. They cover such topics as the mistakes owners make in buying players, the irrational preference for Brazilians and blonds, why big city teams never win, why certain coaches are great, why England can never expect to win world championships. The book is suffused with the kind of thing we are used to from sabermetrics with every aspect of the game of soccer from the length of the pass, the amount of dribbling, to the proclivities on height and width of penalty kicks, the geometric formations that players gravitate to (the triangle is key), to the positions on defense and offense when ahead.
Central to their analysis is a theory of networks where they claim that Western Europe's emphasis on passing, originally developed in the Netherlands has diffused to all other countries . They apply a type of network analysis where they believe that the central nodes of knowledge, those with the most potential branches as arising from the trunk of a tree are most likely to spread and create benefits. Three coaches, John Cruijff, and Josep Guardiola and Arsene Wenger, have been key to the development of quantitative analysis of the right way to play winning soccer.
The book has many economic and sociological asides to explain things such as the rate of suicide, amount of soccer fans, the happiness of countries based on winning and the prevalence of teams, and the mobility of businesses. They claim that soccer is the worst business in the world, run by the worst businessmen. However, now that the revenues of 28 billion are 5 times what they were 7 or 10 years ago, the businessmen, who have a long term horizon, involving wealth as well as income may not be as foolish in their day to day decision making as the authors believe.
The book's major defect is that it assumes you know much more about soccer than the layman might know. Perhaps I am the only person that doesn't know the scoring and results and makeup of the leagues that they write about, but time and time again I found myself completely bewildered by the mechanics of the control of the game by the various associations, and who the players were that every soccer fan hailed as heroes or villains. Also marring the book is that it's written from the idea that has the world in its grip with numerous asides about the defective nature of capitalism and the Republicans. You would think that authors as dedicated and scholarly as these might try to be more objective and write for an audience that contains as much diversity as the billions of soccer fans that make up the game.
There are numerous poignant and humorous asides in the book. One great player asks a reporter, "what team did you play for" and another poses the hypothetical, "What could an economist know about soccer?". And numerous pieces of analysis that give insights into sports such as baseball and basketball where the quantitative analysis of the moves and positions that make up the game (the Yankees just hired 22 statisticians to document each aspect of the game).
The authors believe that the interest in soccer and ultimately the ability of a country and team to win, is based on per capita income, GNP, and history of interest. Much of their analysis is based on a regression analysis that suffers much from the part whole fallacy and a likely inability to predict change with a reasonable degree of accuracy. Similar defects are apparent in their analysis of what they say is the key factor in wining, the payment of high players salaries. Their analysis of the importance of poverty as a factor in allowing kids with no prospects to achieve greatness because they have nothing to do but play soccer 24/7 from birth is much more illuminating and interesting. Of course, since they write from the idea that has the world in its grip they decry any possibility of genetic factors determining who's going to rise and fall in the player firmament.
My favorite chapter in the book is about the training schools that Barcelona has for its young players. It's a model for how to develop good teams. Key to the training are provision of good meals, the development of character in the players, the de-emphasis on winning at an early age, the emphasis on passing above all, the continued connection between their players before and after they leave the ranks of the juniors (Messi comes to eat with the kids frequently), the confident movement of kids from the junior teams to the top team, and the benevolent coaching "similar to a Catholic priest". Apparently this is why Barcelona tends to win the world championships as the games between their juniors and Madrid are quite equal at an early stage.
All in all, the book is an eye opener in the level of analysis that the average team uses these days, comparing very favorably to the type of analysis that we are accustomed to receive about markets. It's great reading for anyone interested in soccer. And it helps to give an uneducated sports person like me a much deeper appreciation for why this game has become the most popular sport in the world, and why it will continue to transcend all others.
October 16, 2014 | Leave a Comment
A nice tour of the court. One wakes up after a 10 hour flight from Munich. Market at 1820. Goes up to 1835. Then down to 1816, then up to 1828, then down to 1818. Then up to 1828. Much volatility and opportunity to be shaken out of positions and opportunity for those with unlimited capital like the banks to profit from weak backhands.
October 9, 2014 | Leave a Comment
Something not well in Tokyo.
Pitt T. Maner III writes:
Super Typhoon Vongfong is about 4-5 days out. It's something to keep an eye on to see how it tracks and if the intensity changes downward.
The storm surge could be devastating and winds and rains in the 150 mph range are extremely destructive if they persist and typhoon stays organized near populated areas. 165 plus mph is unreal.
Satellite at present looks like Mitch 1998 in Atlantic.
Strangely it could have an effect in the US by shifting jet stream lower.
Beauty in the lashing of the tiger's tail
Yes. The way the Fed orchestrates the announcements so that the flexions will not be discommoded, the market will not be weak before an opportunity for incrementing the idea that has the world in its grip, the kind of minutes that are needed when German is weak.
October 6, 2014 | 1 Comment
The book Illumination in the Flatwoods by Joe Hutto, the best book on nature I have read, is a 1 1/2 year chronicle about the connection of a naturalist and artist who lived as a turkey, the most human of birds. It teaches you about the life of humans, the relation between romance and affection, the beauty and artistry of nature, the connections between all things including animals and humans, and how to be part of and leader of a group. One comes away from it with a reverence for the turkeys and Joe Hutto, and many ideas for how to trade the markets better, and live a better life.
Hutto imprinted himself on two dozen wild turkey eggs when they hatched, a thing he has done with foxes, deer, monkeys, waterfowls and many others. He lived and foraged, dreamed about, and protected the turkeys each day, until they grew into independent adults. There's mutual love between them memorialized in such passages as "I have never kept better company or known more fulfilling companionship. Our communications although somewhat abstract is completely satisfying and out interests are identical: plants, insects, reptiles, birds, mammals. We are driven by the same engine, and in spite of our divergent morphology, and intellectual approach, I find that our similarities are greater than our differences." Hutto mixes scientific knowledge and studies about animal behavior with the documentary so that one gets an education about ethology, ecology, psychology, and geology seamlessly and painlessly from a reading.
The Turkeys, spend most of their time on the ground walking on two feet, communicating and sensing like humans, and grow to be close in size to our size. They contain within them the instincts developed from 20 million years of evolution, and all it takes is a trigger from their daily life for them to know exactly the right thing to do. They are totally exuberant and enthusiastic and teach us to enjoy the present moments with gusto. As Hutto says: "They are more alert, sensitive and aware, they are vastly more conscious than I. In many ways, they are more intelligent… Every day I see that the most important activity of the turkey is the acquisition and assimilation of knowledge. They are curious to a fault, they want a working knowledge of every aspect of their surroundings, and their memory is impeccable."
Hutto himself is an admirable person. He is a can do person who loves nothing more than building things, eating a grasshopper along with the turkeys, painting a scene about nature, and picking up a dozen rattle snakes with a garden hoe and transporting them to a new home. I particularly admire his ability to withstand the thousands of insect bites from gnats and Florida black bugs, the constant wetness from perspiration that cause him all sorts of pain and soreness that arise in the day and fray with the turkeys. Yes, this life was difficult, but he notes it was easy compared to his previous imprinting study of water fowl where he lived with them for 6 months, submerged half way in tide pools, with alligators stalking him and his charges 8 hours a day. Without further ado, but recommending the book and accompanying PBS documentary wholeheartedly, I turn to the 15 or 20 things I took away from it that should help us with our trading.
The turkeys are the favorite prey of many animals, and parasites, and have to be very careful from birth that they don't die. As a consequence, they are very serious about learning at all times, and never allow anything out of the ordinary to escape them. While they are exuberant and enthusiastic, they don't have time for frivolity. Like the turkeys, the market person is always prey to disaster, and must not be distracted during the fray.
2. Sense of Place
The turkeys like certain places and will speed up to get to them, and once they get there just relax and admire the beauty and majesty of it. They especially enjoy ponds and edges. The market person has certain landscapes that they should look forward to, and should expedite their passage to them, and take full advantage of their beauty and profits potential.
The turkeys often join flocks of other species, including jays, chickadees, woodpeckers, cardinals, wrens, gnat-catchers. The birds are attracted to the movements of other birds. On occasion, the market person must know that all markets move together. The normal negative correlations don't work. The bid moves in one market carry over to the others. Try to find the mechanism that creates this, but also be alert that one big move can presage another.
Nothing escapes the turkey's attention. Nothing new can happen without them investigating it and assimilating it into their daily life. They won't move on until they understand it. They never forget once they have uncovered it. The market person must be alert to all new things, all unusual moves, all crazy events that cause big moves. For example, on Tuesday, the market dropped a 1/2 % in a minute on news that one man in Texas had contracted Ebola. It was meaningless for its impact on the total economy but the move itself was a preamble to one of the biggest drops the next day in market history.
5. Edge areas
The turkeys loves to forage in areas that are between forests and farmlands, wetlands and drylands, pastures and creeks, pines and oaks. The edge lands are more interesting, provide a better variety of food, and provide more areas of escape. The edge of markets are great opportunities for us. The time between one market open and another open, the moves that occur during and after the fixings, and reopenings, the times that pit markets close and electronic markets open, the times between work and lunch, are all grist for an opportune study and alacritous attempt to profit.
6. Acquisition of Knowledge
The turkey's main business during the day is gaining knowledge. Any object that they haven't met must be assimilated. All new things must be examined by each turkey. The market person should have a wide canvass. He should study science, economic, psychology, politics, and turkeys. Whenever a new relation occurs, whenever a new crazy reason for a market move is on the cusp, the market person must pause to understand it.
7. Fossil Ancestry
The turkeys have 20 million years of evolution to teach them about all things that have ever been life threatening to them. They instinctively know which reptiles are dangerous, which insects are edible, which places they are safe. They rely on instincts leavened by knowledge of the current environment. The humans have fossil ancestries and instincts also. When you feel your color changing, your hair raising, your sense of fear arising, know that your tens of thousands of ancestors are sending you a warning, and pay attention to your instincts.
The turkeys will try to remove any clothing on Hutto that they don't like. Blues are their favorite color, and reds their most hated. Market persons should wear colors that are not distracting to their colleagues, and don't interfere with their quiet contemplation.
9. Skirmish Lines
The turkeys move in a line so that when one turkey harasses an insect but doesn't catch it, and the insect flies away, the turkeys behind it are able to catch it. They maintain that order all the time so that they are optimally formed for the flock to capture the maximum of prey. The humans who trade markets maintain a line of trades so that if the first one doesn't lead to the desired move, the trades right behind it perhaps on a scale down or scale up will do the trick. Similarly, the big market operators can't move the markets by themselves. They form a skirmish line with their colleagues by having meetings where they agree that the market should be down or up, and then go to the old stream media now the new social media to broadcast their views, and make sure that the personages in the line next to them can move the food in the desired direction.
10. Sensory abilities. The birds can detect movement and smells and color to a discrimination level that is almost supernatural. They can spot a hawk at 2,000 feet above. They are always alert and never rest without the protection of cover and their leader. They can smell all their predators and prey and investigate all new things with their beaks. The market person must always keep his eyes and ears open and should never wear headphones or any other distraction.
11. Herding versus Following
The turkeys like to be together at all times. They have numerous calls to assemble. And when they can't see their brothers and sisters they are unhappy and nervous. They never wish to be alone. And yet, they know that Hutto is their mother and leader. They wish and know they should follow him, but he must never do anything that disperses or confuses them. Hutto's relation with the turkeys is similar to many trading mangers, and leaders on a trading floor that I have seen. He stands at the front and reports various ideas and opportunities, and trades that he is doing, and the herd of traders and salesmen follow him in a flock of related activity. Never forget that humans have the herd like tendency of birds in a flock, and as Galton points out the mentality of oxen who will never lead but follow a leader with blind ambition. Okay, that's a start.
Steve Ellison comments:
In point 4 you write: "For example on Tuesday, the market dropped a 1/2 % in a minute on news that one man in Texas had contracted Ebola. It was meaningless for its impact on the total economy but the move itself was preamble to one of the biggest drops the next day in market history."
This is a very interesting example. I suspect the 10-point decline in the S&P 500 after the unemployment report on July 8, 2011 was in the same category. The S&P 500 fell another 130 points in the next month and did not regain its pre-July 8 level until late October. I generally think most news is discounted before it happens, so any market reaction to news is likely to be reversed. However, there may also be cases in which a reaction to news exposes an underlying supply/demand imbalance. Finnegan moves, such as the 2010 "flash crash" and quick recovery (only to have the S&P 500 drop back to the flash crash low 3 weeks later and continue down), may be in the same category.
Jim Sogi writes:
Viciousness. I've heard turkeys can be vicious. I believe trading takes a bit of viciousness. The reality is you are taking money from someone. You may be ruining someone. It takes a certain attitude to do this. It's abstract as you are screened from the other side in anonymity behind the screen. But I've seen the reality of it. A trader needn't have a vicious or a terrifying mien. Take the Chair, for example: he seems mild mannered in person, but underneath there is a drive that makes him a good trader. Please don't take this wrong, I don't mean he's vicious. He's the most magnanimous man I've ever met.
Andrew Moe writes:
I know HFT people who unquestionably take money from someone every millisecond. They are extremely intelligent, geniuses of sciences, seem to be kind; yet they're dedicated full-time to the most direct "taking money from someone" a fraction of an inch behind Bernie Madoff
The only reason they are able to do this is that they provide a necessary function for the market at the lowest possible cost. Perhaps one should take heed of the original brilliant post in this thread and examine the why and the where of how HFT fits into the market ecology. What do they eat? How do they hunt? What do their tracks look like (nanex will show you some pretty pictures)? Do they herd? What are their defenses? When are they weak? The turkeys undoubtedly know all this and more about anything that might be stalking them. Once you understand the predator, it is much easier to avoid being the prey.
Anatoly Veltman writes:
"You are taking money from someone" And do you say the same about someone who is perpetually long stocks?
It's interesting to hear your opinions on the subject. I'll tell you one thing for sure: I know HFT people who unquestionably take money from someone every millisecond. They are extremely intelligent, geniuses of sciences, seem to be kind; yet they're dedicated full-time to the most direct "taking money from someone" a fraction of an inch behind Bernie Madoff.
My 2 cents
The investor's wealth ultimately comes from flows that derive from the real economy such as eventual dividends, buybacks, etc. I would include the return of leveraging equity which is financed by "real" economic activity. This is particularly true when the finance rate is in some way subsidized by state intervention, which is frequently the case.
Trading and speculating -if successful- takes advantage of the money flows of other traders and market participants. Many of these strategies (at least what I am familiar with) are based on the concept of "urgency." My finding is that ideas with persistence are in effect "giving the market what it wants" even if what it wants is mistaken if viewed from an X period(s) of time later perspective, which is where the profit is made.
In the real world there is much overlap, however I see these as two distinct sources of potential return.
If one believes (as I do) that the primary purpose of financial markets to price things (equity, debt, commodities, currencies), it makes sense that there is a competition to set prices and achieve equilibrium (which is never reached). If one does not want to participate in this contest they can hold for very long periods and seek to get the investor's return that derives from the "real" economy and leveraging equity.
My way of seeing HFT is that it occupies the space the floor used to have. They are consistent (the good ones) because they get massive scale and turnover beyond what an individual could achieve trading manually. This is why (once again, the good ones) are so consistent, it is a law of large numbers type effect.
I had the opportunity to invest in such a firm when it was just getting started and the principles were looking for backing. Upon reviewing their business model I felt I could not get a handle on the extreme blow-up risk do to potential operational error. It was outside of my competence level to assess accurately or prudently. I passed and still feel I made a good decision, even though with hindsight the guys were very successful and I would have made a large return. My point in mentioning it is that the great HFT return stream can hide things that are not obvious - particularly operational risk that often appears to be huge (…or at least I tell myself that rather than kick myself for passing).
Andrew Moe writes:
I'm glad the thread lives, and it will hopefully develop in a few directions. But one point I raised was very pointed: I was not implying HFT as a sector. I was questioning the moral aspect of a handful, who managed to place themselves into a no-risk pocket within the ecology. Their only risk is CAPEX committed and personal freedom, should lawmaker flip on them one day. But their conscious choice is to operate daily as nothing more than a tax on all participants.
When Mr. Sogi said "taking money from other human", he merely implied competing (and prevailing) within the risk-taking endeavor–not within 1:1000 day risk of loss.
September 29, 2014 | 1 Comment
Here are some good proverbs of Tom Wiswell that are very appropriate for markets.
Seize the moment: It may come in the midgame, it may come in the ending, but seize the moment, even if it comes in the opening. There are seldom second chances.
Build well: A good game, like a good house, must have a strong foundation
The Follow Through: Once you get a win you have to know how to execute it, or your opponent may execute you."
Fools Gold: The search for a fool proof system is always in vain.
The Wise Skipper: Start your game with a plan, but always be ready to change course in mid-stream.
A Time for Everything: The good player knows when to play for a win, when to play for a draw, and finally when to resign.
The Unexpected: Unless you are prepared to expect the unexpected, be prepared to expect the unexpected defeat.
Seize the Moment: A passive move is best met with an aggressive reply– or an opportunity may be lost.
A Wolf in Sheep's Clothing: The trouble with a loss is that it usually looks like a win or a draw.
Don't Argue with Success: If you are doing well with your lines and style of play, don't change them. If it ain't broke, don't fix it.
Reckless or Wreckless: the player who moves without a motive is an accident going somewhere to happen.
No Risk Policy is Risky: The player who never takes a chance may be taking the biggest chance of all.
The next meeting of my NYC Junto will take place Thursday October 2, 2014 and feature Yale Law professor Peter Schuck speaking about government failures and how they can be remedied. All DailySpec readers are invited: Meeting begins at 7:30pm, speaker at 8:00pm. General Society Library, 20 West 44 St, NYC.
September 22, 2014 | 2 Comments
The webmistress asked me "what can you learn about life from turkeys? You might be able to write one of your 10 things about markets from turkeys" after she read that the book that the documentary My Life as a Turkey was based on. I start by noting the turkey is prey for many animals and has to learn from day one to look and observe and be alert and sensitive to everything in their environment at all times to survive. They become very smart and prone to survival. "Their understanding of the forest is beyond my ability to comprehend".
I wonder offer that male turkeys especially have a fearlessness one would not expect. When I worked for the Chair, one Fall day I was leaving the house and near the end of the driveway, there was a tom with at least 6-8 females. He blocked my way for a good 5-10 minutes until his version of the fairer sex were done in the area with whatever it was. Mind you I was in a mid-sized SUV and gingerly tried to drive around the group, flash my lights, blast my horn to no avail. I was extremely impressed by such bravado and courage as I am a big fan of the underdog. I found similar qualities in the hyena when on safari in South Africa (something everyone should do once). Maligned throughout history, in point of fact, they are like the Swiss army knife of the animal kingdom with both known and somewhat hidden talents (courage, incredible bite strength, great hearing and smell, stamina, running speed, hunting in packs, all around intelligence) all making for an extremely strong survivor in a hostile environment.
"Success in the opening can lead to a weak middle game, and finally defeat in the ending". Tom Wiswell, proverb, 20 in "During the Game" from edspec. The story of Friday, September 19th in markets and many others.
1. There is always a web of market interconnections, but the problem is that the web is always changing.
2. You should never try to make money the same way two or three times in a row.
3. The worst mistake a person can make in business is to get in over his head. Had I held the 7 or 8 largest investments I made, each one a 6 or small 7 figure expenditure, most of them would have made me 9 or 10 figures. The next worst mistake a person can make in business is to pursue a lawsuit when a reasonable settlement is in the cards. Comparable to this mistake is to get in business with disloyal or untrustworthy partners.
4. I am reading The Tyrrany of Experts by William Easterly and each page has new insights as to why the common man, the lowly man, when left to his own devices can improve his well being through technology, innovation or trade. The opposite side of the coin is how technological development from an authorian dictator can lead to trampling of natural rites and ruination. The story of the hard work that led to the prosperity of the immigrants on Greene street in Greenwich Village in new York is particularly inspiring and warrants a visit to that street.
5. The Story of Mankind by Hendrick Willem Van Loon written in 1922 is a great unbiased history to read to your kids.
6. The bonds have been down 14 days in a row or so on a 3 day basis, and they are due to go up.
7. The grains are at a series of 20 day low below constructal numbers and are worth a buy.
8. On option expiration day, the markets will revolve from one round number to the other in order to create maximum churning.
9. The book Principles of Chemistry by Michael Munowitz is the best science text book I have ever read, and I wish I could turn over the trading business to my colleagues and spend a few months educating myself by reading it and his companion physics book.
10. My colleague Gene Epstein to whom I turned over the moderation and selection of the New York Junta which I ran for 30 years has been improved vastly by his supervision. However, he doesn't like the kind of speakers that I get who teach people like me with so much more to learn like George Meegan on how to walk 12 years in a row or Gary Hoover on the story of retailing or Ian Bagley on the heroes of New York.
11. The part 3 of Atlas Shrugged which one saw last night is very inspiring and true to the message of "living for oneself and not as a sacrificial object". The portrayal of the politicians is true to life, and the heroic messages that the producers in Galt's Gulch give to Dagny are timeless and inspiring. Galt's speech is done very well, and there are exciting visual effects of trains and trees and abandoned factories. It starts nicely with Galt refusing to be part of a employee owned business where everyone shares what everyone makes.
11. I would hypothesize that anyone who bought an index fund of companies with the name video or game within it, would have superior market performance the next 12 months. The moderator of our site likes to invest based on what's hot for millennials, and her performance including several 5 baggers like Tesla, and Netflix has been exemplary. Had I followed her guidance, I would be a wealthy man.
Joseph Heller invited Puzo and Updike to steeplechase where you get 50 rides for a 0.25. He told them how when he was a boy growing up in Coney Island he'd wait near the finish for the old people to come out, and ask them for their unused rides of the 50 they didn't take. In the current, Puzo went through the revolving barrel and hurt himself and they all sat on a bench and talked about their terrible publishers and agents, and the decline of the book business, and their kids wasted time on television. As they left after a few hours, some kids came up to them. "Hey mister, can I have your tickets?". There were 47 left.
I played raquetball on Sunday at the central park courts, where 53 years ago I won three national tournaments with my father watching. I was good in those days, and the only way I could get a game was to play my opponents for a quarter hitting every shot behind my back, or if they were really good, hitting it through the legs. I challenged some guys to a match, and they told me they would only play me their backhand against my regular game. I jauntily refused and challenged a 70 year old guy to a singles game. He was ahead 11-6 when he hit one to my backhand and I ran to cover it, and for the first time in many tens of thousands of matches, I fell hard on the back of the head. The sound was so great that the players 4 courts over rushed over to see if I had lost consciousness. When I got home, I mistakenly told the perfect wife about it, and she looked at me and said "should we use heroic measures tonight to wake you up if you don't wake up". I said "No, just take the money, and put it in index funds, and marry someone much younger".
Pitt T. Maner III writes:
Hope your head is OK and you recover quickly. Sure that the doctors on the site have told you to be careful with that type of injury. At 70 you are considered just a kid in Palm Beach…
I have not heard from Mr. George Meegan lately [recent junto speaker and world traveler] but he is in the news in New Zealand.
Tomorrow an anniversary date recognized in New Zealand (where it is already the 18th).
"1983 - British adventurer George Meegan finishes a six-year long walk from the southernmost tip of South America to Prudhoe Bay, Alaska; covering 30,605 kilometers (19,021 miles)."
Thursday, September 18 - World - NZ Herald News
One attended a lecture By Malcolm MacKay, author of Impeccable Connections, about the rise and fall of Richard Whiteny, who was the face of the stock market during 1920-1936 before going broke pegging the stock of a distillery in New Jersey whose game plan was to sweep the nation with apple jack after prohibition was repealed. Whitney spent 3 years in jail and had the entitlement that one often sees among the white shoes whereby when he was in trouble he'd go up to his worst enemy on the floor and ask him, "spot me 250,000 on my face" for a few months as I'm behind on some debts. He had 15 outdoor servants and 5,000 acres on his hunting estate in short hills so often he was in debt. He believed in free enterprise and thus was assured of getting bad press but he deserved it, as he showed no remorse for all the millions he embezzled. Fortuitously he embezzled so much from the NY Yacht Club that they had to sell their adjacent property to the Harvard Club where the lecture was held, and where the present author was not on the losing side of the lead up to the Nationals there for 10 years. He jauntily walked into the US steel pit on black Thursday and bid up the shares of all the blue chips thus temporarily stemming the tide of black Thursday so that stocks closed down only 3.5 %^. His brother ultimately paid off all his debts, and knew of his transgressions but was advised by the senior Davis law firm not to bail out a wrong doer as he might be an accessory to the crime.
Whiteny always wore his Porcelain pin and got some good hits on the prison baseball team playing first base. The wife came back to him after his mistress left him shortly before he entered Sing Sing where he was called Mr. Whitney, and the prisoners stepped aside when he passed. He ultimately tended a farm in Mass, and started a mail order orange company in Florida which he kindly offered at cost to his Harvard classmates on his 50th reunion book. He was the bond broker for the Morgan Bank interests during his heyday.
One should add that I had two distinguished guests with me, the father of market psychology, Mr. Brett, and Mr Siskind, the king of real estate deals during the last 50 years. Brett wondered whether Mr. Whitney had bi-polar disease and Donald Siskind noted that his personality was very similar to many of the real estate developers of the the previous generation. I would note that he reminded me of Peter Peterson who would throw out memos on the floor on the understanding that the servants would pick them up and transcribe them. It should be noted that Peterson once told me that Lorie liked to call him whenever there was a new joke, and didn't hesitate to do so during the Oct 19, 1987, crash interrupting Peterson from a board meeting.
With all the talk about history, one should note that the markets had a historic move last week. Bonds went down 9 of 10 days, a total of 4 1/2 points, the last 6 days in a row something they do only once a year. Crude and the grains and gold and silver are down about 10% in the last month. The stock market is still at an all time high relative to the fixed incomes even after declining one % last week. People forget that bond yields are determined by expected inflation at a time like this, and that gold has nothing to do with international tensions and corn has nothing to do with the size of the harvest. What a time for great macroscopic trades, and level thinking.
September 15, 2014 | 2 Comments
The contagious and pervasive influence of video on our popular culture and markets is highlighted each year by the Video Music Awards held for the 31st consecutive time on Sunday, August 24.
The influence runs the gamut from the extensive time our kids spend with video compared to other pursuits to the spate of billion dollar deals and hundred million user apps that are reported daily these days.
Considering that the demographics and spread of video are ripe for epidemic growth, it seems like an appropriate time to consider how our market activities can be influenced by video.
A good place to start might be the following 10 interactions with markets that the recent awards ceremony elicits.
1. The VMA video of the year was won by Miley Cyrus and accepted by a homeless man who is wanted by the police.
The investment implications are that we should buy the grains to feed the homeless, buy the brics that are in troubles, buy fixed income of Spain and Italy and Greece and Portugal, and other weak EC countries.
Redistribution is the meme for the next year.
2. A cursory look at the video game and video music industry shows that the customers are young and growing and diffusing to all countries. All the major internet platforms are seeing more traffic to these applications. The customers are young and have a life expectancy of say 40 years more than the average customer for a product. This means that repeat business which is always more profitable should be feasible. The spate of acquistions in this space, the latest being Amazon's buying of Twitch and the emphasis that all the device makers and search engines are placing on making their equipment compatible for videos shows that the most knowledgeable and most successful companies in the world see this trend continuing.
The obvious implication from the VMA's is to buy the video stocks. Regrettably they're all up a google this year, but the growth rate trumps value any time. The top video stocks are Electronic Arts, Activision Blizzard, Take Two Interactive, Vevo, and Game Stop. The weather gauge is so good that I believe I'll buy them myself.
3. The most useful words… are small. All the big stars of the Video world and other world have one word names. There's Bey, Iggy, Sia, Miley, Eminem, Lorde, Avicil, Ariana, Kesha, Usher. Does the same dynamic hold for companies? Are the best companies, the ones that are most exciting, most useful, perhaps most profitable, one word companies.
I found 124 companies on the S&P 500 with one word names. Corp, LLC, and Inc were not considered as words. The average performance of the 124 companies was 9.1% in the first 8 months of the year, a hair above the average of 8.0%. For the rest of the 176 companies with two word and more names. A suggestive difference but not a significant one as the average deviation is 5 percentage points. Hats off to the best one word S&P 500 performers: Alco, up 60%, Nabors, up 60%, Mallinckrodty, up 59%, Micron up 56%, Allegran, up 52%, Delta, up 51%, and Harmn, up 44%.
4. There is a stampede of interest in video music. Vevo, a joint venture of Sony and Viacom, for example, has 6 billion downloads a month, up 50% from last year. Interest in video is spreading like wildfire. Who will profit from this? Most of the videos are being watched on Mobile. Who will profit from it? During the gold rush, the popular wisdom with some truth in it is that the suppliers of materials and apparel like Levi Strauss were the ones that profited, not the gold miners themselves. Who are the platforms, the suppliers, that will profit here. Perhaps Facebook, and Google, and the distributors of the music will be the best buys.
5. The more one learns about the video music field, the more respect one has for the movers and shakers at MTV. They are not only at the hub of all that 's going on in the field, but they make the trends. Each year, they have another innovation, some of them quite revolutionary. The latest was that they had multiple screens, and multiple feeds going for the VMA. Now, everyone will have to have two or more mobiles and TVs going at all times including the shower. Their latest trick was to have a team of translators on hand to make all the messages about the VMAs fit for mobile.
One looks back on previous VMAs and notes the prescient way that they showed same sex kissing, nudity, and many other aspects that became the be all and end all of popular culture. Their latest VMA's spread the meme of the importance of family with Bey holding the child and kissing the husband, and of course the idea that has the world in its grip that the purpose of life is to take care of those who have less, and to redistribute the wealth and trophies to the homeless, and to make policing less violent and more in tune with the neighborhoods they cover.vIt's no accident that Angelina and Brad announced their marriage right after the VMA. As always the trends were set and popular culture follows.
Okay, we know that popular culture is set here. How does it affect our market activities. Let us buy family friendly stocks, like Bed Bath and Beyond and Disney for starters.
6. Why is it that video of all kinds is up 50% year to year with a typical statistic being that interactive streaming logs 35.5 billion streams in a current quarter versus 25 billion last year, or Vevo being up 50% to 40 billion downloads a quarter versus 25 billion? The ease of communication from mobile as opposed to a fixed location in a home or a car is the difference. Also, the ability to download contributions from everyone in the world versus a few producers who are responsible for the fixed communiques. We're living in a mobile world, with the know hows and ideas of each individual available for the masses. It's a communications revolution in the new millennium comparable to the industrial revolution in the 19th century.
7. If you can't beat them, join them. The populace demands video. The DailySpec is a meal for a life time that is not with it. We need video here. We are looking for a attractive video personality that knows enough about markets to encap one of the daily spec contributions or Brett's each day in a 2 minute focused and interesting fashion. We'll pay a reasonable amount, and the personality and we will become relevant and modern and diffuse through the masses. Note: One would like to thank a Director of Marketing at MTV, Ms. Joyce Kwon, for alerting me to the importance of video, and the excitement and influence generated by the VMAs.
8. We only respond to video these days. Until the tape of Rice beating the wife surfaced, or the beheading of the reporters was aired, there was no outrage. We're wired to respond to images of things. With all the video apps, the only way to spread a meme these days is through clicks and forwards. All bid individual moves in companies can be accelerated by videos as in the recent Apple announcements of the new Ipods and countless others.
All Harvard and Yale would have to do to increase their endowment by 2 billion a year, would be to dollar average, putting all their money into index funds or Spiders on a once a month for 12 month basis over the next years, and eliminate 99% of their fund managers.
Russ Sears writes:
One of the hardest things to do is to get someone to see they made a mistake because they did not have a broad enough vision or face all the the important facts, when they did have a well thought out plan but based on a narrow approach.
Kahneman's "what you see is all there is" needs to be expanded, to include the stubbornness that comes with it. This is the real danger of modeling. A good scientific model can help you overcome your emotional biases, but models are not perfect. Admitting that the models are not reality and letting yourself adapt when they are not accurate representations of what is happening is critical. This is why I believe in "counting" except when there is a liquidity crisis.
Basing performance on a Sharpe ratio has several problems / efficient frontier has several problems that it is blind to. First, it does not consider liquidity and accounting risk. Second it is exposed to modeling error on hard to model assets. And third it is exposed to execution risk or timing risk due to over-managing "exotic" assets.
A nice accounting scheme, can make certain assets almost guaranteed high sharpe ratios for the short term. Ask Gordon about how this worked with Federal Home Bank Loans and insurance companies. But same can be said about most real estate and other illiquid assets.
Second, the models assume correlations are constant and that there is no auto-correlation within the time periods. But if any asset is exposed to runs on the them, such as home ownership, then these are not valid assumptions. Structured assets are highly exposed to this risk. But so are banks and cash value insurance companies.
Finally, those that are blind to WYSIATI risk are those most susceptible to the news. Buying high because they hear how great others are doing. And then sell at the bottom because they hear how the others made a mistake. Further, most organizations that are void of valid self examination of leadership have many second tier leaders looking to say "I told you so" for any investment outside the norm, whatever that norm may be.
I have sat through many efficient frontier presentations where the conclusion was always the same; invest more in illiquid assets, invest more in assets that are impossible to model right, and invest more in exotic assets which I knew management did not have the guts to buy low and sell high.
This story [about the first demonstration of anesthesia at Harvard] has many of my favorite things in it, including Harvard's ability to pull the wool over the eyes of its alumni and pay its fund managers 100 times as much as the average professor, not taking into account that there is no sales cost, no symmetry of risk, and no taking into account the normal random variations in performance which would always lead to some doing better and some doing worse. But more importantly it causes one too reflect on how he should change his views over time, be open to new things, and be humble, and appreciative of the young and unaccredited. What revisions of your thinking have been helpful, and what should we do so as not to decry things of value.
There is often a tell. In retrospect of course. This time the tell was the hang seng up 2 1/2% on some seemingly ephemeral service survey, presumably doctored. How did Hong Kong know that there would be a Russian settlement? What other tells were there.
An article by El-Erian believes that you fail to realize that there is always an unrequited and unanticipated reason for a market move. The question you are asking is incapable of falsifiying as it is descriptive and retrospective rather than predictive. One wonders if you are still suffering from the new normal disease. An acquaintance with the triumphal trip of Dimson, Marsh, Staunton would convince you that the 500,000 fold rise since 1899 in the index was not due to unusual anomalies related to expectations but was due to the return on capital of 15% and compounding. Such a compounding is particualry alluring during times when the earnings price ratio and the return on capital are so much greater than the long term interest rate as would be consistent with theory and the Fed M.O.
How many of the rich were in the lower quintiles like What's App which recently sold for 18 billion to Facebook and the owners were on food stamps the previous year. Is that bad for a society to provide such opportunity and for the mobility between classes to increase or should we be like England where once you're in one class you can never move to another.
Richard Owen writes:
I am unsure if its really true that class barriers exist to any greater degree in the UK than the USA, other than perhaps in the mind or money of the classes themselves. A bit like Mr. Cosby's riffs to African Americans: don't perceive barriers for yourself. As my friend staying at the Knickerbocker club and being variously harassed for his attire, decorum and guests the other week reported "a certain strain of New Yorker could surely teach the British a thing or two about snobbery." Sure, we have a Conservative government with a disproportionate number of Etonians in it, but when one becomes Prime Minister, one tends to reach for trusted friends and fellow travelers. And being an Etonian is not a vote enhancer. Annunziata Rees-Mogg was asked to reframe herself Nancy Mogg for the purposes of election PR. The USA does not seem short of its own political dynasties and classes.
Ralph Vince writes:
The chair's example of WhatsApp I believe is the exception more so than the rule.
The churn at the higher stratas sees parties leaving unexpectedly. Those arriving, arrive slowly, believing they will be there forever.
Vast sums of money are lost in a day, a minute or the blink of an eye. You see this principle play out at the baccarat tables and the markets. The new arrivals, the beneficiaries of money-begetting-money for protracted periods, often generations.
Mr. Isomorphisms writes:
Regarding the very long timetables, I admired both the diligence/ingenuity of Gregory Clark and The Economist for publishing that the surname "Micklethwait" has enjoyed a run of good luck, when its chief editor is John Micklethwait (graduate of Ampleforth College, and later Oxford). Miles Corak also earns a mention in that Economist piece. A short list of Americans from expensive high schools includes Dan Ellsberg, Charles Coker, Thruston Moore, Glenn Close, Adlai Stevenson, Cosma Shalizi, but not Dan Einhorn.
Stefan Jovanovich adds:
If you do any serious searching of genealogical records, you discover 2 things:
1. Longitudinal searches of census data by county locations, including the immediately adjacent ones, show limited "social mobility" because the people who stay where they are born and whose children stay there are largely content with their lots in life. This is one reason America scores better than Britain in the 19th century; the people who stayed in Britain were ok with their lives where as, in America, nearly everyone was moving around, even if many of them eventually came back to "home".
2. The people who leave are the ones who become very rich, by local standards, or flat broke or need to get away from the law. The very rich tend to move to the places where they can be with their financial equals (so the Rockefellers abandon Euclid Avenue Baptist Church and become Episcopalians in New York) and the flat broke know they have better chances getting help from distant relatives than from local ones (a great deal of the Northern migration of freed slaves and, even more so, their children follows that pattern). The need for people to get away from the local sheriff hardly needs explanation.
The Harvard study deliberately ignores #1 and #2. "We assign children to commuting zones based on where they lived at age 16 – i.e., where they grew up – irrespective of whether they left that CZ afterward." The study also makes no adjustments for relative costs of living as a discount factor in gauging incomes. A child who migrated from Charlotte to San Jose gained 50% in gross income during the study period; but he or she gained no wealth with the added income compared to a child of lesser social mobility who stayed back home.
There is one other fact of human nature that you learn from reading the ancestry searches people have done: Everyone with any pretensions finds a way to trace their ancestry back to European royalty, even if the parish records stop 300 years or more before the connection is made.
Let those of you who follow the news alert us if the humorous agrarian grandmother leavens her talk with any epatez the rich or similar anti individualist things.
Richard Owen writes:
The consistent theme in reportage on central bankers (and their patrons) at the moment seems to be their benignity and attractiveness.
The Fed has a sweet but worldy wise grandmother. Mark Carney is assessed for his suave, tan, and similarities to George Clooney. Rajan is admired for his John le Care father and good looks that have put the 'sex into the Sensex'. Abe was painted in superman costumes replete with bulging red underwear.
It's as if they going to bring us off with gentle palm and sweet nothings.
Kora Reddy writes:
I don't see any edge in the week (weekly returns) after Jackson Hole for $SPY (up by 13/21 with avg 0.11 %, less than the drift of ~ 0.2 %) while $GLD up 8/9 (avg 1.5%, the last symposium was a hole with a weekly loss of -0.2%), $TLT up 10/12 avg 0.94%)
ps: avg % includes the losses as wellfor convenience of others (from here)
end of jackson the following mon/tue ( if holiday)
August 22, 2014 | Leave a Comment
One had a loss today and found it appropriate to go back to Wiswell to see if I can improve in the future.
We have losing days, drawing days, and winning days, and not every day is a losing day, and not every day is a drawing day, and although we may not like it, not every day is a winning day.
The real trouble with making our moves is that we don't know if they are good or bad… untill we have made them.
The good player loses without an alibi, wins with grace, and draws with a smile.
Don't strive to be brilliant, do not scorn simplicity. There is simplicity in the highest flights of all art.
To study the strong players is to learn how to play, to study the weak players is to learn how not to play: to study ourselves is to learn how to play the game of life.
I suggest you study your great victories a long time, and study your great defeats twice as long. You may well learn a great deal more from the latter.
Never let the fear of striking out get in your way.
Many games are won by the art of judicious leaving alone of pieces and men. This negative habit often develops into a win.
Good players do not complain about their lack of opportunities. They are good, in most cases, because they go out and make their opportunities.
Many a draw is lost for the simple reason that you did not ask for it– at the right time.
I seldom use the word impossible regarding chess and checkers. You will see just about everything happen on the board.
The art of playing is not only to make the right move at the right time, but to leave unmade the wrong move at the moment of truth.
Success in the opening can lead to a weak middle game, and finally defeat in the ending.
Playing much, suffering much, and studying much… these are the three pillars of learning.
Common sense wins many games, but there are positions where it would actually lose, and it will take uncommon sense to win or draw. You must decide when uncommon sense must come to the rescue.
The search for the right move while you are playing is helped by the research you have done before playing.
The good moves are all there— waiting to be made: all you have to do is sort them out and put your hand on the right pieces and move them to the right squares. Yet some of the greatest master have made serious mistakes in carrying out this "simple" transaction.
Andrea Ravano writes:
Great ideas Vic. I've often been confronted with poor performance, and the most difficult part of it is looking straight at yourself in the mirror and saying to that innocent looking person "you are wrong". Admitting ones own errors is the beginning of rebirth, just as realizing that your win at the backgammon board was more then the consequence of unusual dice statistics over your calculating power.
August 20, 2014 | 2 Comments
The erudite and esteemed historian of ours raises the question what can we learn from ancient Rome. Richard Epstein [cv ], believes that almost all that is good in our own law comes from Rome. Nock believed that only classics should be taught in college because everything good and bad happened in Rome and Greece and all we have to do is learn from the mistakes. I have always believed with Nock that the stock market will do whatever it has to do to increase agrarian reform, i.e. whatever will create a easier flow for reduction of social power and increase in the palindrome type of state. I often follow that line in my own trading. Do you believe Rome, Caesar, the two wolf men et al the Greeks, have things to help up with our investing?
Stefan Jovanovich writes:
Eddy aka our daughter Nora had the great good fortune to study Art History at Cal Berkeley while doing the requisite training in molecular and cell biology that would enable her to go to the wikipedia school of medicine at UCLA. She had the even greater good fortune to discover Andrew Stewart and make certain that she took every one of his classes. This left Eddy with the handicap of having the closest thing to an Oxbridge education one could get in America; Stewart was a kind, clever and relentless tutor; he even forgave her at graduation for abandoning a career in art history for the dubious privilege of wearing progressively longer white coats.
My apologies for the long-winded preamble; I am attempting to explain where I got my answer to the Chair's question. The "Greeks" of the Hellenistic period, not the classical one, are the people from whom we should take our lessons about finance; for they are the people who established the patterns of trade - grain from Egypt, Crimea and Sicily, manufactures from the Eastern Mediterranean, spices and clothes from West Asia, etc. - that endured in spite of the Roman's preference for military-industrial pillage.
Dylan Distasio writes:
Today marks the 2000th anniversary of the death of the emperor, Augustus.
If our esteemed historian would be so kind, I was hoping he might provide one of his favorite books on either Augustus or ancient Rome in general.
Stefan Jovanovich replies:
Karl Galinsky's "Augustus: Introduction to the Life of an Emperor"
His discussion of Augustus as a politician is the best description of how "Rome" actually worked politically that I have ever read.
Pete Earle adds:
Ironically, this was published today as a 'Think Piece' by the Adam Smith Institute: "Currency Reform in Ancient Rome". In it I look at four obscure emperors and their efforts (as well as their fates) with respect to shoring up the denarius as Rome entered its "Age of Inflation".
August 19, 2014 | Leave a Comment
"How to Be Prepared for a Secular Stagnation" by Mohamed A. El- Erian
A bad agrarian reformed always comes back.
Stefan Jovanovich writes:
"Economists know how to beat secular stagnation. There are really two sorts of policies here according to Summers: prevention and cure. Policies that stimulate productivity growth and raise labour-force participation build in buffers against the zero lower bound by boosting persistent investment demand. Such pro-growth policies are uncontroversial in the policymaker world, even if they are politically difficult to implement."
It would be cruel and possibly racist and certainly totalitarian to find where Hubert Humphrey and Augustus Hawkins' minds came from and then impose a Carthaginian peace on the places and ideas. But it is tempting. The idea that enterprise can somehow through "policy" be connected to employment is the soft socialist fantasy of the modern world. There are no "policies" that stimulate productivity growth; there are only ideas and their applications through machinery and process that allow people to do things better, faster and cheaper. And the "cheaper" invariably involves substituting software and equipment for labor.
"Pro-growth policies are uncontroversial in the policymaker world" precisely because the only growth in employment those policies create is more jobs for policymakers and the Keynesian knock-on effect that comes from their spending money to go to conferences.
Shaw really did have it right. The problem with the undeserving poor is that they have even greater requirements than the people who accept the market values for their skills and services. What makes those casualties of "secular stagnation" so attractive is precisely that their greater requirements involve perpetually more funding for the people who know they can fix the problem.
Earnings drift relative to the surprise factor, the reaction in the minutes after the announcement, the relation to size of company, and its continuity and change is of great interest. Many people study it and try to predict the earnings and sales, and talk about the anticipatory moves before the announcement, and the subsequent moves after. There are numerous articles about it on ssrn, including 495 with the heading "earnings report" and almost all of them seem to leave out the question of ever changing cycles and are based on outdated data.
Typical of the research is a recent paper by Jiasun Li on moves after earnings announcements. He finds that if you put a limit order half way between bid and asked and follow the drift 1 minutes after the announcement, there are profits to be made. Bloomberg seems to have incorporated many of the academic papers and gives a history of the last 40 earnings reports classified by such things as the estimated earnings, the actual, the surprise, the price change, the p/e. It's amazing how many of the actual earnings, are proximate to the estimates. Also, the muted reaction of price to the earnings change is also notable.
Two exceptions are Hewlett Packard and Netflix which often seem to have prices changes of 10 to 40% in the day following the earnings release, but almost all the other changes are within 2 or 3%. Most of the studies show that transaction costs are very high relative to any regularities that exist, and as mentioned these are before taking account of ever changing cycles, and the tendency of any published research if it didn't have the numerous biases that they tend to have, to be vitiated by shrewd operators in the period after publishing.
One intelligent thing that a few of the papers do is to classify the earnings surprise by dividing by a denominator based on price change rather than earnings announced. Considering the intense focus on earnings reports and the many firms that provide the estimates and base their trading decisions upon it, and the small margin of superior or inferior performance that exists, the tendency of those who follow it to endeavor to create market neutral portfolios that would lose the entire upward drift of the market in a dysfunctional effort to reduce risk, one would consider that it is a fallow area for research and only an academic could afford to low increment to knowledge that would result from attempting to unravel the biases, regularities, and opportunities for profits. At least that's my opinion, and I am interested in any corrections, or augmentations that might be made to my preliminary thinking.
Tom Wiswell, 1910-1998 wrote 22 books on checkers, was world champion from 1951-1975 and coached me and Wisdom in my offices in a series of weekly lessons over 20 years. Each week he'd prepare 10 proverbs about checkers and life with a view to the markets that his students strove to master.
Wiswell thought that the book of his proverbs would be his best book. I have about 8,000 of these proverbs and I often study them, to improve my game. I find them sustaining and inspirational. I looked through about 500 of them last night and here are some of them that I found particularly useful for the market game. I find that by substituting markets for checkers they are quite resonant and appropriate.
P.S. Whenever Tommy would come into the office, and we'd put the sign up "Board Meeting in Progress", he'd like to say, "Victor— the one thing I regret the most in my life is that I didn't marry a girl like Susan. Then he'd look down at the legs and around a few times and say… "But then again if I had, I might not have written 22 books. But this one's going to be my best."
Here are 16 of his proverbs:
Check your checkers. Every defeat not checked today will haunt you by future defeats tomorrow. Defeats that are corrected are transformed into victories.
A doubting Thomas. If you want to be certain of your position, you must begin by doubting it.
Sensing Danger. A good payer sees the hand-writing on the wall before there is any hand-writing on the wall.
Good Character. Weaknesses of Character are normally shown in the game of checkers and markets.
Defeat. In many losses, it is the one fatal move that breaks the camel's back.
The Good and the Bad. We are inclined to remember the things that go wrong in our games and that's good, but we should also remember the things that go right, that can surely help us.
Thinking Ahead. I have lost many a checkers game– because I didn't think ahead.
Temperance. The race is not to the swiftest, nor the slowest. The Laurel wreath is awarded to the steadiest and the surest.
Keeping records. Writing your games down– and studying them is one combination that often leads to victory: if you don't write you are wrong.
Warfare. It's always wise to remember that your opponent may be as machiavellian and scheming as you are.
A Double Loss. When you have a winning move and instead make a losing move, it is like two games: you lose instead of winning.
Coordination. Never let your hand move faster than your brain: synchronize your thought processes.
Reflection. Sometimes the best move you can make — is to make no move. Take time to reevaluate your position and you may discover a move that you entirely overlooked before. I've often saved a draw. The "no move" may be your best move.
Star Dust. Against a player who makes only star moves– it is very difficult to score any wins.
Depth. The length of time that you have studied is not as important as the depth. You must get to the bottom of the game if you want to reach the top.
Hovering. Good players seldom hover over the board. After you decide on your move– take a firm hold of the piece– and move it to the right square. Hovering shows that you are nervous, undecided. That gives your opponent a decided advantage. You may be headed for a fall.
I was at the Whole Foods this weekend and spotted a very attractive woman giving out samples of a new, "Small Batch" whiskey made by a new "craft" manufacturer. Naturally, I stepped up and requested a sample. While I sipped (slowly, as I am not a regular whiskey drinker) she rambled incessantly, providing the charming "back-story" of this "craft manufacturer." It was a "secret recipe" passed down for generations, etc.
I pulled out my phone and took a picture so I could easily research the brand further when I got home. It turns out this "craft" brewer was featured in the following article.
The "secret recipe" of this "brand" is the unaltered factory product from the standard, generic producer of this Whiskey variety. The entire "charming story" is a work of fiction. I am not naive enough to think that this not often the case, but at some point it gets ridiculous. I think it was that this woman wasted three minutes of breath telling me the ludicrously bogus story that put it in a different perspective. Perhaps if she was not busy telling the fraudulent story, we could have had a decent conversation — which would have made my time sipping the mass-industrially produced whiskey far more enjoyable.
Victor Niederhoffer writes:
As the Senator would say, where's the picture of the con artist?
David Lillienfeld writes:
My wife is a pathologist who also completed post-doctoral training in epidemiology/outcomes research. Her thesis was on reasons physicians adopt new laboratory tests. It turned out it was the first time the question had been posited, at least in the academic sphere. It blew her thesis advisor's mind. I was in my Marketing 201 class at the time, and both she and her advisor were surprised with my response to her finding-"Don't you think that the marketing departments earn their keep? If they didn't, that cost would have been cut already." I've been told that mine is a naive view, that no one in a business would dream of cutting marketing back do the degree I suggested if the exercise had little ROI.
Same thing here. Someone in marketing had some rich ideas, and it sounds like the sales department was executing nicely.
John Floyd writes:
What are the usual tells and ways to decipher such marketing? I wonder about market parallels such as market reversals shortly after events that were fully priced, i.e. the market reaction after the first shots in Gulf War, etc….also makes one think of the famous Schlitz live beer taste during NFL games.
Chris Cooper writes:
It has always been hard for me to understand the appeal of small-batch, "artisanal" marketing stories. Nevertheless, we sometimes use it ourselves in marketing our bottled iced coffee. But the sooner I can scale to big-batch brewing the happier I'll be. I designed the process so that it would scale…now I just need the sales.
Better than any marketing story is simply letting people sample the product. Even better is blind tasting against the competition. When people try it, they know it is the best. But that marketing approach does not scale.
One would posit that the same way the real estate stocks went up a nice 40-50% from their lows, while the S&P stayed at the lows, the Russian equity indexes which are now up 10% from their lows of a month ago (an alleviation?), will mark the end of Russia's negative influence on the western markets.
August 10, 2014 | Leave a Comment
Of what predictive significance is the first Monday, or second Monday or third Monday or 4th Monday or fifth Monday of the week? Same for Tues, or Wed or Thurs or Friday. If there is any non-random behavior, are any profit opportunities related thereto?
Anatoly Veltman writes:
I honestly think any hypothesis should originate with a reason for it. In this case: first Fridays are employment data. FOMC also has set schedule for certain Tue+Wed throughout the year. Other than that, you face random occurrences that vary with cycle stages. For example, the recent years adage of Bullish Tuesdays brew within a protracted Bullish phase. Of course, any week in the midst of Bull market would develop its up move from early in the week. But I vividly recall the adage of turn-around Tuesdays thru the 80's and 90's: the decades of more market struggles and volatility, the decades of real market interest rates.
Here's a composite of a typical season in a horse trader's life that will enable you to understand such things as why the market is bad when it looks good, why the value stocks are good when everyone wants the tech stocks, the importance of liquidity, the prevalence of deception, and the back and forth in the market during the day and year.
Ben's usual technique when entering a new area like Mississippi is to sit at the long table in the hotel and flatter the locals:
Of course I didn't hesitate to let them in on the fact that I was from Texas, and I didn't know too much about the farming business, that I'd made my living on a horse about all of my life. But I told them I had a high regard for the people that tilled the soil and fed the world and provided fiber that made the clothes, and I knew that this type of citizen was the salt of the earth. I said something about what a fertile land the Mississippi Valley was and how much of the rest of the world Miss could feed and clothe. I also dropped in that I knew the Miss Valley was stock with some of the finest old Southern people in the nation because that wasn't going to hurt my case any either.
How many times one is cajoled into some deal where it starts out that they flatter you to death thereby lowering your guard. "Our trader is thrilled at the opportunity to trade with you but begs that you go easy on him."
But this time, hoping to meet a better heeled citizen that could buy 60 mules that he couldn't sell for a dime worth 30 bucks a head, Ben Green stays at a fancy hotel where there are fewer mule men to sell at a proper price when he wishes to sell his mule. "I was just peeping out from under the brim of my Stetson and had my boot crossed over my knee so that everybody could for sure tell I was from way out West". The anxious seller always pretends that he's short on brains and the farthest thing from his mind is selling.
He sees a mark: "He walked up in the lobby and stood looking into the dining room and I could tell for sure he was off his home range." (The best cons come spontaneously when the other side isn't expecting it.)
"I got up and moseyed up close to him to get acquainted because I knew I looked country enough that he would ask me whatever it was that he was trying to find out". It must might be that he wanted to buy some mules and the last thing that Ben wants him to know is that he might sell. (The salesman with tremendous urgency to unload bonds or stock is in conference.)
I would posit that every time an equity market set a 10% correction, defined in some quantitative way, it was a good time to buy. Often the definition of a correction is very fuzzy depending on whether one uses intra day or closing prices, and much latitude is often taken to try to prove the point.
Anatoly Veltman writes:
Yes: if you are a perpetual Bull, a 10% discount can't be worse than a lesser discount. But that was the question I posed yesterday: are there market junctions, where such discount may be justified, and more discount is likely coming?
My proposition: yes, such junctions are quite possible in the markets. Temporary factors (like sub-prime credit, or ZIRP, or QE) might have produced such overvaluation at market peaks that a one-third price correction (and not just a 10% correction) is required to bring prices more into line with economic realities. In the process of such "one-third correction", you may still get a quick bounce off of a 10% level or any level. Is such a bounce a "good play"? Your stats may well agree. Yet others will prefer to use your bounces as a shorting entry point to continue position themselves within a greater decline phase. Both may be profitable plays. During a decline phase, "Short and hold" will prove profitable. But quick bounce-ups will also prove profitable, because they will be sharp. You are already having an over-20 handle bounce on some Friday short-covering, an odd Putin tweet, all kinds of mumbo. Yes, there are ebbs and flows for both sides.
On the precise sampling of "10% declines": why buying into a twentieth "10% decline" is supposed to produce the same success as buying into a seventh "10% decline"? Given the progressively increased valuations (which might have not been supported by corresponding economic growth), such study makes no sense to me. I only hope someone proves me wrong, and I am anxious to find out exactly why my reasoning is worthless.
Jeff Watson writes:
While the sky is falling among the retail class of trader, and they are getting quite bearish, the fact is that the S&P is only off 4.22% from it's all time close on 7/24. Hardly any reason to shout "Fire" in a movie theater. We're nowhere near correction time yet. And when it does come, there will be great opportunities for the nimble minded trader. I've been in a bear market in the grains for months and am quite enjoying it, but then again I'm one of those who learned the ropes in a decade long bear market.
Gary Phillips adds:
It all depends on one's time-frame. As a leveraged trader, one makes short-term decisions/trades, manages the risk/ keeps draw-downs to manageable levels and occasionally turns short-term winning positions into longer ones. Since early 2013, the average spx one-year return has stayed above 5%. Today's low was at the ~4% level and at major technical support, i.e., the highs of the previous 3-month-long trading range, so a bounce back to 1950 should not be overruled. Nevertheless, p/c ratios, breadth, and volatility indices, remain on sell signals, leaving the market intermediate term bearish. Long term, everybody knows the " bubbly" situation, yet even the valuation bears see the market going to 2250, and as long as Japanese funds continue to diversify out of the yen, Chinese investors continue to park their money outside of China, Draghi's narrative is accepted, and interest rates don't rise dramatically. The final tipping point is probably years away.
Jeff Watson replies:
Everyone knows the "Bubbly Situation"? I guess I need to be more enlightened because I don't see that at all, or am unable to see the forest for the trees. Anyway, one has seen the effects of a market where "everybody knows." In those kind of cliche cases, everybody usually gets a hard kick to the gonads from the Mistress. Since the stocks as a whole haven't been going down as much as "everybody" thinks they should, I wonder who is on the other side of the trade, buying? After all, the Fed is working 24/7, 3 shifts a day creating money that the flexions get first crack at. That should be pretty bullish for stocks. But then again, I am the absolute worst stock picker on the planet and what do I know?— keep looking »
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