Ten straight days with a 141 settlement handle. Ten day Vic (cumulative changes) at less than 2 points. How is Draghi going to upset this quiet?
Editor's Note: The Vic (first defined on this website in 2002) is a measure of volatility that uses absolute point changes rather than standard deviation. For example the "10 day S&P Vic" is found by adding together the absolute daily point changes in S&P for the last 10 trading days.
It is important to understand what the currency markets are for and how they are used in the modern context.
Arguably the whole game is about keeping the stock markets (or more generally the 'risk' markets) going higher.
The USA started the game late in 2008 with QE. After a time the Europeans took over. Now increasingly the Japanese will supply the liquidity.
The Euro currency lower story is fading into the background in terms of 'rate of change'.
For the avoidance of doubt, the only two countries that are serious about lowering their currencies are Japan and Switzerland (Switzerland is a case study in defeating the markets - read about their actions in 2011).
The current QE in Japan is huge– make no mistake — an order of magnitude greater than the USA's actions.
The Europeans, at heart, are stable/ strong currency types and do not have the stomach to get genuinely serious about weakening the currency.
A multi-billionaire of my acquaintance in discussing Japan, put it to me this way– it is not often that a country pre-announces it's own bankruptcy.
Inflation is an interesting phenomena in this era, it is hard to create but when it arrives, it destroys. It is pathetic that policy makers believe that they can keep such a thing in control when it gets going.
There exist genuine reasons for low probability scenarios to play out in coming months.
I know we've done a million studies showing the full moon doesn't predict squat about the market, but tonight's blood red moon full eclipse sure was accompanied by big moves in the market. Do you think a lot of people happened to be up watching the moon and figured, might as well do something crazy in the market? Hospitals and cops both say full moon is a busy time for them.
But full/new moons do influence stock prices theres even a Fed Reserve paper on it.
Jordan Neuman writes:
This full moon coincides with the Jewish harvest festival of Sukkot. I posted on the site two or three years ago that the period actually saw decent gains. The saw about selling before Rosh Hashannah and buying before Yom Kippur had validity. It worked again this year.
Within the "dark pool" of the market's ecosystem, there exist top feeders who like to provide bottom dwellers with 'insurance' policies. This "magnanimous" activity manifests itself in the provision of such products as options and more 'complex' structured products.
Clearly, as with all insurance policies, the seller of the policy has no intention to pay out upon the risk if it eventuates.
One noticeable element of these structures is the inability to get out of them in a timely fashion.
An examples should suffice:
In 2008 one was fortunate enough to have bought an AUD Put / JPY Call. As the AUD/JPY cross rate declined (and, for those who remember, Armageddon approached) not only was the 'delta' of the position increasing but the 'Vega' was too! A rare occurrence in option-land for TWO of the 'Greeks' to be in one's favour. At a time when I wanted to cut the position with a reasonable gain, the counter parties in the options market made a volatility spread so wide, that to have sold the structure back would have entailed losing money even though I had bought a low volatility and the spot had moved massively my way. To have simply bought back the delta and ridden it to expiry would have led to massive illusory PL swings because of the way options are revalued by the seller. The upshot is that I was unable to collect on the 'insurance policy'
Even in today's 'it can only go up/ prosaic times', market insurance policies are a scam.
Some things for speculators to consider:
1. Is there a level of volatility at which markets become 'untradable'? On the upside, I believe there is a level - or put differently, there is a quantifiable rate of change in the cost of insurance after which the spreads are impossible to deal at (In the above AUD/JPY example the volatility spread was 30% / 130% !!!!)
2. Is there a certain minimum level of volatility that the ecosystem requires? The answer might be different for different markets but overnight implied volatility in the major currencies hit the lowest in more than 20 years yesterday at circa. 5.5% annualised so who knows.
3. As alluded to above, should one watch the bid/offer spread on insurance as a predictor of bad/good times ahead. The magnitude of the spread in At The Money options markets certainly widens as the underlying approaches the point at which the big sellers might have to pay out thus making it hard or impossible to exit.
4. The amount of inbuilt spread in structured product in the street at the moment is genuinely appalling. But it is selling VERY WELL because large over regulated investors are being required by their 'consultants' to deliver 'stability' at all costs….. Not a single one of these structures is fit for purpose.
Lifting a line from EdSpec - '…..are there any words in the English language that mean 10000 times less than zero..' is a good way to explain the probability of the buyers of these products being made whole if the worst happens.
Jordan Neuman writes:
It is a fear I share when I buy out of the money puts. I recently corresponded with OCC about their "Doomsday" procedures and found out they don't really have anything concrete. How do you plan for option settlements under total chaos? And I do remember the 30%+ spreads on plain vanilla S&P options in the fall of '08.
I recall in the original Market Wizards Jim Rogers advised shorting Japan but said that while you might be able to get some money out on the initial decline, if you wait until the ultimate collapse you won't.
Ed Stewart writes:
Awesome post with much food for thought.
For the health of the market I would think that two environments are critical -environments that best feed market makers, and environments that most encourage commercial participation. If a market becomes too stable there is less need for commercial hedging, less transactions for market makers, and the range for speculative profit to profit dries up. I see it as speculators "crossing the bridge" between commercial buyers and sellers - the profit incentives motivate us to find ways of doing this. If the path is too short we can't make any money to cover costs.
A notion that I like is that the best speculative markets are where commercial interests have just been pushed to their uncle point in terms of pricing - at that point there is a very strong need for speculators and certain premiums develop - one can see this dynamic if you read the reports of (for example) commodity processors after a large price move.
Also which side of the trade is weak (buyer or seller) might depend upon who is on which side is the speculator vs. the house, or alternatively which side can take delivery vs. the side that needs to offset over a certain time horizon. The edge to the first party grows as (say) first notice approaches.
April 14, 2014 | 1 Comment
Bloomberg news picked up this article. I am not endorsing the paper, its methodology nor its conclusions. But counters should heed the underlying message. Especially Kora. I find it surprising that he doesn't look at the multiple comparison issue nor cite Bonferroni etc, but rather prefers to ask the question, "what is chance that a backtest generates a great result by chance." He argues that if you use 10 backtests, you are very likely to find a strategy with a Sharpe Ratio of 1.6 which is over-fitting: "Pseudo-Mathematics and Financial Charlatinism: The Effects of Backtest Overfitting on out–of-sample Performance" by David H. Bailey, Jonathan M. Borwein y Marcos Lopez de Prado z Qiji Jim Zhux, April 1, 2014
What good is a hypothesis that cannot be disproven? A Cautionary Tale (In Memory of Ross Miller)
1. Kora observes: Y = Fn(X) with a significance of T.
2. Kora raises a small amount of investment capital based on the expectation of this stochastic function alone. She gives no consideration to dynamic or causal or other exogenous relationships or intellectual or information edge.
3. Kora produces excellent performance as Y= Fn(X) as predicted.
4. Kora raises a massive amount of investment preformance after establishing a track record.
5. After raising a large amount of capital and collecting substantial management and incentive fees, something happens and Y <> Fn(X), and the clients suffer horrendous drawdowns. The fund shuts down and the total net amount of loss dwarfs the net amount of gains.6. The SpecListers say, "The probability of this was extremely small. But it is an example of Bacon's Ever Changing Cycles." Rocky says, "This is a example of bad science because any utility of the observation Y = Fn(X) without a casual understanding is limited to and qualified by, the ability to anticipate the onset of a changing cycle. And if the scientist can correctly anticipate the onset of a changing cycle, then this meta-hypothesis is vastly more important than the functional hypothesis.
Unfortunately, this is a recursive paradox, because the ability to anticipate the onset of a changing requires the ability to anticipate the onset of a changing cycle of a changing cycle, and then the onset of a changing cycle of a changing cycle of a changing cycle … and this continues ad infinitum OR UNTIL spec partiers go home to bed — whichever comes first."
Jordan Neumann writes:
I admit not to have fully read the paper — I searched for the word transaction cost but did not find it, yet it makes finding a profitable strategy much harder than it seems.
Isn't this a problem with statistics in general? How does this differ from using thousands of drug candidates to find a drug? We still don't know why Advil works, but I take it anyway based on the statistical evidence. When quants believe that earnings or margins or insider trading affect prices, I would say that the economic justification is far from random.
There is a recent series of news articles that disparage quantitative analysis, just as several quant funds suffer for a few bad years. I would think that everything moves in cycles, and this might be the bottom.
Hernan Avella writes:
Mr. Rocky offers some valid questions to the counting battalion. However, I'm afraid his argument suffers severely from the straw man problem. It assumes that one can't have an approach that incorporates: logic, an economic framework, money management rules and counting. Even more. As you move up in the frequency spectrum, the economic framework becomes optional (useless).
The real question is (for med/long term speculators). If you incorporate all the said components in your approach, can you quantify your success per component?
Ralph Vince writes:
Yes, in my humble opinion, more money is to be made on the assumption of EMH (the cost of being wrong in this regard is less).
Stefan Jovanovich writes:
The test of the reality of a market is whether or not there are prices for quantities exchanged in actual transactions; and the market itself is sufficiently profitable that dealers are willing to pay for the rent and other costs of keeping the lights on. Market failure happens all the time; a trade disappears because other markets have swallowed the action or the inter-mediation itself is no longer handled by bid-ask. Even now more than a century and more after they disappeared you can find the remnants of "corn exchange" buildings throughout Britain; dealing in grain continues but it is no longer handled by open outcry involving dealers and farmers within half a day's train travel of a regional hub.
Markets are efficient in the way that engines are efficient in that they work. They are inefficient in the sense that there is wasted energy, some or much of which can be the result of insider manipulation and general fraud. The debate is over numbers matter - the economics of the companies and the world of money as a whole, the prices themselves and their patterns, the numerical indices of sentiment; for that question there is no absolute answer, nor should there be. Larry Williams, the R-Man, the Watsurf, RPH and many, many others can all be right - and wrong. And, in that sense, markets are permanently inefficient because, even among people to whom Morgan would have assigned a perfect grade for their financial character, the only final word comes when the market itself disappears.
One is accustomed to the contumele of certain parties, especially when I point out, as the loose cannon Mr. Kora, who could ruin us all by posting such good stuff, shows that 8 or 8 such events led to substantial profits, a point which one intentionally omitted so as not to self destruct the list. But one is very surprised on a list with so many free market devotees, albeit a conservative here and there, that one doesn't consider the right of a personage to better himself. If an immigrant can gain gainful improvement and housing in this country, why in the world should we stand to prevent his pursuing his happiness and bettering himself. And of course it's good for both parties.
Jordan Neuman writes:
The Chair is correct of course– ceteris paribus. Unfortunately, it is not ceteris paribus. For example:
In 2009 (based on data collected in 2010), 57 percent of households headed by an immigrant (legal and illegal) with children (under 18) used at least one welfare program, compared to 39 percent for native households with children.
Immigrant households' use of welfare tends to be much higher than natives for food assistance programs and Medicaid. Their use of cash and housing programs tends to be similar to native households.
A large share of the welfare used by immigrant households with children is received on behalf of their U.S.-born children, who are American citizens. But even households with children comprised entirely of immigrants (no U.S.-born children) still had a welfare use rate of 56 percent in 2009.
Gary Rogan writes:
I would like to add that eventually these immigrants start to vote and they vote, by a huge margin, for big government because (a) to them it's a significant net benefit (b) they know of no other way of thinking about the role of the government. Additionally, they are used as pawns by said big government in every way imaginable to maintain itself as the master of us all. And additionally, large flexionic business absolutely love these immigrants because they work for less (good) but as their families are subsidised to an enormous degree by the taxpayers, these business do not bear the full brunt of their cost. As these flexionic businesses are enormously powerful with the government, being flexionic and all, this creates an almost unbeatable coalition of government and crony capitalists to import a certain kind of immigrants to the detriment of us all.
Greg Rehmke writes:
Research supporting the benefits of immigration to the U.S. is compelling. Welfare programs continue to be expensive and distorting, but vary by state. "Generous" welfare in California is more expensive and damaging to immigrants than Texas programs. But recent studies show the services provided and taxes paid by immigrants (legal and illegal) outweigh the cost of welfare programs including govt. education.
Immigrants run or are key technology people in half of Silicon Valley tech firms, for example. But even low-skill immigrants free U.S. workers to concentrate on higher skill jobs. Immigrant workers in hospitals and nursing homes provide key services.
I have links to various articles here.
Stefan Jovanovich comments:
Qui bono? As long as it is that marvelous construct — the economy, "immigration" always wins; and the trivial question about whether or not people are following the Constitutional rules for naturalization can be conveniently discarded. When the question becomes who pays for the price effects of competition from illegal immigrants, obfuscation is needed. But then what else are "studies" good for if not to tell ordinary Americans that their common sense is not good economics.
I do wish Greg would read the footnotes. Mr. Powell is distorting the truth beyond all recognition when he writes that "George Borjas is probably the most established academic critic of immigration. But even he admits that immigrants create net benefits for the native-born." What Professor Borjas actually stated was this:
"The evidence indicates that the wage of the skill groups–defined in terms of educational attainment and labor market experience–that experienced the largest influx of immigrants grew most slowly over the 1960-2000 period. It has been estimated that the wages of native workers in a particular skill group will decline by about 3-4 percent for every 10-percent increase in the number of workers that can be attributed to immigration."
I have come to the conclusion that Libertarianism is, at heart, a theology that wants ownership of property, including the property of citizenship, to always be subordinated to the idea of liberty. Yet, at the same time, people should not be free to exercise the freedom to truck and barter in credit. We are back, once again, in the world of Fourier and George Ripley and Brooks Farm.
Greg Remkhe replies:
I can’t speak for libertarians or economists in general, and I don’t believe economic gain is the most important thing. I think justice is. People have rights and deserve freedom and justice before the law. Welfare state programs and business regulations distorted the immigration process for California in ways very different from Texas. Texas government policies are more open to enterprise and its booming economy is putting latin american immigrants to work. Welfare is harder to qualify for in Texas and enterprises are easier to start and expand.
It is important to separate the consequences of immigration from the consequences of dysfunctional U.S. immigration policy (and distorting state welfare and business regulation).
New competition benefits consumers,but can challenge or hurt existing producers. Immigrants are producers in the labor market and where they compete with existing producers–American workers–they challenge and can hurt both unskilled workers and high-skill tech and engineering workers.
But the challenge part matters too. Imported cars from Japan challenged U.S. car companies to improve their cars. Many U.S. firms met the challenge of imported goods and improved to regain market share and also export. The tens of thousands of immigrant workers employed by U.S. firms helps them compete overseas, and that helps U.S.-born workers in those firms.
And now U.S. companies like Boeing, Ford, Apple, Dell, HP and others are global with goods and services produced by a mix of U.S. employees plus employees and subcontractors overseas. Plus Honda, Toyota, VW and other foreign car companies invest billions and employ hundreds of thousands of U.S. workers, engineers, and designers.
Robert Guest’s “Borderless Economics ” is I think one of the most compelling discussions of the dynamics of the new global economy.
The benefits to the U.S. from immigration and from outsourcing is one part of the story. But the benefit of immigrant entrepreneurs returning home to energize China’s and India’s economy is another major benefit. Hundreds of millions have been helped overseas by the return of inspired entrepreneurs trained at American and European firms. And these now wealthier producers and consumers in China, India, Brazil and Mexico now buy more goods and services from American companies and workers.
All that said… I must agree that a combination of crummy schools and corrupt government in Mexico and other Latin American countries shapes new immigrants, legal and illegal who come to the U.S. to live and work. Crummy schools and corrupt governments in the U.S. make matters worse.
Someone noted that we don’t need to make a wall around the U.S. but instead to make a wall around the welfare state. Over the last couple years, I’ve been recommending the Krieble Foundation’s Red Card proposals. They argue that Mexican working in the U.S. now and those who wish to come should apple for a worker visa Red Card that provides documentation and insurance, but not access to welfare programs.
I came across this interesting graph, which isn't likely much of a surprise given where the market is these days–no fear and all is well in the world. What I don't get is that absent 1987, there are few drops in the trendline, and it's been a notable feast and famine starting in 1997 or so. Question from the ignorant: what happened in 1997? There was LTM in 1998, but the upswing seems to precede that.
Jordan Neumann writes:
Asian currency crisis. Some on this site could tell you more about it.
Pete Earle writes:
Currency hi-jinks which began in Thailand, spread to Indonesia, South Korea, the Philippines, Malaysia, Singapore, Hong Kong, and resulted in a number of short, sharp recessions.
Gary Rogan writes:
I read something about that series of recessions a few months ago that seemed quite instructive to me. While there were a small number of countries that had what could be described as hi-jinks, most of them did not. The way global investors reacted was indiscriminate though, and they pulled out capital from anything that remotely resembled a dangerous Asian duck, whether or not it walked or quacked like one. This fear response can probably be generalized to how different panics start.
Are there any events these days that make people inordinately happy or sad. Perhaps these would influence the market? An event like an earthquake or a mass tragedy in a theater would seem to qualify. Perhaps there are classes of events that effect particular groups like flexions that cause them to be happy or sad that have a measurable effect also, like intervention by the EC, or the Fed. What do you think? Is it worth quantifying?
Rocky Humbert comments:
Yes, there are such events. Flying a Boeing 767 into a tall office building is one such example.
Scott Brooks writes:
Not sure this is an event, but…..the realization that massive fraud is occurring. For instance:
The Accounting debacle (i.e. Arthur Anderson, Enron, Worldcom, Global Crossing, etc.) of 2001.
The Mortgage Fraud Debacle of 2008.
Jordan Neuman writes:
The 2003 rally began with the freeing of Elizabeth Smart. Certainly the market was sold out, but I thought a collective sense of gratefulness served as a catalyst. But file this one under the difficulty of setting up the study.
Craig Mee writes:
Potentially state dinners and the like, when the flexions are busy cleaning their shoes and are getting ready for another free meal. Maybe that's why silly season (late Nov through December) appears to do ok. Plenty of back slapping, industry awards and the like. Also maybe Oscars week (or award month) is a winning combo for listed movie stocks.
Jim Sogi adds:
Here's a couple of ideas. Use facial recognition software to detect a "smile" tune in all the security camera in the world, process for correlation. It's a bit big brother-ish, but there are cameras all over in cities now around the world.
How about using beer sales? Old Chinese proverb: If you want to be happy for two hours, drink wine; if you want to be happy for two years fall in love. If you want to be happy forever, take up gardening.
Track gardening sales, or farming yields. It's said one of the few real producers of wealth is farming. Good weather=good farm yield=good production=happy markets.
This has been posted before but I will add some color. Stocks and Treasuries have moved opposite of each other the last several years. So I am not sure waiting for the stock market to correct based on USM's decline is "money good."
If you scatter plot the changes in S&P and US this year the line of data is almost perfectly NW to SE. There are only four days all year where both have declined. And the ten times the S&P has advanced by at least ten points? US down every time.
In the spirit of ever changing cycles, tell me when US is set to improve and I will bet on the S&P correction.
Thumbs-up, the inverse of professor Robert Shiller's cyclically adjusted price-to-earnings ratio — or CAPE — was greater than the yield on a long-term Treasury. When Buffett wasn't crazy about stocks, the opposite was true.
Steve Ellison writes:
Using the 12-month forward top-down earnings estimate for the S&P 500 of 93.75 published by Standard & Poors, the E/P for the S&P 500 is8.25%, 4.5 times as high as the 10-year Treasury bond yield.
Jordan Neuman comments:
Historically large stocks have an 11% ROE. The S&P's book value of 594 implies about $65 in earnings. Discount by the Baa rate of 5.2%, not the treasury yield, and you get 1250. With the S&P at 1136, the discount in this measure appears to be the widest since 1974.
Most of this list's valuation parameters are positive but I still can't stop the bleeding.
September 12, 2011 | 2 Comments
I read this interesting article lately that posed the question:
Is it possible that student loans are to some extent simply replacing unemployment insurance as a source of subsistence income? If so, we may be creating another asset bubble of sorts, with consequences much more dire to the debtors than anything we have seen before. Thanks to the “bankruptcy reforms” of 2005, those student loans cannot be “cleared” by bankruptcy, no matter how hopeless the situation. We may have simply created a new version of a Dickensian “debtors’ prison” that may ultimately imprison an entire generation of young borrowers."
The answer is yes.
(Department of Education) The U.S. Department of Education today released the official FY 2009 national student loan cohort default rate, which has risen to 8.8 percent, up from 7.0 percent in FY 2008. The cohort default rates increased for all sectors: from 6.0 percent to 7.2 percent for public institutions, from 4.0 percent to 4.6 percent for private institutions, and from 11.6 percent to 15 percent at for-profit schools.
And keep in mind student loans are still expanding in this crisis. While every other sector of debt is contracting this is the only area growing. What is worse is that the earnings for recent college graduates doesn’t reflect the higher costs of college:
Since 2000, in real terms college costs are now up by 23% Since 2000, in real terms real pay for college graduates is down by 11%
The reason when we look back and see greater earnings for those who go to college is the reality that many never came out with so much debt. Decades of data are being used and applied to the current rip off and high cost model that has never been seen in the past. Plus, you had a tightly regulated market and for-profits were nearly unheard of.
Alston Mabry writes:
Also, as I understand it, the default rates, especially for for-profits, are understated, because the DOE only looks at default rates within a certain period after the student leaves the school (two years, I believe). And so the schools have programs to keep people out of default until they fall out of the counting period, after which they are on their own.
Jordan Neuman adds:
It is like anything else, whether you want to call it a "bubble" or "ever-changing cycles." In the late-90s the argument for stocks was that they had never had a down 15-year period. By definition, then, no price was too high for stocks if held for the long-term. Of course taking the yield down to 1% was never part of stocks' history. The same goes for housing in the last decade. Housing prices only go up over time!
The reasons that college educated workers have done better historically is that the college degree served as a screening mechanism when fewer went to college. Now that everybody goes the screening is worth less to employers. But colleges are charging, and are abetted by Government policies, for the old promise. Just like health care and housing, government policies have distorted the pricing mechanism enough to wreck the whole system.
1311.11 or about 14% above the "real" opening price. Could this be one of those bad prints that tells the future?
With the President being so concerned with the markets on Monday in the absence of a debt deal, is this not a test of who is calling the tune? Bernanke points to the Russell 2000 to judge QE2 a success. Does the market have to come down Monday to keep the theme alive? I would think if non-Governmental market participants had their say, they would rally stocks as a giant middle finger to the President. Who is he to invoke markets?
Gary Rogan writes:
It's a test whether the truth can triumph in spite of all the propaganda
Sushil Kedia adds:
The Zimbabwean markets went up like something….. with their QE ad infinitum. Eventually the only thing everyone needed to buy was chastity locks…
One played a game of checkers with someone likely to be a front runner for president in a few months, and we discussed the importance of Tom Wiswell's proverb "moves that disturb your position the least disturb your opponent the most". In checkers, I think it means not to break up your foundation, not to have too many infiltrator single men far removed from the bulk of your pieces. Not to have too many holes in your position. Not to have too many of your forces divided by big spaces. Maintain your dike which is a solid row of checkers on a diagonal of at least 4 or better 5 or 6. In general, make sure you have near neighbors for all pieces. I got to thinking how this applies to markets. It seems very applicable. Don't put all your chips at one price. Do things on a scale down or up. Don't move into other markets with big positions when you have the bulk in one position. Keep your positions at approx the same size. Don't throw all your chips in at a certain time, but gradualize into positions. Don't get out at close or in at open. Maintain a constant capital stream. Be humble.
What else would you say? How would it apply to life? Don't move into new investments unrelated to what you do without much reflection and gradualization. No staccato in your movements into your second childhood? What else?
Anatoly Veltman writes:
To add: a grandmaster can't use the same sole opening pattern all the time. High level competition will adopt– and they will no longer be disadvantaged. So while it's important to stick with your successful patterns– see if those patterns can be validated for situations arising out of a different opening sequence.
Nigel Davies writes:
I agree with Anatoly. Actually I've often given up opening systems at the height of their success; waiting crocs plus loss of vigilance etc.
Jordan Neuman writes:
There is a similar thought in baseball strategy. In a situation where one's move will lead to countermoves, it is sometimes best to do the opposite of what your opponent wishes you to do given his perception of his own countermove options.
This is all under the general category of putting yourself in someone else's shoes. I find it very easy to see where others have messed up their or their children's lives. I would say my "win percentage" is much higher in those cases, prospectively, than in my own life. Perhaps the Wiswell proverb describes depersonalizing decisions as a way to make them less emotionally difficult.
Henry Gifford comments:
Regarding the above about ruining the lives of one's children, my uncle used to say he ruined the life of his son, who was a heroin addict.
Looking at what he said from the other side, if what my uncle said was completely true, then parents have the power to stop their children from doing drugs or partaking in other ruinous activities, something many parents are frustrated to know is not true.
This perspective can ease the pain in some situations in life, and maybe in trading losses also.
Allen Gillespie writes:
On the violin to play fast one must leave fingers down for the return.
Range of bonds was only 4 times as great as stocks today. One still wonders what terrible collisions in the foundations of markets would be caused by a 5% yielding 30 year bond compared to 4.4 % today.
Jordan Neuman comments:
The Baa corporate bond yield is a better barometer. While spreads have narrowed, there is still room to tighten before they return to the glory days. While none of us (Rocky?) expect that, stocks could survive a 5% 30-year with the Baa rate where it is. That being said, stocks would be in trouble by this metric if the Baa would follow the 30-year's direction even a little.
The Wall Street saying of "sell on Rosh Hashannah and buy on Yom Kippur" is well known. But more traditional Jews know that Sukkot, the Harvest Festival, is the real bear. There is some secular history to this as farm finance was a major part of markets well into the last century. Anyway, what do the numbers show? Going back to the origins of the S&P Futures contract in 1982 we have the following:
Sell RH; Buy YK Avg. -.7% +.03%
St. Dev. 3.97% 1.58%
From YK-Sukkot Avg. -.45% +.1%
St. Dev. 3.47% .94%
This is interesting in that the large SD is in a period that can be no more than four trading days and sometimes is only one. This is where we are now, by the way, from last Friday's close until the close tomorrow.
Sukkot Avg. +.21% -.08% St. Dev. 4.38% 1.88%
I do not think there is anything to see here, and of course my "memories" were wrong. Sukkot was up. But if anyone wants the raw data to apply their own t squared, or whatever you quants do, ask me in the comments, and I will send it to you. And if you find something, let me know!
This article on income mobility will put in perspective the malaise affecting our economy. It's the 40 % from each of the lower 2 quintiles who moves to the top 2 quintile that has made us beautiful and created the jobs and responded to the past incentives, and dolorously "prefers not to" create jobs and value now.
Australian Nick White comments:
This is a great country. Being back here the last few weeks just reinforces to me how lucky America is– even if you're in a perceived funk right now. This is the country where anything can get done…that's not the case in any other western nation. You have freedoms that you take for granted every day (even post legislative amendments that may have eroded them more than trivially). You have every type of geography and lifestyle. You have 36 different choices of one brand of orange juice fer crissakes! (which you can drink while watching one of thousands of tv channels).
I don't know much, but I know that if America continues to focus on the the things that got them to here– without trying to reinvent the wheel– you will all be just fine. The only danger I see is increasing reliance on form rather than substance– but this is a malaise of the world in general, not just the US.
Rudolf Hauser writes:
This data on income mobility does not give us a complete picture. Large gains or losses from realized capital gains/losses, special bonuses payments, decisions to take long breaks from work, etc. can all influence results for any one year. One would also expect income from most careers to advance with experience and age. What would be interesting to see but probably very difficult data to obtain would be an average of five years of data say at age 50 with those relative income positions of those households income compared with that in the same period in the lives of their parents. I suspect that there would be a good deal of upward income mobility demonstrated by such an analysis, but it would nonetheless be most interesting to have that evidence.
Russ Sears writes:
Isn't this the premise of the sitcom "The Big Bang Theory"?
A group of nerdy physicists meet their neighbor, a beautiful blond girl waiting tables at the cheesecake shop… but even she is hoping to become an actress.
But you miss the point– from the Will Smiths to the nerds in physics to the marathon runners to the Saints QB, they are all incredibly talented, even the WS geeks, not just the WS geeks.
And as someone seen how letting a small business owners put the money back into a sport can revitalize: it can change how everybody developed talent. In 1992 The US marathon trials were a joke, but these guys changed it.
The world will never know the talents that were not developed for lack of a few dollars, but I have seen first hand how thin the pie can be sliced at the top, and how a few centimeters thicker can change everything.
Jordan Neuman comments:
It is interesting that you mention the varieties of orange juice. I just read The Paradox of Choice which argues that our lives would be better if we did not have so many choices. The varieties of grocery items was the author's starting point.
It would not matter unless such ideas had support in this Administration. The references to health insurance in the book are illustrative. And I found the interview with the author in the afterword absolutely chilling. This professor was sure he and his "expert" friends knew better.
Larry Williams writes:
Living in the US Virgin Islands means giving up many choices in foods, clothes, cars, etc. I have found that a wonderful thing; it causes one to focus on what is really desired (that can be ordered from off island). It makes for a simpler life style and turns ones attention from man made consumables to the ocean, the trade winds, local markets and such.
Sam Marx comments:
I remember one of the escaped English spies then living in Moscow, when asked what he missed most about England, he replied Lea & Perrins Steak Sauce.
I should write something about baseball and markets. I've written about the wisdom of Ted Williams for markets, and Larry Ritter, 100 market related things about baseball dare that was included in PracSpec with collab, and I've written about the hidden signs of baseball with all the thievery and spies of signs etc., and I've suggested some insights of Bill James, but the problem is I don't know anything about baseball, and I hate to write about something I don't know about like the chapter on poker in EdSpec which I wish i had never written since it was derivative and worthless. So if anyone can help me appreciate what baseball can teach about markets, I'd appreciate it. I'm particularly interested in the hidden rules, and I think I have a market system based on not running up the score, etc.
Allen Gillespie comments:
UK came back from a large deficit to tie UT with 2:13 left before loosing the game. Does the market do the same? One notes that the S&P regained its positive footing yesterday after being down for most of the year.
Also, one hidden rule is don't talk to a pitcher that is throwing a no hitter after 7 innings and give extra effort on defense. A market equivalent might be what happens over the next X batters after the first gets a hit if the market is down over the previous 21.
Jordan Neuman comments:
Baseball traditionalists love the idea of the bunt, the stolen base, and assorted "small ball" strategies. These are basically one-run strategies. And as Earl Weaver and Bill James have written, baseball people who actually do the counting, when you play for one run that is all you get. And you might not even get that.
The market equivalent has got to be all those maxims and strategies that emanate from the brokerages and the talking heads that are consistent money/opportunity losers. What is appealing in theory is more difficult in practice. I place covered calls in this category.
Stefan Jovanovich writes:
Any pitch above the shoulders is life threatening; you can die from being hit in the neck more easily than from the top side of the skull. Even so, throwing above the shoulders was within the Code even in the days before helmets had ear flaps. Sal Maglie did not get the nickname of "the Barber" because of his artful use of the straight razor. Drysdale and Early Wynn were notorious headhunters. The rule was and is a good deal more subtle. You can't throw at a batter's head if you also throw a curve ball that breaks away from him. You can't play even high level minor league ball without standing in against a pitch that is coming at your head because, if the guy is any good, that ball is going to break down and away for a strike.
Drysdale and Winn were fastball, change-up pitchers so their aggressiveness was tolerated; it was part of their game. Walter Johnson and Bob Feller are always written about as being "gentlemen" because they never threw at batters; they didn't because with their stuff (fast balls and right-handed down and in curve balls) it would have been attempted manslaughter. Sammy Sosa was "beloved" because he was a cripples hitter; he killed mistakes and ate up mediocre pitchers, but he was never feared by anyone who had stuff and knew how to use it. Barry Bonds was "disliked" because he ruined everybody and because he had the guts to wear protection for the batter's most vulnerable body part - his leading elbow and forearm - and not give a damn what the league or opponents thought about it. He also mastered what remains the hardest thing to do in hitting: swinging late and still getting around on the inside pitch. In that he was a throwback to the golden age when even someone with arms as long as Ted Williams would have his wrists pass over the inside of the plate. Modern hitters with their longer, lighter bats don't go there any more– which is why the Atlanta Braves during their glory years were always coached to pitch outside: "Having Leo Mazzone as a pitching coach lowered a pitcher's ERA by a little more than half a run."
The respect thing is wildly exaggerated. Players appreciate each other's skills but they get paid for winning and numbers, not for obeisance. Chuck Hiller, who was a wonderful catcher for the Giants, once said that if the league learned that a player had leukemia, they would be sad but, if the guy still had his stuff, the dugouts would be calling him "Luke" by the 3rd inning. Bang the Drum Slowly gets that right; everybody is sad for Robert De Nero who is dying but nobody on the team comes to the funeral except for Michael Moriarty.
Rodger Bastien comments:
A pitcher is expected to throw a brush-back pitch in the next half-inning if his teammate has been hit with a pitch, but it's taboo to throw that pitch above the batter's shoulders or behind the hitter ( a batter's instinct is to hit the dirt therefore he could be beaned that way). Good hard slides are a part of baseball but sliding "spikes high" is a no-no. Along with not stealing with a big lead you should not stretch singles to doubles or doubles to triples with a very large lead. If a batter leans over the plate, a pitcher is expected to throw inside to regain that part of the plate; a hitter with such a stance should expect a fair amount of inside pitches and should take his base without protest when hit by a pitch. When an umpire takes a nasty foul off of his unprotected areas or is shaken with a foul off of his mask, the catcher should go to the mound to give the umpire time to shake it off. And middle infielders protect themselves by throwing the ball to first during a double play right between the oncoming runner's eyes; its his responsibility to get down to avoid getting hit.
November 18, 2009 | Leave a Comment
One speculates after seeing the high correlation to change in bonds issued for the year and the index, if there is a more predictive correlation when an individual corporation issues more new bonds and their stocks return. Are there good studies on this?
I also looked at the ratio of junk issued to total for the year and thought there may be a positive correlation to performance of Russell 2000 vs S&P. However, there was a fairly strong negative correlation. The S&P generally outperforms Russell 2000 when there were a high percentage of junk issued, perhaps because the junk issuer is forced to. Which again could use a good individual stock study.
It would seem that one of the lessons to this crisis is that keeping an eye on and understanding the too liquid and subsequent illiquidity in the bond markets is key seeing the "fat tail" or "black swans" like John Paulson.
Year LN Change LN Change in S&P in US Corp Index Bond Issued
10/2009 13.7% 12.3%
2008 -48.6% -46.8%
2007 3.5% 6.3%
2006 12.8% 34.1%
2005 3.0% - 3.6%
2004 8.6% 0.6%
2003 23.4% 19.8%
2002 -26.6% -19.8%
2001 -14.0% 27.8%
2000 -10.7% - 6.9%
1999 17.8% 3.0%
1998 23.6% 27.0%
1997 27.0% 30.4%
For the bond issuance data:
Jordan Neuman responds:
I don't know if full year returns sufficiently catch what you are looking for. It seems that Junk Bonds are issued when they are in demand, after a small-cap (or "risk") run. Then the S&P out performance makes sense as the cycle changes. The Russell 2000 is still about even with the S&P this year, but has gotten trounced on a relative basis only lately.
Russell Sears responds:
In my theoretical way of thinking, generally new debt is issued when there is either a change in perception of risks (increase leverage) or new opportunities for profits (expand empire). However, with junk it not as clear where the "equity" line is. It may be that junk needs more dissecting than simply "junk". It is not clear which stocks or bonds come first the chicken or the egg. Also, for the list only, I suspect that perhaps an early warning sign may be if the debt is under or over subscribed at issue. However, debt or mbs bonds especially in the sub-prime area signaled over issuance and too high a demand that a bubble had formed well before it broke.. AAA stuff was being sold as risk free arbitrage where you simply hedged out the duration or interest rate risks then leverage it up high enough to get whatever return you wanted. It had to end badly.
September 30, 2009 | 10 Comments
Evidence is accumulating that football, at least at the professional level, is causing dementia and other cognitive problems among retired players.
"..the Michigan researchers conducted a phone survey in late 2008 in which 1,063 retired players — those who participated from an original random list of 1,625 — were asked questions on a variety of health topics. Players had to have played at least three or four seasons to qualify. Questions were derived from the standard National Health Interview Survey so that rates could be compared with those previously collected from the general population, the report said.
"The Michigan researchers found that 6.1 percent of players age 50 and above reported that they had received a dementia-related diagnosis, five times higher than the cited national average of 1.2 percent. Men age 30 through 49, for whom the national average is 0.1 percent, showed a rate of 1.9 percent, or 19 times that of the general population.
"The paper itself questioned the reliability of using phone surveys to assess prevalence rates of diagnosed dementia, as did several experts in telephone interviews. For example, some of those affected might not be reachable; then again, N.F.L. players may have greater access to doctors to make the diagnosis, and so on."
The study already seems compelling. There could be some promising ways to test the idea further and learn more, such as measuring the dependence of cognitive problems on:
– years played
– self-reported number of diagnosed concussions over football career
– height and weight at retirement
– "safety" of position played, as rated by some independent source.
(e.g. punter and kicker would probably be rated safest)
Obviously this may cause some worries among high school and college players. One can hope that the problems don't really kick in until the play reaches the weight and speed level of the NFL.
Victor Niederhoffer generalizes:
The study the Professor alluded to reinforces my long held belief that soccer is an evil sport, and the body is not meant to be banged up, especially the head, and that this causes early death and dementia. In addition to the heading shot, which must be involved on at least a third of all goals, I find soccer objectionable for my kids because kids with no other means of recreation or occupation play it from the day they are born, and by the time they compete with Americans who have to go to school and develop other interests, they are much too good for the Americans to compete against . Also, I hate that you can't play it without great effort after you graduate from college so it's not a life long source of recreation. My father Artie always said, whatever you do, don't let your kids play football. And I would add soccer and boxing.
Jordan Neuman opines:
I always thought that the rise of soccer in the suburbs over the last generation was just an extension of liberal politics because everybody can play. If someone has no talent they just stick him on defense. (I am speaking of school kids, obviously at higher levels of play this does not apply.)
On the other hand when my kid is pitching, he is on the stage. When he is throwing good strikes it is beautiful. When he gets lit up you have to tip your hat to the hitter (also on his personal stage). I always thought all those volumes expended on "America is baseball" were wasted, and most are. But there is a reason that baseball is a uniquely American game.
Ryan Carlson digresses to his favorite sport:
One of the many reasons why I find hockey to be such an honorable sport is that cheapshots and any unsportsmanlike conduct is dealt with through "the code" that such behavior has to be answered through fistfights. The code serves as a check and balance for problems to be addressed quickly and so liberties aren't taken when the ref is looking the other way. An entertaining book for those interested is The Code: The Unwritten Rules Of Fighting And Retaliation In The NHL
Scott Brooks continues:
Having grown up a big St. Louis Blues fan and overall general hockey fan, I watched more than my fair share of hockey. We had season tickets to the Blues when I was growing up in the 1970s. My dad ate at a restaurant by his work that was frequently attended by Blues players. Dad was on first name basis with such greats as the Plager Brothers, Garry Unger, Bob Gassoff, Noel Picard, Chuck Lefley and many others.
Watching the dynamics of hockey growing up, it was clear that every team needed at least one good enforcer. This was the guy that would go out and beat up whoever on the the other team "breached protocol". If someone smashed into the Garry Unger (the Blues main scorer back in his day), he'd have to deal with one of the Plager Brother or (even worse for him), Bob Gassoff!
My father knew Plagers and Bob Gassoff and would tell me regular stories about what nice guys they were — but on the ice, holy cow! They were animals!
Pound for pound, there was no tougher, meaner group of hockey players ever to step on the ice than those Blues teams in the early/mid 1970s. The Plager Brothers were two of the toughest men ever to play in the NHL. And the best pure fighter to ever step on the ice was Bob Gassoff!
Bob Gassoff was the ultimate enforcer. Even the Plager Brothers — easily in the top 25 best fighters to ever step on the ice in the history of the NHL — would defer fights to their teammate Bob Gassoff.
Of course, there is always the image in my mind of the Blues going up into the stands fighting with the crowd in Philadelphia (a city known for its toughness).
And of course, there is ultimate showdown in the history of the NHL: Bob Gassoff vs. Tiger Williams as to who was the toughest man in the NHL. Both coaches agreed in advance to not let the players on the ice at the same time. But with around three seconds left in the game (and the game already won), there was a dead puck face off. The coaches put Gassoff and Williams on the ice at the same time. They lined up next to each other in the circle, looked directly into each others eyes, nodded to each other and proceeded to drop their gloves and go at it!
What a spectacle! After the fight, Bob Plager grabbed a bloodied Bob Gassoff and skated him around the ice holding his hand up like a referee does for the victorious prize fighter. Gassoff had won the ultimate hockey battle!
I think the markets would be a lot more interesting if we could have enforcers. If someone squeezes you out of your position too many times, you just send over your equivalent of Bob Gassoff to let him know he'd better not do that anymore!
Vinh Tu gets back to the subject of using the head in sports:
When I was between the ages of 8 at 12, my parents signed me up for soccer, and made me go play it, even if it sometimes meant they had to tear me from my Apple II computer. Doing clever things with one's feet was fun, and I'm sure that all the running was beneficial to me, physically. But I also remember heading practice, where a beefy coach would force 10-year-olds to use smack their heads against a flying ball. I remember that I only once, after much trepidation, allowing a ball to hit my head. I immediately knew that the feeling in my head after the impact was not at all good. After that, I could not help but flinch or duck during these heading drills, despite feeling intimidated by the large, angry, frustrated coach. Meanwhile there were a few kids on the team who really took to it and were gleefully smacking their heads against balls launched at them by the coach. It would have been interesting to follow up on my team mates and see if there has been any correlation between being a keen header and intelligence, and a few decades from now, dementia, and also whether there are correlations with other behavioural traits (perhaps lack of caution and restraint, impulsiveness?) and genetic correlations.
Stefan Jovanovich reassures:
The most important question to be asked about getting smacked in the head is "where?". The upper forehead and the forward peak of the skull can take a severe impact without any damage; the same blow to the temple will kill a person. There is no question that football players and professional boxers have problems with dementia from the repeated blows to the temple. Vinh Tu's beefy coach was an idiot and bully. The first lesson in learning how to head a ball is teaching the kid to watch the ball into his/her forehead, and the best way to teach that lesson is to have two kids soft-toss the ball back and forth, as if they were playing pepper.
There is very little risk of head injury in amateur boxing; if it is properly worn, the head gear protects the temples and the upper jaw – the two places where you can get hurt.
What is stupid about the design of football head gear are that the helmet is allowed to float; compare the design to military headgear where the webbing and the helmet are cross-braced so they move together.
Tom Marks is skeptical:
A humble postulate: Nearly all orthopedic and neurological injuries related to professional sports stem from the fact that eons of evolution hardly designed the human body for the unique stresses these activities put on it.
Sports-related head and knee injuries aren't going away anytime soon, especially the latter. Somebody could design a more efficient helmet, but only nature could design a knee that could better withstand the unnatural rigors of playing running back in the NFL. And there's nothing hasty about nature. It tends to deliberate long and hard.
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