Feb

8

 Like many on this site, I have created economic, trading, and predictive price models. Therefore I have an appreciation for the work that goes into building them. Donald Trump's "Superlatives without Specifics" (SWS) political model is pure genius. It is structured to be multi-faceted and applicable to nearly any interview situation. Not only does he not provide specifics but in many ways he makes that one of his strengths. Like any good tease in a sales process, you find out the answer only after you have made the purchase.

Another key point and what I love even more is that it completely contradicts conventional election wisdom about what it takes to win over the electorate. While I don't know how this will ultimately play out, this has a certain air of "money ball" aka Billy Bean of the Oakland A's, who actually analyzed the player stats in a different way and signed free agents as well as drafted accordingly. My suspicion is that this algorithm of Trump is no mistake and most likely the byproduct of rigorous modeling of both semantics and exit polling data of past elections.

Feb

4

The NYC Junto will meet on Thursday February 4, 2016 at the General Society Library, 20 West 44th Street. The open discussion begins at 7:00 PM and the featured speaker begins at 8:00 PM. Acclaimed writer and sociologist Charles Murray ("Losing Ground" (1984), "The Bell Curve" (1994), "Coming Apart" (2012)) will be speaking about his latest book "By the People".

Feb

4

 The Global Burden of Disease Study published in 2012, is the most comprehensive and systematic analysis of causes of death undertaken to date, involving nearly 500 researchers from more than 300 institutions in 50 countries, and starting with almost 100,000 data sources. What did the researchers find? Here in the U.S., they determined that our biggest killer was our diet. Number 1 on their list of the most important dietary risks was not eating enough fruit, responsible for an estimated 4.9 million deaths a year around the world.


link to article

link to study

Feb

4

 The gravitational constant, G, is 6.7 x 10^-11 N-MM/kg. Is there a similar G in financial markets for the super hot stocks? It is conventional wisdom that information is analyzed faster and better today than 20 years ago. If that is true, then G has increased. But is it true? Or is the constant really human nature?

An anecdote:

Iomega, the (in)famous disk drive manufacturer that was going to take over the world, ipo-ed in June 1996. It went parabolic. And then flamed out. It took 22 months to trade back at its IPO price before descending into oblivion and a takeover by EMC for about 3$/share in 2008.

GoPro, the hip portable camera manufacturer (with a surfing dude for a CEO) was going to take over the world (and was the next BIG media company), ipo-ed in June 2014. It took 17 months for this stock to trade back at its IPO price amidst a flameout — and with yesterday's news of a loss, is on its way to oblivion — to be acquired by Sony? for about $3/share in about 5 years?

Based on this non-scientific study, the market is indeed moving someone faster. But still plenty slow enough that if you strap a gopro to your forehead and point yourself in the direction of the major slow trend, you'll still make plenty of money (and have a nice video to upload too).

Steve Ellison writes: 

Anecdotally, when I started working at Hewlett Packard in 1992, I worked in a division that manufactured hard disk drives. It was a very dysfunctional organization (that was shut down by the company a few years later because of excessive losses). The production lines were especially dysfunctional. To ensure quality, the drives were tested in a "burn-in" process that took more than 24 hours. Only a minority passed the tests and were shipped; the rest went into a rework queue. The lines prioritized producing new drives over troubleshooting and fixing those that had failed burn-in. This tactic kept revenue flowing, but resulted in ever-growing inventory.

Fast forward to 1995. The division was drowning in red ink. Over a few months, nearly all the manufacturing managers left the company to go to Iomega. Imagining the practices I had seen being implemented at Iomega, I had an idea that Iomega was going down.

Feb

1

 This article is quite thought-provoking; although my amazement probably results from my somewhat novice understanding of quantitative finance; although I've learned quite a bit over the last year and a half (in large part due to this site, and of course The Chair, who has greatly inspired my relentless study of statistical analysis, and computational finance).

This article discusses a study conducted by Poland's Institute of Nuclear Physics who studied 100 works of classic literature using advanced statistical techniques. They discovered that the works that have stood the test of time are actually fractals, an ideal mathematical pattern found in nature. Some are actually multifractals.

Among the works analyzed in the study include those from authors like Sir Arthur Conan Doyle, Honre de Balzac, Charles Dickens, Fyodor Dostoevsky, Aleaxander Dumasn, Umberto Eco, George Elliot, James Joyce, Victor Hugo, William Shakespeare, JRR Tolkien, Leo Tolstoy and Virginia Woolf. One particular book mentioned is War and Peace.

"Study Finds Mathematical Structure in Great Literature"

Jan

29

 "Future Grains"

This is seeing the data before the actual data is announced. The rice example leads me to think that the same can be done with corn, wheat, cotton, coffee, poppy, coffee, and any other crop that has color change that is visible from satellite imagery.

It definitely gives a leg up for this to those that get to see the commodity of choice they trade or hedge.

Is it really for the common good of the world or is it to be a tool for a heroic trader?

Jeff Watson writes: 

I've been using satellite data since the 80s. 

Jan

29

"Japan adopts negative interest rate in surprise move"

Didn't they do this in the 80s as well? Was this on the Commercial and Industrial (C&I) loans in the 80s?

John Floyd writes: 

10 year government yields tell you the story [quote]. Factor in the deflation, lack of growth, and JPY move [link]. More recently look at the shifts in the Balance of Payments in large part driven by oil and nuclear issues [link]. But the core of the question is best summarized by asking what are the likely policy actions going to be and how might markets react given where the macro story is likely to move to. For example, consider the sovereign debt levels [link], demographics trends and their influence on consumption, etc., where is future inflation likely to be, and then factor in Japanese stoicism [link].

Jan

28

 After some practice, a kid can throw a ball and compute the trajectory on the fly. It becomes internalized. Mathematically it is a complicated computation. Normally people don't think statistically unless say after 45 years of doing it it is internalized.

My question to Chair and others is whether after trading for many years using statistically based evidence you have internalized the data and math such that a trade is similar to throwing a ball. Computations of course help reject ideas, or deflate misconception, or identify newly arising cycles but what percent is intuition? Even system traders identify new systems by eyeballing data or plots or using analogies.

Stefan Jovanovich writes: 

If we are talking baseball, the throwing equations have their own internal derivatives. To throw a ball well enough to play the game at even a semi-professional level as a pitcher requires a great deal more than "some practice"; for the people who make it all the way to "the show" the internal computations get down to the questions of how much pressure you place on the joint of each toe. The calculations about how you hold the ball for each pitch are maddeningly complex; then there is what you do with your biceps, elbows, trunk, etc.

I suspect surfers have the same kind of subtlety in their thinking about what they do. But, I don't know: can't pitch, wouldn't dream of surfing. What I do know as a catcher is that pitcher's internalization process is never finished; they are flakes because they have to be.

anonymous writes: 

When surfing at the home break, most of the good locals have it pretty well wired. Knowledge of the bottom, how the surf breaks on different tides, swell direction, currents, winds, and where the wave will peak allows a local to successfully get waves. When traveling for waves, new breaks tend to present a host of different challenges. While I will never have another place wired like my local break, when visiting a different one, I'll catch a few waves, but the locals will catch many more. I find injuries are more common at other breaks, mainly because of the lack of knowledge of the wave and the lineup. An outsider never knows all of the quirks, inside rules, players, and forces at a beach.

Seems like a good time to present a market analogy. A competent local surfer generally gets more waves than a competent outsider, just like an insider or specialist in a single market generally has more opportunities than outsiders for good trades. The insider/specialist knows his market just like the surfer knows his home break.

Jeff Watson writes: 

Surfing is a good example of an intuitive process internalizing complex multiple variables. At my big wave spot I know the secret line up markers: a grass spot on the mountain, the tops of certain palm trees, a rock, some foam. It puts me in a 6 foot square in the ocean. I can see the waves in the distance, sit in a certain spot, and the wave come right to me. Someone 6 feet to the right is in the wrong spot. Newbies often get slaughtered. For example, there was a big crowd out two days ago with medium size waves when a HUGE set came thru and washed almost everyone out who were sitting on the inside.

On the rare occasion that I hit it right, I enter a trade at a good spot and ride it on most of the full move. You can feel the variables, the amount the market has fallen, its speed of trading and movement, the way its trading. The price location in relation to the last week, the last few days, the last few hours give info. When to go out and not watch. Seems like there is a lot of info being processed internally, somewhat unconsciously that has valuable input. Ideally one could quantify all these and have a computer do it with AI better than a human. The multiple variables make it hard to quantify though. I suppose some simple rules apply: after multiple 2% drops is a good time to buy or after a 50 point down move in a day on the third or fourth down day, after fake bad news, on on some stupid announcement like FOMC and the market dives 50 points for no reason. I'm sure there are more rules of thumb that one always keeps in the back of your mind, including all of Chair's caveats, and all Wiswell's proverbs. Maybe that's the point, over time one internalized all the rules, the basic setups, the data, even more complex set ups, without having to count on the fingers as its happening. 

Jan

20

 I first learned about Thompson's On Growth and Form at a talk back in the late 80s by Benoit Mandelbrot, who referenced the book as an influence. I think Thompson's book has relevance to equity markets, philosophically as well as on more practical terms. Thompson simply observed nature and described relationships of form to function. He didn't attempt to infer an evolution process. In this sense the book is an early precursor of Bejan's Constructal Theory.

Examples: Thompson shows that the speed of a fish or ship is proportional to the square root of its length, and that the kinetic energy exerted by an organism is proportional to its mass to the fifth power. Thompson considered form as the product of the dynamic forces acting upon it. Logarithmic spirals reflect a constant proportional growth rate. The logarithmic spirals in pine cone scales or sunflower seeds result in a Fibonacci expansion in the number of scales or seeds. The Fibonacci sequence is just a discrete version of the continuous logarithmic curve.

It's not unrealistic to think that logarithmic spirals and Fib sequences crop up in equity prices. Daily returns are often assumed to be lognormally distributed. The relationships are probably not as simple as "stock x should drop to 38.1% Fib level and bounce".

One of the forces acting on the form in this case is human perception of emerging patterns. One of the more powerful conclusions drawn by Thompson is that many species share features that are invariant under simple linear transformations. So the shape of a gorillas skull and skeleton is the same as a human's through a "stretching" deformation.

If we make an analogy to stocks, this could imply self similarity in price patterns (fractal relationship) or the idea that we need to adjust for both price and time transformations when using historical analogs to predict future returns..

Jan

18

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

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

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

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

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

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

Jan

18

 This is very good writing starting with The Hateful 8. Economic theory with current events considered.

"Slavoj Žižek: The Cologne attacks were an obscene version of carnival"

Andy Aiken comments: 

"So what if we conceive of the Cologne incident…as a carnivalesque rebellion of the underdogs?"

To dismiss what happened in Cologne as a droll little Rabelaisian episode is forgetting that the middle class they deride keeps the lights on at the universities. The Euro and US left intellectuals will be surprised at how swiftly they find themselves on the losing end of a cultural counterrevolution, how adamantly the return of Volkish horrors defies their browbeating.

But they have created the preconditions for this. The social sciences have become as detached from the tradition of free inquiry as University of Freiberg was in the 1930s. They have thrown away the weapons that could have fought it.

Jan

18

 My friend's bearish posture toward Stocks stems from deflationary signs. Yes, they are pronounced. Wage growth has been non-existent. There is no pricing power anywhere. Currently you can't give away raw materials world-wide. Copper at $1.95, Brent led WTI to below $30, grains/fertilizer are cheap. Coal must be given away: just look at US's largest coal Peabody (BTU), down from $1100.00 in 2011 to below $4.00! Uranium is shunned: I notice UEC down from $7 in 2011 to .72 cents! World's largest miner FCX is $4.35 from $60+ in 2011. No wonder credit is being pulled from under most of Canada's enterprises, with Canadian currency depreciating 50% during the same time frame. Investors dread holding the bag over the weekend, as increasingly more corporate treasury shenanigans may need to be disclosed/announced.

Yet Chair reminds us that all of that is (eventually) Bullish, as the lower input prices should act to improve margins. But how do you re-ignite demand and revive pricing power? Surely not by interest rate hikes via the lift-off. So what policy actions can we anticipate nowadays, as Bullish weekend surprises?

anonymous replies: 

The usual quibbles:

FCX is not the "'world's largest (copper) miner"; SCCO is. Its price has fallen by half from its peak at the end of 2012 and by a third since its recent high in May of last year. Hardly wonderful performance but nothing extraordinary for the copper business. The decline in FCX is a comment on its woeful balance sheet. The company has a quick ratio of .6 and current ratio of 1.7; SCCO's numbers are 2.5 and 3.5.

Even two years ago, none of the public U.S. coal companies had a balance sheet that was anything but a joke, especially if you included the pension liabilities. Peabody was bankrupt 2 years ago; the stock market just didn't know it.

As Carder has patiently explained for over a year now, in the U.S. coal now suffers from having direct price competition from natural gas. Those of us who lost a third of the money we put into a coal mining equipment stock (JOY) last year bought the company because, unlike all the U.S. public coal companies, it had a decent balance sheet. It still does; and if we were not busy trying to lose more money in the refiners, we would be tempted to try for being a 3-time loser now that the private owners of coal reserves (the Lexington KY gang) have gotten some wonderful news.

For those who are looking for possible speculations, the Stowe Coal Index is the best source.

In carbon-based energy, demand is not the problem, even for coal; supply has been. The dramatic increases in output from new production techniques (fracking, continuous miners to name 2) have created a surplus. The question now is how much of a surplus. The EIA now says it will be a year before supply and demand in oil match each other.

Jan

18

 While the world was mesmerized with China currency "manipulation", and played hot potato with equities worldwide - the Japanese retail and institutional investors decided over the weekend that they've had it enough with chasing South African yields. The result was a 10% gap opening that produced a new all-time low in that country's currency. Of course, the opening was overdone, and the extreme quotes were way too wide to deal any substantial size. Yet, the signal went out - even if it was little noticed.

So the South Africa Reserve Bank will have to deal with run on their currency. Indeed, no Central Bank will allow overly rapid devaluation - so they'll have to be buying Rand in the open market, daily. With what? Obviously, they can't spend their meager reserves of US Dollars doing that - and they'll have to auction off or pledge some of their Gold reserves (I believe they hold Platinum bricks as well).

Now, when I pointed that out at last night's CME open, Gold was still up much bigger than Silver - on pure speculation. Speculation based on standard notion that Gold would be more valuable than Silver "during Stock Market uncertainty". That's pure speculation. The dynamics I point out about the South African Central Bank is less of a speculation - they are rather the actual procedural transactions in these kinds of circumstances. Thus buying Silver futures against a sale of Gold futures was a smart thing to do right from the Sunday night open. And that's as close to easy money as one can come!

anonymous writes: 

Just read the South African Reserve Bank's annual report and appendix: "Management of gold and foreign exchange reserves." They don't have any platinum. Their forex reserves have increased to over $60 Billion (according to this document). So they've got plenty of ammunition to intervene if they want to.

Markets will do what they want to do. However, if the gold and silver markets are behaving based on Anatoly's theory, the mkts are wrong on the facts.

John Floyd writes:

My African Grey parrot has learned to whistle the beginning of the Rocky theme song. I would frame the opening two rounds between anonymous and Anatoly more broadly by considering the following.

1. To what extent does the move in the South African Rand last night portend for future pockets of illiquidity, for example the stock flash crash, the fixed income flash rally, the Chinese currency devaluation, etc. ? How might that be best handling offensively and defensively?
2. Why has the decline in oil and gasoline prices not transpired to a more robust pickup in consumer spending?
3. Why are corporates generally more willing to buy back stock than increase capital spending?
4. Is it an issue that according to the BIS emerging market debt has risen from $15 trillion in 2010 to $25 trillion today?
5. What happens to domestic risks when foreign currency denominated debt has increased from $1.5 trillion to $5 trillion?
6. What happens to inflation when emerging market currencies plunge and how do central banks respond in an already weak domestic economy?
7. If the Fed was concerned about global risks in September how might this change their behavior?
8. In 2008 troubles in the US$10 trillion mortgage market had broad implications, are there parallels today?
9. What might occur to cause present market themes and trends to reverse?

That is enough for 9 rounds and hopefully we can all make a victory run up the Philadelphia Museum of Art steps and perhaps make enough to buy van Gogh's Sunflowers inside.

anonymous comments: 

We all must acknowledge that the stock market (and subsequently bond markets) seem connected at the hip with the crude price right now. Does this make sense? I don't know. But it is what it is.

This oil discussion got me to finally run some quick numbers. I'm sure similar numbers have been in the press, but I like to look things up for myself.

In my cheap-seat view of the world from my gopher hole, I've been thinking about how there are certain crucial parts of the global equilibrium that have gone through important changes, and that part the current volatility is a process of finding the new equilibrium.

The various QEx/on-off moves are part of this. And also China, in that they are (slowly [probably]) moving away from the mercantilist import/currency/capital control system, which created the macro-financial jet stream effect where we bought their stuff, and they sent the dollars back to their Fed account, to the tune of a few hundred billion a year, while they paid off their exporters with new yuan and thus created a global inflation sink.

But the biggest, quickest change has been oil. Some nice rounded numbers, referring to the change in $/bbl from June 2014 to present:

global avg daily consumtion: 90M bbl price change: -$77/bbl loss of revs to oil producers: $6.93B/day annualized loss: $2.53T

A big chunk of that money flows into Saudi (about 1/9 of global oil revs), and they have some kind of pattern of spending and investment. Used to be the Saudis spent a big piece of it on gold. Probably not so much now.

They are like one of those deep-sea hot-water vents where the life grows around it. There has been an equilibrium for a long time with that money flowing into oil producers and providing the hot water for those vents. In a very short time, ~$2.5B of flow has shifted away from that system, not to mention all the downstream segments like the integrateds, mids, E&Ps, etc.

I remember when big numbers had an M. Then we moved to B. Now to be big, a number has to have a T. I figure a $2.5T change in the global equilibrium is going to take a while to digest, not to mention the unrealized political consequences in the Middle East and elsewhere.

Again, without being overly precise, subtract US oil exports from imports, and you wind up with 9.2M bbl/day, which translates to a little over $700M/day in payments, which annualizes to $260B. Which, all other things being equal, should be less downward pressure on the USD.

Cui bono? The American consumer, of course. Again, June 2014 to present:

avg gas price/gal:
June 2014: $3.766
Dec 2015: $2.144
Change: $1.622
US est daily gas consumption: 375M gal
Daily savings: $608M
Annualized:  $222B

That's our piece of the action, and it has to be really good for somebody.

I can't think of a clever summary, so there it is.
 

Jan

14

 Silicon Valley-centric but a very quick read: "The State Of The Startup: Fundraising Market In 2016"

Highlights:

- $42B invested in start-ups in 2015
- 34% in seed or series A.
- Substantial shift to consumer investments

Concluding paragraph:

"The late stage market may witness a different phenomenon. More than 40% of the dollars invested in Series B and later rounds originating from corporate venture capital, mutual funds, hedge funds and family offices. This money isn't committed to startup investing. Investment strategies for these types of investors can change quickly. If suddenly all that capital were to disappear and everything else were to remain the same, about $10B would leave the startup ecosystem - a drop of 25%. That would surely be felt across Startupland."

Author is a VC at Redpoint.

It feels a lot like dot-bomb in these here parts…

All the best, Stefanie Harvey

Jan

12

Why chart reading is confusing: "When a Circle is a Straight Line"

Jan

8

 On January 27, shareholders of Royal Dutch Shell will vote on the company's plan to buy BG Group PLC (the upstream remnant of Margret Thatcher's privatized British Gas).

If you are a merger arbitrageur, you are praying that the RDS shareholders will shoot themselves and vote yes, as the deal spread is very wide.

If you are a shareholder in RDS and have carefully studied the assets, forward prices, and assumptions, you have concluded that this deal is likely to be remembered among the largest destructions of shareholder value in the history of the world. I reached this conclusion several weeks ago. Today, Standard Life, RDS' 11th largest shareholder concluded the same thing and said they will vote "no."

Perhaps if you are the analyst at Institutional Shareholder Services (ISS) who recommended that shareholders vote in favor of the deal, you might be assured of a future job at Goldman Sachs, JP Morgan or Rothschilds after the deal closes — as the investment banking success fees will likely be extraordinary.

But — where are the activists? They can easily and rightly point out that there are numerous other assets around the world that RDS can buy at much better prices ; with a better risk/reward…

THIS DEAL IS EERILY REMINISCENT OF BANK OF AMERICA'S KEN LEWIS BUYING MERRILL LYNCH DURING THE FINANCIAL CRISIS OF 2008. The day that this RDS deal closes, billions of RDS equity will be destroyed.

Are we witnessing the downside of billions of dollars of passive index money blindly following the ISS pied piper over a cliff?

Carder Dimitroff writes: 

This deal is complicated. Most shareholders lack enough information to form an opinion. While I'm on record as being concerned about the liquefied natural gas industry as an investment, I have no opinion on this deal.

This deal is about BG and RDS's natural gas portfolios and forward values of any combination. To know future values requires a full understanding of their book of contracts, their hedges and their speculative accounts. It also requires the analyst to be certain about future market conditions.

Here's what I know:

1) By definition, liquefied natural gas is an international commodity. There are few to zero domestic markets for this commodity.

2) RDS will likely become the <production> cost leader in Western Pacific's liquefied natural gas markets.

3) BG could become a cost leader in the Atlantic liquefied natural gas markets. BG bought 20 years of supply in the US market and must sell in another market. Those markets are not correlated. It's likely BG's 20-year purchase agreement is unhedged. Nevertheless, the deal currently has a substantial gross margin. If oil prices increase, their margins will likely increase.

4) Combining portfolios can sometimes offer surprising results (good or bad). Combining Pacific and Atlantic portfolios could create substantial value. It also could create interesting hedging opportunities, which in turn create value. Without understanding details of RDS's portfolio strategies, it would be difficult for most shareholders to correctly value the combined portfolio.

5) Liquefied natural gas can be used as a substitute for coal. Under current market and political conditions, natural gas is currently an economic alternative to coal.

6) Finally, there is a speculative element to liquefied natural gas industry. Consider the pressure to reduce coal consumption. Also, consider desperate gas markets. If Europe and Asian markets can replicate UK and US markets, indexing natural gas to oil prices could be defeated. If defeated, international natural gas markets could open up with RDS as the clear leader.

Apparently, people looked at portfolio details and they have concluded the BG-RDS merger is a good deal. Other experts looked at the same data and concluded the merger is a bad deal. I don't know. 

Jan

5

 I noticed at the drug store today a modern devices like a wrist watch that reads your blood pressure, heart rate, and oxygen use. Some years ago Dr. Brett Steenbarger, a trading psychologist, talked about monitoring your vitals as you trade for beginner traders trying to get a hold of the excitement which might detract from decision making. Seems like these might be helpful for a beginner trader getting used to the stress of trading and practicing relaxing a bit under uncertainty.

Brett Steenbarger comments: 

Yes, and the Fitbit devices can also be effective in helping people become much more data driven in their workouts.

Jan

4

 The Revenant has been seen and is the most boring 3 hours one has ever spent in a movie, as I didn't leave early this time as had to escort some daughters home. No survival skills or tension whatsoever, and much pc stuff concerning the evilness of business, and the virtues of the men of paint.

anonymous writes: 

I agree with Victor on this.

I was looking forward to seeing the movie and was quite disappointed.

The action scenes are good, but they were too few and far in between.

In my youth, I felt that I was born in the wrong century. I should have been born in the time of Lewis and Clark and been an explorer. After researching it more thoroughly, I came to the conclusion that it would have been very uncomfortable to have lived in that era (I like my two showers a day). And I don't know how far I would have gotten back in that day due to some relatively easy to fix health problems that I've had that were not easy to fix back then.

The stress on the body of living out in the wilderness (as portrayed by the movie) makes me wonder how any of those people survived back then. Maybe they were just the toughest of our lot.

The scenes of intense cold that involved DiCaprio's character getting into the water, staying in the water for extended periods of time and then getting out of the water with all his clothes completely wet were hard to accept. Especially considering that he had recently been mauled by a grizzly bear.

I guess the drive for revenge can be a strong motivating factor.

The cinematography in The Revenant is the best part of the flick. Otherwise, it was a disappointment.

Stefan Jovanovich comments: 

Hugh Glass was not the only one of these tough frontiersmen. In a bit earlier age you have the likes of Simon Kenton, who survived at tomahawk blow into his skull and before that had a journey through the wilderness naked and without weapons after he barely escaped an Indian attack while sleeping. After that he always slept with a loaded rifle next to him. (See The Frontiersmen by Allan Eckert.)

Jan

4

 When they proposed the four day work week, a number of workers exclaimed, "Hey, we don't mind working the extra day!"

Jokes aside, I've noticed a number of recreational retail companies closing for Black Friday (REI), closing over the holidays (Oakley), even doctors offices. Is this a sign that the younger generations do not feel the need to show up early, and wait until the boss leaves, that they value their independent lives over work, that there is more to life than money?

Speaking of overwork, this year I've made fewer trades, with months off between some, yet made more than in years were I've overtraded. It can be debilitating and negatively affect judgement to stare at the screen all day. My best trade was when I entered a position and went camping, but forgot my security device and was unable to sell. I sold when I got home, whereupon the market continued up for several more days. The few times I looked just happened to be when the market was up, and I did not look to see the dips.

I think there is a lot to be said about not working to much, about working to make work to look busy. Americans are prone to this in the US. After all health is your best wealth in the end. How much money do you need? After a while it starts piling up unspent.

anonymous adds: 

There is a tremendous amount of wisdom is this post.

The only thing that I would add is that the ITOT (Ishares Core S&P Total US Market ETF) now charges an expense ratio of 0.03%. If you have a Fidelity Account, it can be purchased commission free. 3bp and no commission. This is not a typo.

Dec

30

 Why All Hipsters Look Alike:

Here comes the crucial twist. In all of the examples so far, we assumed that everyone had instant knowledge of what everyone else was wearing. People knew exactly what the mainstream trend was. But in reality, there are always delays. It takes time for a signal to propagate across a brain; likewise it takes time for hipsters to read Complex or Pitchfork or whatever in order to figure out how to be contrarian. So Touboul included a delay into the model. People would base their decisions not on the current state of affairs, but on the state of affairs some number of turns prior.

What Touboul noticed is that if you increase the delay factor past a certain point, something amazing happens. Out of what appears to be random noise, a pattern emerges. All of the hipsters start to synchronize, and they start to oscillate in unison.

Gibbons Burke writes:

The same phenomenon could be observed in the allegedly non-conformist Hippie fad, of which the Hipsters are a cultural echo. Before that, the rebelious spirit of the Jazz-age flapper era or the 1920s was another.
 

Dec

30

 I live in a place where the rich and famous like to have second homes and take vacations. Each year around this time I like to do a hand count of the private jets lined up on the runway. This year there were 78, which the capacity, and the overflow goes to Maui or Oahu. More were on their way in. These are almost all big 16 or more passenger jets, not the little Lears that you have to bend over to get into. A new twist is the Kukio jet 'bus' where people buy a book of tickets to share a private jet.

The theory here is that the captains of industry and finance have some sort of read on where the economy is going and the money piling up in their coffers. If its tight, the jets are fewer, and smaller.

The prediction is that the coming years looks good.

Dec

28

  Our Maverick Resort is technically in Ormond Beach. The tide was up (early morning), as I walked out South - ankle-deep, no phone or watch. Not a single sea shell and very soft white sand, so the entire way felt like a carpet. My only company were thousands of seagulls and an occasional crane. No cars on the sand early on, and not many people - as the sun was struggling thru early clouds. A few teams of women conspicuously preferring women, here and there, testing the shallow surf… I made it all the way to Daytona Pier in probably an hour, and checked out Joe's Crabs plotted on maps "off shore"!

Turned around, and sun was barely up now, and in my back. Hilton was just awaking, and so were Ocean Walk condo twins, The Regency and the Plaza. Mid-morning tide was noticeably inching back in, uncovering Daytona's trademark copper-color spliced sand micro dunes. It was only at this stage that I began noticing that most of my walk occured within the areas of Fourth Wave "correction", having been continually mesmerized by unending powerful Third Waves. Many waves still produced the Fifth, momentarily kissing sandy flats of the vehicular lanes. But barely now… I observed an increasing number of Failed Fifth - the ones that never made a new high…Somewhere in the vicinity of Americano Beach Resort, I noticed a first sudden Extended Fifth. Reminded the stupendous spike up to $130 on the outgoing September Crude futures in 2008, way after the Crude bear had deflated the prompt contract from $147 all the way down to $110. A few pipers, caught by surprise, were hurrying just ahead of the wave on their tall thin legs (an analogy of Small Traders progressively cutting excess Shorts in response to relentless daily margin calls). Only huge fat seagulls seemed unfettered. They just stood there against the nuisance wave, which eventually receded and retraced all the way back into the ocean. Reminded me how Jimmy Rogers shorted Gold over $600 early in 1980, only to watch her spike to $875 in utter horror. But then, she dropped off all the way back to $500, allowing Jimmy the hard-fought profit!

Passing by Beach Bucket, Daytona Beach Resort and Aliki Towers at morning's tail - I now observed fewer and fewer Impulsive Wave sequences. There was more and more resistance found in deeper dunes, and a variety of shells showed - yet not nearly enough to ever step on one. This was definitely Bear phase in the cycle, although it did have Bullish splashes, and never went to total zero. I took a refreshing long swim on approach to my Resort, and rushed to my suite 618(!) to pen this report near the surf's noon lull. On to Hull's seafood market to stock up for the festive BBQ!

Dec

23

 Vic, some time ago you made a comment about the market's drift and the analogy with Bacon's cycles, in that the entrepreneurs require a 10% return over the long-term and the public as a whole must always lose the vig. Intuitively it makes sense, and it's hard to argue with Dimson et al's data too, but my thinking breaks down when I try to define the parametres in the market model. At the racetrack we know who collects the vig and how, but what's the equivalent in the market? The crowd selling to the point of 10% in expectation? But then how do you capture it if you held, since the new entry point is lower? Could you shed some light on this, or it was just an off-hand comment and I should stop wrecking my brain?

Victor Niederhoffer replies: 

Thanks for your thoughtful comment. The return on capital is 15% for most companies and that compares to a 2% 10 year rate. That's enough to give a 10% return especially since companies grow profits by 5% a year. Dimson always questions whether the future can be comparable to the past because of dividend yields low. I don't buy that. Compounding the difference between 15% and 2% is enough. The companies are smart. They know how to get handouts from the government. As for the vig, there is no vig is you buy and hold. I like to buy spiders whenever there is disaster in the air, and that often gives me the vig. 

Dec

23

 I haven't been to a casino in many years. Here in the seaside city of Sihanoukville, Cambodia, there are many casinos. There is one at the 5-star Sokha Beach Resort.

On a sunny and hot late morning after swimming at the superb private beach, my wife and I walked in the big windowless building cross the lawn from the hotel's main restaurant. At the door, the rule says the followings are not allowed into the casino: sunglasses, hats, bags, cameras, and certainly knifes and guns.

Just as we got in, a waitress gave us each a $10 coupon, saying that we could use $10 cash and the coupon to get $20 credit. Asked about the conditions, she said that with the coupon we could only take away wins above $60.

The big hall was very quiet. In fact, there were only a few guys sitting at one poker table. Of course there were many waiters/waitresses around.

We walked to the slot machines area. Not sure how much we could win, we decided not to use the coupon. With the help of a waitress, we put a $5 bill in one machine and started playing. After about 30 minutes, we got it to $15. Then we wanted to take the money and go to another slot machine. Here is what is different from Las Vegas: you don't press a button and get the chips or bills and go. We had to ask the waitress for help. She came to the slot machine, photoed the machine screen and wrote down a bill, she then walked to the cashier to get us $15.

We then walked to another slot machine and put in $5. This machine gave us very little chance and we lost it all in not much time.

Then we walked to another machine and put in $5. After about 20 minutes, we got it to $10. So in about 1 hour, our $5 turned into $15. Unbelievable to me, so we decided to leave.

As the waitress handed our wins to us, she informed us that we could eat the casino buffet lunch for free. We walked to check about the food. It was not bad, though not too fancy. I tried to stay cautious with these mostly gang (Chinese mostly) controlled casinos, so decided to not have the lunch and left.

I wonder if the wins can be attributed to our strategy, which was to largely vary bet sizes. Didn't Ed Thorp advocate this idea in his Beat the Dealer?

The slot machines give one significant leeway to bet at different sizes. The minimum bet is 1 cent on a single play. One can choose up to 10 times the minimum bet. One can also choose to play up to 10 simultaneous plays. With these options, one's bet size can be anywhere from 1 cent to 1 dollar. We tried to bet small after a win and bet large after many losses.

Or perhaps, they tweaked the machines to give us some initial advantage in order to attract us to bet big. It is not impossible.

Anyhow, Sihanoukville is a fun place: the nice beaches (some are getting ruined though), beautiful islands, and the food (a lot of world cuisines). Hotel rates go way up since Dec. 24, so we will stay away from the crowds.

Happy holidays and new year!

Dec

13

 This is one of my favorite stories. I hope you enjoy it, and I wish you a Merry Christmas. — Victor Niederhoffer

High on the mountainside by the little line cabin in the crisp clean dusk of evening Stubby Pringle swings into saddle. He has shape of bear in the dimness, bundled thick against cold. Double stocks crowd scarred boots. Leather chaps with hair out cover patched corduroy pants. Fleece-lined jacket with wear of winters on it bulges body and heavy gloves blunt fingers. Two gay red bandannas folded together fatten throat under chin. Battered hat is pulled down to sit on ears and in side pocket of jacket are rabbit-skin earmuffs he can put to use if he needs them.

Stubby Pringle swings up into saddle. He looks out and down over worlds of snow and ice and tree and rock. He spreads arms wide and they embrace whole ranges of hills. He stretches tall and hat brushes stars in sky. He is Stubby Pringle, cowhand of the Triple X, and this is his night to howl. He is Stubby Pringle, son of the wild jackass, and he is heading for the Christmas dance at the schoolhouse in the valley.

[For the entire text of the story, please follow this link].

Dec

10

I looked at 3 month T bills to identify tightening/easing cycles since 1954 from a chart at FRED. There are 10 cycles that stand out. This is retrospective as the cycles could only be identified after the fact.

Given that, below is the SP500 performance comparison using weighted annual growth rates during each leg of the cycle. There is some evidence that stocks do better during easing over the whole period, but since 1976 they are about the same at positive 8%.

Since 1954

Easing cycle              8.6%    28 total years

Tightening cycle        6.6%    33 total years

Since 1976

Easing                       8.0%    23 years

Tightening                 8.4%    16 years

Dec

10

The key mathematical problem of factoring the large prime numbers looks close to solution through a specialized module with this new item. The encryption mechanisms used by traders in vpn, brokerage and messaging would not hold security forward or backward. How will this change the trading business?

Dec

9

 It is my expectation that we are in the final leg down in crude oil prices for this cycle. I've learned to never predict both PRICE and TIME — so my prediction (based on historical precedents and rig counts) is only that the cyclical spot price low is most likely to be seen in the next 90-180 days. I have no prediction on the exact spot price low but I would neither bet on not dismiss the chance of a seemingly absurd spike low price. Being early can be catastrophic with the contango's roll cost. The June 2016 40/30 put spread costs about $2.5 — so Mr. Market is putting a 25% chance of us seeing 30$/barrel by June. Similarly, Mr. Market is putting a 6% probability of 20$ crude by next June…

If your focus is on the energy stocks (and their weighting in the S&P), you can glean substantial information from watching the behavior of the back contracts out to 12 months– which have NOT made new lows since August. A capitulation in those contracts will start a fresh leg down in IYE, which has so far been telling a different story from the spot crude price. Also, a break down in the long-dated futures will also feed through to the high yield market. Those are the contracts which will can create a lasting jolt to the S&P.

Separately,

I keep asking myself "who are the big winners" from a continued weakness in spot crude?

The "easy" answer has been airlines. (Consumers seem to be saving, not spending, much of their windfall.) But I don't ever own airline stocks.

There is another less heralded winner — which is being validated by Mr. Market.

Local municipalities, agencies and State governments (excluding Alaska, North Dakota, Texas) are huge winners from a continued decline in fuel prices. And this is being confirmed in the credit spreads of these issuers. Also, the bridge and turnpike authorities are seeing increased tolls as car mileage increases. Historically, Muni/Treasury spreads trade as a percentage, so there are some other reasons why these securities might be outperforming.

A bearish third order effect is that car insurance companies are experiencing continued pain due to increased mileage (more accidents), tight premiums, and lower returns on their float.

Lastly, Congress is reviewing the extension of the commercial and residential energy tax credits for installations of solar, wind, and geothermal projects. The current tax credit regime expires next year. The residential tax credit is 30% of the installed cost. Without the credit and at sub-40$/bbl, most of these alternatives do not have reasonable break-even periods. Hence, another "headline" to watch, and which may affect the psychology of the domestic energy market (i.e. longer dated futures) will be whether these tax credits are eliminated.

There have been only a handful of 50%++ energy bear markets in the past 40 years, so the ability to quantify these observations is difficult. That provides an opportunity to devise and implement trades with a variant perspective.

Dec

2

My take from eyeballing this chart of the day about the gold market: one should prepare in advance for buying opportunity. Chart is longer-term Bullish, as most asset charts are LOL. Trick is: gold bugs are getting progressively more rattled by the corrective phase that commenced 2011. More often than not, the nadir of such correction will trade very quickly - leaving the unprepared behind. Not sure one will be able to buy size on final low (as the algos are very adopt in frontrunning both ways). So if one is looking for size, and just needs to fine-tune timing, one should explore all kinds of venues. Gold equities will be the most leveraged Bullish bet. But the real deal is physical gold (stored under your control). Eventually, when Gold is attractive for extraordinary financial panic reasons - physical will outperform by leaps and bounds!

All this being said, the final low print will likely occur deep in three-digit territory. Any initial Fed tightening will hit all assets hard.

anonymous writes: 

Seems to me like a test of support at $1000 round, which was the 2008 crisis year high, might be in the cards one of these days.

Stefan Martinek writes: 

Re: "Not sure one will be able to buy size on final low (as the algos are very adopt in frontrunning both ways)"

I do not understand what algo story you are taking about. You want to buy a multiyear low and then you are afraid to miss the last tick on a decline? There will be plenty of time. Days, weeks, historically even decades (1980-2000). Who cares about "algos". I cannot even comment on Elliott voodoo. This flawed concept cannot be falsified, at the end it is always right regardless the number of counts. We all know what this implies.
 

Nov

19

 Again and again I see misdirection as an important factor to understanding markets. When everyone is focused on China for example it will be German industrial production that moves markets, or when interest rates seem important it will be earnings and growth that matter. Big moves in commodities matter, until they don't matter anymore. A rate change now seems in the bag so the 30 year rallies, not sells off. The Fed Fund rate is in fact rarely even employed by banks, misdirection. It is the reverse repo and excess deposit rates that are very active.

Even using a quantitative approach to markets, there are only so many things you can test. So testing the what happens to the right hand will not help when the ball is in the left. No easy answers here, but Ricky Jay is a great resource on the topic and has a good film on Netflix.

Nov

6

 Has anyone studied Art Cashin's claim that:

"When October is up over 7 percent, the result of the next two months — the so-called Santa Claus rally — is cut in half," UBS's director of NYSE floor operations told CNBC's

His research comes from Stovall from S&P, if I hear him right. Cashin says that instead of approx 3% benefit long drift you only should look for half of that because of the >7% rise in Oct.

anonymous writes: 

I have not studied his claim, but if he does not somehow factor in the relative strength of the market in months just prior to October, I'm not sure the observation is worth much. Presumably, the very week August and September of 2015 created a reset of sorts and the odds of a Santa Claus rally occurring this year are probably no worse than usual. Just my opinion of course. 

Jeffrey Hirsch writes: 

We have.

While I love Art Cashin, he and everyone else mistakenly calls the yearend rally the Santa Claus Rally. As defined by Yale Hirsch my illustrious father and mentor the Santa Claus Rally is the short 7-trading-day period cover the last 5 trading days of the year and the first 2 of the New Year. Most importantly as the songwriter in Yale has made clear: "If Santa Claus should fail to call, Bears may come to Broad and Wall." Here is the page from the 2016 Almanac and a slide image I use a presentations.

From Page 114: "Santa Claus tends to come to Wall Street nearly every year, bringing a short, sweet, respectable rally within the last five days of the year and the first two in January. This has been good for an average 1.4% gain since 1969 (1.4% since 1950). Santa's failure to show tends to precede bear markets, or times stocks could be purchased later in the year at much lower prices. We discovered this phenomenon in 1972."

The history of the Santa Claus rally:

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Oct

26

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

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

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

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

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

anonymous writes: 

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

Who does this benefit?

Russ Sears writes:

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

Oct

22

 Obama is pressing for Congress to give Puerto Rico money to save USA SPEC investment.

anonymous writes: 

I don't know what the president's view is on this. But, I am fairly certain that discussions within branches of the government are entirely against any monetary support at the present for Puerto Rico. Consider the example it might set for other municipalities, states, etc.

But to be sure, Puerto Rico will be a growing topic going into the next election year. I believe I outlined here what I thought where some of the key macro issues in Puerto Rico several months ago. Specifically the key salient differences between Puerto Rico and say a Greece. I didn't see the whole piece but apparently Wilbur Ross was talking about this yesterday.

Since that time one particular meme has caught my attention. The general workout numbers developed by many on the degree to which Puerto Rico must right down the debt fall into the same trap the IMF and Europeans have. Here in lies one of the similarities with Europe as well. Both PR and Greece are in a currency union and cannot use the currency for stimulus and the fiscal tightening required to get the budge in order contracts growth for a very long time. Thus the future GDP assumptions several years out are inflated relative to what realistically can occur.

Further, despite the tax incentives, one might consider the population exodus at circa 3% of total population per year. Yet another key issue in the debt workout for the future as those leaving tend to make up a certain bracket of the population that has both financial and educational resources.

Oct

20

 Monday, October 19th is the 28th anniversary of the 1987 crash. As I was a young pup in junior high school in Queens, NY at the time, I certainly remember the reaction around New York be it media, neighbors, etc. I even watched my father pretty much chug a scotch when he got home that night and he is an Accounting Professor who never drinks and is certainly not of the speculator ilk. (He likes his drift nice and slow) For participants who lived it, what is the best thing to do in that situation? Certainly, taking out the canes is warranted for best of breed stocks. But does one start thinking differently, would a past in a form of martial arts training, boxing, or Krav Maga be of help? I can't help but think of the value of situational awareness as is taught to fighter pilots. Any insights would be appreciated.

Jeff Watson writes:

That week in '87, the grains had a magnificent sell off, which made many locals millionaires. I know that I had a good year in a 7 day trading period. That rout was almost as good as the Chernobyl disaster a year and a half before when one was able to sell as much grain as their account would carry……at the top. However, Chernobyl had some tectonic shifts which caused mini quakes for months. Lots of newly minted millionaires on the 19th, and the existing trade didn't get hurt that much so it was good business for all.

Russ Sears writes:

This, I believe, is a great question for sports psychologists. Visualizing your actions in a stressful situation and deciding ahead how you are going to react is very helpful. Then when the pressure comes your instinct is much more likely to go with what worked in your visualization rather than choke, flight, or freeze. You are even able to choose your fight tactic.

If I would have known this in 1992 at my peak in running but novice at the marathon, I could have been an Olympian. The USA competition was weak that year and I was at my prime. But when I hit 20 mile mark in the LA marathon at 1:41 time of change but also hit the wall soon after and crashed and burned because I eased up rather than pushed through it. That pace was easily the fastest pace for a USA runner up to that point that year if I could have head even close to it.

On active trading I found though that much of the stress comes from watching the market too closely so that every jump seems to need preparation. But basic risk management says to have a cash contingency stored for a short emergency use whether it's a stock crash or a bout of unemployment.

Mr. Isomorphisms writes:

Five minute miles. I just can't wrap my head around that.

Russ Sears writes:

Easier for those who run 65 second 400's than those who run 11 minute 2-miles, imo.

Oct

16

 Amazon has 45 million people who are subscribers to Prime and roughly the same number of regular customers who are not Prime members. The current estimates are that Prime members spend $1500 a year and non-Prime members spend $700.

Alibaba claims that it now has 400 million customers on AliPay who spend between $1000 and $1100 annually.

The per capita GDP in China is estimated at $7500; for the U.S. The figure is $56,000.

Hmm..

Oct

7

 I rushed into a shop the other day, seeing a football logo drinking glass that I quite liked in the front window. I was rushed, as I needed to be somewhere, and was running late. I asked the shop assistant, do you have one in my team colours as I picked it up and he said no.

While still standing near the front of the shop, some distance from him I asked how much it was, while at that moment seeing a price tag on the item of $20.00. He replied $12.00, and I said $10, while simultaneously making a move to put the item back in the window. He said DONE.

It only occurred to me later, how many variables came together in my actions and words, totally non scripted, to get him to deal at a price half of what the label said.

I looked rushed, it wasn't exactly what I wanted, and I gave the attendant no time to sell the item to me and prove its value, ending in him hitting the bid, not me lifting the offer.

Some things to remember for trading or further purchases.

And yes, I can hear you, his deal price may of been $5 and he still got the better of me. Though I still quite like the lessons learned. 

Oct

5

 GS just launched a smart-beta product which I believe is their first proprietary ETF.

They are charging only 9 basis points for the GSLC <equity> etf!!!

It's a large cap etf, rebalanced quarterly based on their scoring of value, momentum, quality, and volatility. A quick look has them underweight the largest 40 S&P names except for Gild, HD, CVS and WMT. Interestingly, they don't hold any GS — probably due to regulatory issues.

If anyone knows of a backtest of their index, I'd be interested in examining it. Without historical data, it's difficult to understand the attraction versus competitors (except their fees are extremely low and so they've undercut Wisdomtree and other smart beta products). Perhaps their inhouse brokers will sell this as an alternative to the S&P?

Ed Stewart writes: 

Have you continued to look at this product? at 9 basis points it seems like a reasonable core holding. I'm curious what the turnover will be given the rebalancing rules. I assume GS will make the money on servicing the fund such as trading, stock lending, etc vs. the direct fees.

anonymous adds: 

Ed,

There are a number of similar products out there (so-called "Smart Beta") which charge between 9 and 20 basis points. So the management fees are only slightly more expensive than S&P or Russell Index Funds. I would argue that the Smart Beta products are themselves "index funds" — but they are tracking a different index! I think this discussion is very important and provocative. I'll provide my two cents below:

Rather than focus on a 5 or 10 basis point savings, I would focus on assessing the probability that one (or more) of these smart beta strategies (of whatever flavor) will outperform the S&P over the next 3, 5, 10 years. When you commit to one of these things in a taxable account, you also need to consider the tax effects of selling early/switching to another fund — as the capital gains taxes can really hurt your long term performance. And you need to consider the chance that the ETF is liquidated for some reason, because that will trigger taxes too. You also need to consider the chance of upward fee drift. For example, GS priced their fund at 15 bp in the prospectus, but lowered the fee to 9 BP on the offering. AQR is also cutting their prices. But at some point, there must be consolidation among these many fund complexes, and after that happens, they will surely start to raise prices — since the tax consequences of switching make the assets very sticky.

BUT FAR MORE IMPORTANT THAN THESE MECHANICAL THINGS:

The academic literature for the anamolies which these smart beta funds exploit is, I believe, compelling. But equally compelling is the fact that their outperformance versus the S&P has been in secular decline. I did some back of the envelope calculations and found that the average annual excess performance for the past 15 years > 10 years > 5 years. That is, the market has woken up to the anamolies and with the advent of these low cost/smart beta funds, it's plausible that you'll see decreasing, if any, outperformance in the future. Cliff Asness at AQR recently wrote an essay on this subject. See: https://www.aqr.com/cliffs-perspective/how-can-a-strategy-still-work-if-everyone-knows-about-it

HOW DO I THINK ABOUT THIS?

I think the right way to pick one of these funds is to understand one's own temperament and market beliefs. It's during bear markets and periods of underperformance that one's temperament is revealed and it's critical to be able to stay with these smart beta products during 1, 3 and 5 year periods of underperformance (however you define "underperfomance"). For example, do you love the "hot" stocks? Would you own Facebook/Amazon/Netflix regardless of valuation? Then the momentum strategy is the right choice. But if you like to own "quality" and feel comfortable with less sexy things (Johnson & Johnson, Microsoft, etc) , then you the Quality anamoly is your right choice. Do you like to be a contrarian? Then the "value" portfolios might make more sense. And if you think you are a trading genius, then you want to move around these different things as you predict the next flavor of the month.

If you put a small amount of long term capital into each of these funds, what's the probability of outperforming/underperforming the S&P on a compounded total return basis? I honestly don't know. But I'd guess that at any given moment — with a X month lookback — one of these smart beta funds will look really good — and one of these smart beta funds will look really bad. And therefore, it's no different from picking a stock or a fund manager or a sector. And consistently doing that is very difficult. 

Oct

5

 As of Friday, mining stocks make up the lowest proportion of the broader ASX 200 ( Australian Stock Index ) since modern records began.

One often sees hysterical market commentary such as:

"Market 'X' trades at the lowest or highest level since such and such a date"

In and of themselves such statements are best ignored.

One wonders, however, if it might not prove of some nourishment to test future expectations of sub components within broader indices based on, for example, if the dub component currently resides in the lowest or highest decile as a percentage of the broader index.

One is far from being a single stock specialist but straight off the bat I can see trouble with the fact that one is not measuring like with like and companies fall into and out of the sub- index.

Regardless, it can be tested against randomness/ throwing darts towards a dart board.

(Or a picture of the Captain of the English Rugby team in anticipation of their drubbing by Australia,  who are, incidentally and pound for pound, the greatest sporting nation in the history of Carbon based life. And YES that does include you America.)

Oct

1

0.95 is lower than 1 /1.05. For this reason a 5% increase followed by a 5% decrease (or vice versa) results in a net decrease. *

In researching volatility drag, with respect to daily vs monthly ETF's (and levered vs unlevered ETF's) I am drawing near to the conclusion that the famous drag phenomenon might be due to a flaw in design rather than in execution. If you design a product to match *percentage* moves, you will induce drag.

The discussions I've read of this phenomenon all go too deep (AM-GM inequality, Jensen's inequality, geometric averaging, lognormal returns, ….) into maths to pick up what I think might be the root flaw of some of these 3rd-gen / 4th-gen ETP's.

* .95 and 1.05 aren't the best numbers to see the mismatch. 1 / 0.5 = 2, not 1.5.

Oct

1

 James Simons wisdom:

"I was just lucky to be good at two wildly different things. Maths and finance are not very alike."

"Tax strategy is very important." (Look at whom he hires.)

"My early success [I believe this is at Axcom] came from just thinking about things slowly, deeply, for a long time."

I've also heard the speculation that the fetish for hiring rocket scientists on Wall Street began with Simons. I would have thought it began with Meriwether. BTW, "Characteristic Classes" by Stasheff & Milnor is what to read if you want to understand Chern-Simons theory (imo).

Here is a video of Milnor discussing something where they come up in a way you might be able to catch from the context. To watch it you need to know that a solid disk maps to a spherical shell via the "drawstring bag". In general N-dimensional rooms map to N-1 -dimensional spherical-shells similarly.

Sep

30

 One for Dr. Bejan.

The Coffee Ring Effect is a well-known phenomenon. A puddle of coffee leaves behind a dark ring, instead of a uniform brown stain. This video explains why— and how this phenomenon resembles what happens in an avalanche.

Dr. Adrian Bejan replies: 

Dear Victor and Pitt,

Thank you for this excellent video. Very inspiring.

I have not worked on predicting the coffee ring phenomenon, but I worked on related phenomena. Here I show you two related ideas:

First, my short video on predicting the architecture of the snowflake, which is based on an article in nature scientific reports.

Second, my article on how to predict droplet impact behavior, splat vs splash. No film about this yet.

The broader domain of life and evolution as physics, to which all evolutionary flow architectures belong, was reviewed during my lecture at the NYC Junto on 3 September.

With best wishes to all,

Adrian

Adrian Bejan ( MIT ' 71, ' 72, ' 75 )
J.A. Jones Distinguished Professor
Duke University

Sep

30

 We often hear that hard work is critical. I agree. But what about the power of waiting? Anxiety can drive one to take an action that is inopportune, not ideal, rushed, or sloppy. Wait and pick the fruit when it is ripe. The idea is related to time preference. I came to the idea when I noticed that much, if not most, work is a salve to cure the desire to "do something" instead of accomplishing something real. So what if one sits back and just waits and by waiting accomplishes in minutes or days or weeks what could not otherwise be accomplished in most of a lifetime. Is it possible? Yes, I think so, as long as one can work hard when needed and on command.

Vince Fulco adds: 

Very hard work is often an avoidance mechanism, and a terrible one, for active or passive significant underdevelopment of the rest of one's life…especially hard relationships which require smoothing out or resolution. I am seeing it with unhappy married friends now who work ridiculous hours because the thought of confronting the elephant in the house is too painful. I think it is a middle eastern saying, "if you wait long enough, your neighbor's body will pass by your doorway."

Sep

23

 In some states, like Oklahoma, there are no emissions inspections. So it would seem like now would be a good time to buy one of these cars on the cheap before the software upgrade and then not do the upgrade (assuming that is, that you don't care about the emissions).

A friend said: "Don't underestimate the seriousness of this.  I am not a lawyer, but isn't triple damages common due to fraud, if proven?"

My answer: Ha! You are assuming that laws actually apply to top corporate executives.

Jordan Low writes: 

I almost purchased a "clean" diesel vehicle. Even if the government is out of the picture, as a consumer I would be outraged. As a consumer, wouldn't you want to return a product that has fraudulent specifications? The liability would already be huge for VW.

Stefan Jovanovich writes:

Read the fine print, people. The car does pass regular emission standards; the software fix was needed so that it could also pass the higher standards that made it eligible for "clean" (sic) energy tax credits. Those were, for a brief period, so ginormous that they would, by themselves, sell the car. That was the incentive for the cheating. 

Sep

23

1. Why don't the exchanges and the sell side research behemoths distribute the same descriptive information set about all markets equally?

For example, the FX Market disseminates certain highly valuable information into the public arena that would be most valuable to the trading of various futures markets. An exhaustive yet discreet enumeration of ALL available information released by exchanges about major futures contracts does not include the information to which I refer.

(I posit that the FX market does not realise the power of the information so it slips out)

2. What does it say about the value of financial information when it is given free of charge?

3. What value financial instruments sold as 'protection' when, if the feared or hoped for event occurs,  best prices (or no prices!) are not available to the participant due to extraordinary spreads, components of the instrument not opening or exchange diktat? I refer here mainly to options markets and the much degraded and over interpreted VIX, among much other detritus.

4. Why are strategies, techniques and other associated 'bells & whistles' best kept out of the public eye?

I don't think this is as clear cut as many other points. I do agree, to an extent, with the AQR research team's recent paper about how a strategy can still work in the public domain , but in the context of not relying on drift or long term returns, being leveraged and aiming for solid risk adjusted numbers - I think things are best kept close knit (perhaps with the judicious application of the law of contract). If anyone reads this post and wants to see the AQR piece let me know.

5. The HFT crescendo. The move from cable to things like sound, vibration and microwave line of sight technology that I have mentioned over recent years in the annals of this lists contributions have certainly coincided with a high public awareness of what goes on now.

Attempts to 'beat' them and devise strategies to mitigate the effective HFT tax should now be 'du jour' to all market players. If not… Well. The Chair's two decade old published comments on the ecology of markets have certainly withstood the test of time.

As a nice aside and another in the plethora of available examples of ever changing cycles, much of the HFT–ahem–'talent' has moved on. It started in the banks, then HF's and now much leading edge technique resides within private family offices. I refer here not to execution of orders but to short term trading based on the ingenuity of the portfolio managers.

Sep

21

 This is my advice to a college student or grad who is worried about answering the question "what are you doing with your life?". Have a little speech put together ahead of time. You can be sure at a family dinner, or other gathering some one will ask you, "what are you studying? What are your plans?". If you have a good sounding and coherent statement to make, whatever it is, say it confidently, mix in some recent related personal experience, and you'll impress the heck out of everyone. Be specific, even if you're not sure what you want to do. Don't just say, "international studies". Say what country you studied at least. Even little kids can do it. I want to be a fireman. I want to be like my Dad. I want to be an astronaut.

Sep

21

 I love Formula 1 Motor Racing.

I love the technical side, the global locations and, after several attendances at the Monaco Grand Prix, I admit to a love of being aboard the super yachts and the beautiful women.

This weekend sees the staging of the Grand Prix in Singapore. It is a very challenging street circuit against a spectacular backdrop.

The qualifying stages are interesting.

There are three stages–Q1, Q2 & Q3. Q1 has the full field of 20 cars, Q2 starts with the quickest 15 cars and Q3 with the top 10. The point of the whole thing is to set places on the starting grid.

It brings to mind relative performances of and rank consistency in markets. Considering groups of stocks within an index it may be worth considering relative performances and rank consistency in a similar way to F1 motor racing.

I could include all stocks for the first month, eliminate the weakest 5% at the end of month one, and then eliminate the worst 5% at the end of month two and so on.

If there is anything to relative strength and momentum in physical stock trading and investment then there should be value in something derived from this.

I am definitely not the person to ask on this as none of my strategies deal with single stocks or momentum and relative strength (although like all reversalists I am a trend follower as soon as I put a trade on–ha!)

Sep

19

This paper is interesting.

It deals with the estimation of travel times on roads. Of much interest though is the volatility of these times.

In the context of the paper, the author speaks of the factors that influence average travel times such as traffic incidents, weather, time of day etc.

Looping back to markets one believes that time is at least as important as price. Given that, it is interesting to consider how the path of prices throughout a trading session impacts upon average price moves or ranges for a set holding period.

To elucidate further, imagine a market, let us call it market 'X'. Perhaps the average range of this market is 14 units.

It is interesting to consider the path dependency throughout the day and study if the steps and stumbles throughout the day will hasten or prolong the time it takes to achieve the average range.

[no need to be married to 'average range', the point is to have some measure of price performance whose average time to occur can be measured].

Sep

17

 Water is unstoppable. Given enough time, it will defeat all the mortal ingenuity of the best and the brightest.

Two atoms of Hydrogen bonded with one atom of oxygen.

How can something so powerful in one context also be so weak in another. Jump off a high diving board and hit the water abdomen first and tell me it doesn't hurt, but sit next to the pool and you can effortlessly push your finger into the water.

I think it is very helpful to think of relationships between financial markets in this way.

There are circumstances under which past conditionality allows one market to predict another for a given holding period with much greater accuracy than normal. In this context the weak bonds between molecules that allow you to push your finger into the water correspond to those occasions when leading correlative effects are absent and vice versa for those fleeting periods when regularities are plentiful.

It makes some measure of sense to look at what situations might make the molecules (predictive relations) hold closely together and those times when the mistress collects her dues from market protagonists.

Clearly having the predictive relations is enough. But some measure of 'meta-understanding' does not hurt, even if such classification is elusive or futile.

There really is nothing to lose by doing so.

Jim Sogi writes:

The speed of water or the object over the waters will determine the interaction. Anonymous's belly flop example is good. A slow moving stream is easy to cross, but a raging torrent will knock down huge trees. A small little wave tumbles gently, but larger waves move faster. In the surf, the lip of the wave as it pitches out and over on an 8 foot wave can be over a foot thick moving at 50 miles and hour and is enough to snap your board in half. In surfing, one of the worst things that can happen is getting "axed" by the lip as it crashes over on hits you directly. The tactic to avoid this is first, don't be there, or second, on smaller wave is to duck dive, with your board, under the the water, under and below where the lip hits. A big wave will penetrate deeper than you can dive, so that doesn't work big waves. The strategy is to wait for a lull to get in the water. We time the sets, their period, and the amplitude in order to time entry.

The analogy to the market is that a fast moving market carries some momentum. Big waves, like we are having now can wash through. Measuring amplitude, period seems helpful. Expecting wash through can save some wipeouts.

Jeff Watson writes: 

One must be very careful when describing the characteristics of water or any other molecular compound. While bonding is of utmost importance, temperature is the main determinant of the characteristic one will observe. Water temperature at -50 degrees C is ice which can be as hard as a rock. Water at the triple point can have the lowest co-efficient of friction which is close to zero somewhere around .02-.05. Water above 100 degrees C assumes a gaseous nature and contains a latent heat of vaporization of somewhere around 2600 Kj/Kg which means it feels hotter at 100C than liquid water at 100C. At around 11,750 degrees C water can turn into plasma….But when describing compounds, one must take into account the temperature and pressure.

Temperature and pressure are important in the markets also. One might think by the looks of things an easy splashdown of a trade will occur because it's a soft landing in water. It could just as well crash into solid ice, land into steam and cook you, or it might land into plasma where very interesting things will happen to your electrons.

Metaphorically speaking, one must find the sweet spot where it will be easy to get out of a trade with an minimum transfer of energy. Ideally using water as an example, that sweet spot would be at the triple point (0C depending on pressure) where the ice on ice has a co-efficient of friction of 0.02. The nice thing about this analogy is that there are more sweet spots than one depending on pressure differences. Always go for the gentle landing, it's easier on your account balance. It would be interesting to study other (triple points) and learn some market lessons.

Sushil Kedia writes: 

With so many interesting insights into markets relating to the molecular chemistry of water, here are my two cents on the table.

This derives from a Chemistry exam term test in the 9th year of my schooling. We had an awesome new teacher in Chemistry Mr. A Das come into teach us. The entire school was swept over its heels with his intellectual purity and his natural charms as being a fantastic teacher. The term exam paper he set had maximum 50 marks and Minimum 20 was necessary to earn a pass. None but yours truly got exactly 20, several ended at 19 and no one could cross the boundary of 20. His entire question paper was to tear everyone apart and push everyone to go to the library and read far beyond the textbooks.

That game changer question where I "managed" to earn that 1 mark was as follows:

If Sulphur is a heavier compound (Its in the row after where Oxygen is in the Periodic Table) then how come H2S is a gas and H2O is a Liquid at the same room temperature and same atmospheric pressure.

This question was poking a hole into an "anomaly" into an "irregularity" of the almost divine knowledge that we felt we received in learning the Periodic Table.

In battling with that very humbling question paper, I didnt want to leave any answer blank. This H2O is a liquid and H2S is a gas question I made a "Story-telling" answer:

The true molecular structure of water must be (H2O)n where n is a random unfixed number creating large coalescing molecular structures of variety giving a lighter compound as H2O the properties of a liquid while a heavier compound as H2S is only a gas and I believe this number n is an unfixed (I didn't know how beautiful the word random was at that age so used unfixed) varying number due to which there is no specific colour or odour water has since colour and odour of any compound is an intra-molecular property and not an inter-molecular property and because water has no odour or colour the varying value of n cancels out all intramolecular frequencies to produce a null colour and null odour.

This question had 2 marks. I got 1 from the 2 possible, because I was almost right, it so turned out when our answer papers were discussed by our teacher! My teacher penalized me in not giving the entire 2 because I wrote unnecessary additional mumbo jumbo about how n must be a varying quantity.

Morals of the story:

When faced with an irregularity, ingenuity in your response does work at least often enough and there is something called luck we knew back in school and today I love to call it as randomness.

When you are still able to make an effort to pull yourself out of a pile of horse-manure be brief and to the point. 

Jeff Watson writes:

We were never lucky enough to get essay questions on chemistry tests. It was either multiple choice, or solve a problem with showing your work and getting the correct answer. Our teachers were sadists. they never gave partial credit.

Sushil Kedia writes: 

Jeff,

Is the glass half empty or half full? Yes, it depends.

An Essay Type test has an undefinable probability of scoring on guess-work. A multiple choice test does have a definable probability of 1/n if n is the number of choices! If teachers never gave partial credits the also could not deduct 1 out of 2 marks possible for telling more than required! Glass is half full and half empty, always. 

anonymous writes:

A final note on this subject:

I accept that a multiple choice exam can test the ability of a student to possess and regurgitate basic and essential factual information. And a well-written multiple choice exam can do somewhat better than that. However, I have met and worked with endless numbers of people who score in the 99th percentile on standardized tests and have perfect grade point averages and despite these "successes," these people lack the ability to differentiate between facts and knowledge; they never learned or acquired critical reasoning and creative problem solving skills. I believe that these things cannot be probed on a multiple choice exam — they requires a free-form response. (Some might say that these things cannot be taught, but I believe otherwise.)

Just for amusement, let's imagine a multiple choice exam for the Presidency:

Question: If Russia invades another country while the President is on vacation what should you do?

(a) Instruct the Defense Secretary to move the 6th fleet to the region and have US fighter jets engage in skirmishes near the border

(b) Call an emergency session of the UN Security Council

(c) Recall the US Ambassador to Russia and boycott the Olympics

(d) Launch a pre-emptive nuclear strike on Moscow

(e) Continue with his golf schedule because the President must appear calm and in control.

And here's one for a hedge fund manager:

Question: If the stock market suddenly drops .8% on an unconfirmed headline of a terrorist attack in New York City, what should you do?

(a) Immediately reduce all open positions by 30%

(b) Immediately cancel all stops to avoid getting stopped out.

(c) Immediately increase all exposure by 30%

(d) Do nothing because you are a long term investor

(e) Check Twitter and if the subject is "trending", then (a). If the subject isn't "trending", then (c).

And here's another one for a hedge fund owner:

Question: If a new employee is producing P&L results that are remarkably good and vastly superior to expectations and everyone else in the firm, do you:

(a) Give the employee more capital to manage and a pat on the back?

(b) Call the employee in and ask him probing questions about what's going on in his portfolio?

(c) Have another employee study the new guy's trading records and positions to figure out what he's really doing?

(d) Reduce the employee's capital because you think he's just lucky and his hot streak will end?

(e) Retire and hand over the firm to the new guy.

Now imagine what a free-form essay response would be ….

Sep

16

 Hi Vic

I send you greetings from Pretoria.

Here is a reaction to my lecture last week at the Academy of Europe.

Please share this with Mr. Epstein, in the hope that he will review my book Design in Nature.

With thanks and best wishes,

Adrian

Adrian Bejan  ( MIT ' 71, ' 72, ' 75 )
J.A. Jones Distinguished Professor
Duke University
Academy of Europe

Sep

15

Most specs need to work on their skills of sizing up a market, whatever it is they trade. A successful spec should at all times have a pretty good idea how much of whatever they are trading is for sale, they need to know the size of the market. In the wheat market, one can expect a market and likely fill of 1/2 million bushels at every quarter cent, possibly several million bushels at the cent. Be very wary when you're in the grains looking at the highs of the day/move and there is nothing for sale. It's times like these that cause people to jump out of buildings.

Sep

14

 On my last haircut before moving, I gave my regular lady a $100 tip on a $17 haircut (applause line here?). That small gesture brought her to tears. She is a very interesting older woman. I've enjoyed talking with the past few years. She knew I worked in investments/trading and asked if I had any ideas for her. I asked about credit card debts and she told me she just cashed in 25K of an IRA to pay down 25K of credit card debt, yet already had accumulated 2K since then and was getting in the hole again. I might invite her down to do some murals in my kids room, and perhaps do some studies on trees (She is an artist who made a living cutting hair for the last 40 years).

The point is (perhaps? At least the relevant one?) is the deadly financial problem of never having working capital that provides the flexibility that keeps one off the spike of usurious interest.

This lady had been sold on long term investments (by her branch XYZ big box bank) in high fee mutual funds with perhaps at best a 5% yr expected value over the long term, while paying off 25% interest rates on credit cards. The scams run on the lower middle class or working class are obscene.

And it is not income. Clearly if these folks can pay these obscene high interest rates, they can afford much more than they have. The problem is that they never understood the idea of having "working capital". I told my friend that her best investment is at least 6 months of living expenses in the bank. As basic as it is, and at such a low margin for error that standard that is, for many it is an alien concept. Her recent issue was a car repair that blew up her budget and started the credit card problem again. With no working capital plus compound interest against, it is like a giant pit metaphorically with wood spikes and lions at the bottom to gobble one up.

So in trading and investing, how can we use this idea? Victor has taught "never get in over ones head" as one of the key tenants of speculation. So how do we manage our cash in our speculations, investments, life's "issues" to have the flexibility to seize opportunities and avoid pit of being bent over a barrel–while still getting a solid return.

Scott Brooks writes: 

The problem is deeper than that.

The people that Ed is referring to don't have the mentality to accumulate wealth and get rich. They are sold on the "here and now" mindset. They go into debt to satisfy the here and now. Something will always come up that will prevent them from succeeding. The only thing they are really good at is coming up with PLE's (Perfectly Legitimate Excuses) to justify their failures.

They are defined by their failures.

anonymous writes: 

Especially with respect to this site, I would wonder the data and testing behind those assertions. Otherwise, one might consider them to be presumptive, elitist, and uncharitable, with mean-spirited implication. But for the grace of god….

Ed Stewart writes: 

"presumptive, elitist, and uncharitable, mean-spirited"

Yes but who cares. I'm guilty of most those things at most times. Is time preference the essence of trading? That might be a more interesting question vs. my original one. Can it be quantified? I think so, as a hypothesis generator. Does it work better than other thought models?

Russ Sears writes: 

Sorry, I disagree Scott. Ed is correct, it's a matter of education and coaching. Have a plan, believe in the plan, stick to the plan.

The average working poor Josie is not a loser. It's the average bank has learned they are more valuable dumb and paying fees than smart with small accounts. The stats say that the fees are several hundred dollars per person in the USA. So some are paying several times that. The banks have the average poor working single parent or mom in a snap trap that they can't figure how to unsnap and lift the door.

The first thing I tell kids is that you need a minimum of $1,000 in emergency cash preferably $2,000. Have a garage sale, stop buying lottery tickets, no gambling, stop buying new clothes, stop cable, and stop smart phones, etc until you have that emergency fund. Also budget, if you can't fix the budget to the pay, downsize housing, get roommates, no car, bus, pay for car pool, whatever it takes to have a workable budget. Then save for the 3 to 6 months expenses in a cash account ready for a big expense. Only then should you invest.

Most people in this problem don't have anyone they can trust to give them the advice and perhaps the tough love they need to stop living in denial. The truth is the banks want the poor.

What does this mean for "investors". Frankly I think most investors have it wrong. It's not so much managing your risk as it is managing your cash flow first, then manage your risk. You can take a lot of equity risk if your investment horizons 20 years out.

Also the lesson to investors is just because someone is in the best position to give you advice and would make some money off you if they gave you that advice, it doesn't mean they will give you the advice that's in your best interest when it conflicts with their best interest. Their best interest is CMA (cover my …) by silence or sin of omission. Then it's to make more money by selling what gives them the most profit to "cover" you like payday loans.

anonymous writes: 

The thing I practice (and I don't know if it adds any edge that can be computed) is to always take some off after a good run. No mater what, be it trading, investing, bonus, etc. Never spend it all–or even most of it. Put it away for when SHTF, because as day follows night, it will…

Andrew Goodwin writes:

A major part of the problem is the thinking that makes the credit limit on credit cards equivalent to ones own money.

For my part, I will never willingly stop at a gas station that has two prices for gasoline with one higher for the credit card user than for one paying cash.

In a world where there are card rebates on gasoline, what is the point of acting responsibly with credit when those who did not act responsibly get subsidized by those who did. The dual pricing also serves to support a cash economy against the public interest.

Peter Grieve writes: 

I feel that I am unique on this site as having been in this hairdresser's situation for most of my life (Hello, Peter). Obviously this is not due to a lack of economic education or upbringing. I feel that the factors include a lack of skepticism regarding my own appetites, a lack of faith in the future, a certain immediacy in response to the world. These are traits associated with immaturity, to which I confess. Of course this leads to tremendous inefficiencies, even when viewed from a purely hedonistic perspective, but it does have its compensations.

I do not regard Scott's comments as elitist, presumptive, uncharitable, or any of that baloney. On the contrary, I find the the use of the word "uncharitable" to be condescending. I do not feel that people in my position are a fit object of charity.

Everyone has their irrationalities, and they are often incomprehensible to those who do not share them. Scott's words are simple, honest truths, which many people (including me) would benefit by internalizing to a greater degree.

Stefan Martinek writes:

It is good to have an emergency cash for at least a decade; locked, untouchable for trading or similar. The rest can be at risk. And after MF Global steal from client accounts (is Corzine still free?), I think it is prudent to keep as little as necessary with FCM. In case of a brokerage failure, the jurisdiction matters (Switzerland is preferred, the UK is too slow but ok, then Canada, and the last option is the US broker).

Ralph Vince writes: 

Stefan,

I entirely disagree; emergency cash has a shelf life which is very short, and our perspective warped as we are speaking in terms of USD. Being the historian you are, you know full well how quickly that cash can be worth nothing. (And again, a many of our personal experiences here would bear out, money is lost far quicker than it can be made).

A bag of air on hand is good for one breath.

People are taught that "saving" is virtuous, borrowing a vice. I would contend that we have crossed to Rubicon in terms of the notion of stored value — no more able to contain that vapor than we can a bottle of lightning. The circulation brought upon by a zirp world, turning all those with savings into the participants at a craps table, the currency being used the product of a confidence game, among the virtues to be taught to tomorrow's youth is that of creating streams of income — things that provide an economic benefit their neighbor is willing to pay for, as opposed to a squirrel's vermiculated nuts.

"Stored value," is a synthetic notion we have accepted and teach as a virtue. It has no place in nature, it is a synthetic construct, one that is not scoffed at in the violent, life-and-death world of fire and ice. Young people need to be taught the fine distinction between the confabulation of "storing value," and that of using today's fruit to generate tomorrow's.

Stefan Jovanovich adds: 

From the other Stefan: I agree Ralph. "Stored Value" is another part of the economist dream that platonic ideals can be found. Money is and always has been one thing: the stuff you could voluntarily give to the tax man that would make the King find another excuse for throwing you into the dungeon. The gold standard did not change that; it simply gave the citizen a chance to make the same kind of unilateral demand on the government. It is hardly surprising that the fans of authority and "government" hate the Constitutional idea of money as Coin. How can you have a permanently elastic official debt if the citizens can ask for payment in something other than a different form of IOU?

However, Stef does have a point. Having a hefty cash balance is a wonderful gift; it gives you the time to figure out your next move. The sacrifice is the absence of leverage; the gain is having literally free time.

Scott Brooks comments: 

There are a lot of companies out there that take advantage of them and the bad advice they were given from their parents. Banks certainly do. Then you've got insurance companies and brokerage firms selling them crap products as well.

But that doesn't hold water in today's society with Suzie Orman and others like her being nearly ubiquitous on the airwaves and net.

These people live beyond their means. Plain and simple.

Yes, they lack education, but even with education available, they don't take advantage of it. They are just doing what they were taught as kids. For far to0 many of these people, as long as they've got enough money for their 1-2 packs of cigarettes/day and their quart of Jack/week, they go and live lives of quiet desperation, hoping that they don't lose their jobs and are lucky enough (i.e. like not spending money on stupid stuff is "luck") to pay off their debts by the time they are in their early/mid-70s so they can live out their remaining few years (if they even make it that long) on social security.

I know. I grew up with these people. I know how they think. But for grace of God (as was mentioned earlier), I might have been one of them. But for some reason, I was blessed with gray matter that works, and I saw the error of those ways, and I was able to get out.

Ken Drees writes: 

I knew a guy–lost touch with him over the years–who exclusively dealt with hairdressers and salonists. He sold variable annuities to them since these people had no retirement plans given to them from the salon owners. I believe in his mind that he was doing them a service–and I really do not know the quality of his products–but at a glance I saw them as mutual fund annuity hybrids that came from heavy fee fund families. He was a tall, dark and handsome gent and he would actually get entire staffs of salon ladies to invite him in after hours for a group meeting/financial planning discussion presentation.

He always said that business was brisk! 

Jim Sogi writes: 

When young friends ask me, how should I invest, I give them a simple asset allocation model based on ETFs or Vanguard and an averaging model. Invest x% of your paycheck off the top each time. Doesn't matter how much really.

Russ Sears writes: 

 Scott, since this is the DailySpec let us bring a little science into the discussion, even if it is social science.

Where we differ is not what is causing the hairdresser's problem. It is in what can be done about it that I differ. I believe you can coach people to delay gratification. I coached kids that never did homework before and got "D's" and "F's" during a summer and by fall the kid was an "A" or "B" student. You probably owe a hardy thanks to the coaches in your life.

Perhaps the greatest social science finding has been the "marshmallow experiment" done at Stanford. They did test on 600 4 year olds telling them if the child did not eat a marshmallow for 15 minutes after they left, they would get a second marshmallow. 1/3rd of them made the whole 15 minutes, a small percentage ate it immediately after the others had waited various amounts of time. They followed up on these kids several time in the last 40 years. Just about every way you can think of to define success was highly correlated with the time the 4 year old delayed gratification: SAT score, college/HS graduation rate, credit scores, long term committed relationships, contentment etc. And almost any way you can define failure was inversely correlated: jail time, high school.

The correlation was stronger than IQ, social economic status at 4 years old. In other words even the dumb poor kid that delayed gratification was happy/content/successful 40 years out. He may not be making much but he is happy with it.

For a humorous view of this experiment reproduced: Joachim de Posada: Don't eat the marshmallow! 

Sep

14

 In deciding on strategy, I think it efficacious to consider, for the intended holding period of the trade or investment, the ratio between the expected return on the one hand and the 'coastline' on the other.

Some specs may not have heard of the concept of the coastline in markets. It refers to, at the tick by tick level, how far a market actually 'travels' in getting from point A to point B.

In terms of markets, an investment or trade may depreciate 6% from point A to point B but the 'coastline' might be 30%. i.e all the up and down squiggles add up to 30%.

Another way to think about the coastline is as a measure of pure path dependency. By definition the coastline will always be longer than the simple difference between A and B.

Those who care if their transactions move against them may want to study past examples of the trade and ascertain:

1. Whether the ratio of expected return to coastline over the predetermined holding period tells you whether buy( or sell) and hold is more or less efficient than an active trading strategy.

2. In market moves in general of a given elapsed time and net magnitude, might the future distributions subsequent to shorter coastline measurements be more harmonious with a counter trend or momentum approaches.

3. Might relatively longer coastline measurements be indicative of impending volatility.

4. For a move of, say, 1% in the price of a macro market- do the different coastlines for the different markets foretell subsequent individual and relative performances.

Sep

14

"What Markets Can Learn from Statistical Learning: Systemic Risk and Systematic Value" is a reasonable introduction to what all the fuss has been about in recent years. In an of itself predictive of little but a good read nonetheless.

For non technical readers out there, there is barely a summation sign or Greek letter in sight.

Sep

14

 Twenty three years ago, when I was more stupid than I am today, I stood beside my Senpai on the floor.

He had just been given (had sold to him) the equivalent of 2000 contracts in the Australian Share Price Index futures market. This was a sizeable position forced upon him and the market was immediately well lower with no bids. All of a sudden he started buying short dated interest rate futures.

What was he doing? As the colour drained from my face and I metaphorically soiled my shorts, he found the bids in the SPI and then covered his longs in the interest rate futures. Nett he lost small but only about 20% of what he would have lost just covering in the core market.

During my post trade inquisition he told me there was no liquidity in SPI so he 'hedged' in the next best liquid instrument. He subsequently did this scores of times and later when the student became the master he did too. He kept manual records of reactions of the local markets to one another in 30 minute increments and used it as a 'hedging cheat sheet'.

But that was in the 1990s, that was before the Internet, when promoters of dying strategies in warm climates raised billions–before the best and brightest lost interest in the world.

It is interesting to note how things that used to be excellent short term 'hedges' have lost much (if not all) of their efficacy. One notes the much reduced to useless hedging effectiveness over the past decade or more of:

The Swiss Franc, Gold, Short Dated Interest Rates, Options based markets: Like all insurance products the spreads to exit during the panic right at the low in the futures market - that the option was purchased to protect against or profit from - are so wide as to make it not worth the bother - better to stick with the futures.

It is changing 'Baconian' cycles, it is government & central banks learning the game (the ruthless and gifted Swiss National Bank is the absolute master), it is interest rates at zero, it is technological advancement and it is - in some way - 'natural' and just that what was once done so well by the true masters has been traded away into nothingness by the smarter student.

Sep

4

I have read that holding periods for stocks are getting shorter. I could ask if lower average holding terms in one period are predictive of higher volatility in the next period. -  A reader.

If you visit Google Scholar, you will find hundreds of papers that address the relationship between market friction and turnover, average holding periods, etc.

Changes in price volatility can be associated with many things. But I find it difficult to see any theoretical economic logic why increased turnover (shorter holding periods) should predict higher price volatility. In fact, I think the opposite can be compellingly argued. That is, if most people don't want to change their holdings, then those people who want to transact will pay a higher price for an execution.

Here's my thought process: Turnover and friction are inversely correlated. Friction consists of commissions, fees and capital gains taxes, bid/ask spreads, and the true depth/size "liquidity" on the bid/ask. Of these, commissions and bid/ask spreads have been in a secular decline since 1990 and I believe this explains the bulk of the data in that chart. Secondly, if you are subject to a 90% capital gains tax and a $1 per share commission, your holding period will increase a lot. That was the case from the 1960's to the 1982. (Note that capital gains taxes increased with Obama's election in 2008.)

Also, in bull markets, one generally sees increased participation and increased turnover; in sideways or bear markets, there are usually fewer transactions, wider bid/ask spreads, and obviously, higher risk premia. This is generally true in most markets including real estate, collectibles and stocks.

Sep

4

Take it for what its worth, but I haven't seen this kind of academic study before.

This study assesses the economic value of technical and fundamental recommendations simultaneously featured on "Talking Numbers," a CNBC and Yahoo joint broadcast. Technicians display stock-picking skills, while fundamentalists reveal no value. In particular, technicians overwhelmingly outperform fundamentalists in predicting returns over horizons of three to nine months and moreover they produce large alpha with respect to the Fama and French (1993) and momentum benchmarks. Considering market indexes, Treasuries, commodities, and various equity indexes, both schools of recommendation generate poor forecasts. Overall, the evidence shows that proprietary trading rules could, at best, enhance investments in single stocks, while returns on broader assets are unpredictable.

"Consider first the stocks that the technical analysts identified as strong buys. They on average proceeded to outperform the overall stock market by 7.9% over the subsequent nine months, while the stocks they recommended as strong sells underperformed by 8.9%. That spread of 16.8 percentage points is highly significant from a statistical point of view. As the professors put it in their study, it means that "technicians display rather impressive stock-picking skills." "Contrast that with the performance of the fundamental analysts. The researchers found that their strong buys proceeded on average to underperform the market over the nine months following recommendation — though not by enough to conclude at the 95% confidence level that these analysts were actually worse than random. Even worse, the stocks that these analysts rated as strong sells did not perform appreciably differently than those they considered strong buys."

Andrew Goodwin asks: 

How would a chart technician buyout fund do? 

Sep

3

 Another beauty escapes into the clutches of cyberspace.

The Baconian saying 'Copper the public' is developing more into something like 'iron pyrite the public'.

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Sep

3

From the NBER Digest, National Bureau of Economic Research, September 2015 Issue:

Cheap Talk, Round Numbers, and Signaling Behavior

Items listed at multiples of $100 ultimately sold for 5 to 8 percent less than items with non-rounded prices, but received offers faster and were more likely to sell. In the marketplace for ordinary goods, buyers and sellers have many characteristics that are hidden from each other. From the seller's perspective, it may be beneficial to reveal some of these characteristics. For example, a patient seller may want to signal unending willingness to wait in order to secure a good deal. At the same time, an impatient seller may want to signal a desire to sell a good quickly, albeit at a lower price. This insight is at the heart of Cheap Talk, Round Numbers, and the Economics of Negotiation (NBER Working Paper No. 21285) by Matthew Backus, Thomas Blake, and Steven Tadelis. The authors show that sellers on eBay behave in a fashion that is consistent with using round numbers as signals of impatience.

The authors analyze data from eBay's bargaining platform using its collectibles category˜coins, antiques, toys, memorabilia, and the like. The process is one of sequential offers not unlike haggling in an open-air market. A seller lists an initial price, to which buyers may make counteroffers, to which sellers may make counteroffers, and so on. If a price is agreed upon, the good sells. The authors analyze 10.5 million listed items, out of which 2.8 million received offers and 2.1 million ultimately sold. Their key finding is that items listed at multiples of $100 receive lower offers on average than items listed at nearby prices, ultimately selling for 5 to 8 percent less.

It is tempting to label such behavior a mistake. However, items listed at these round numbers receive offers 6 to 11 days sooner and are 3 to 5 percent more likely to sell than items listed at "precise" numbers. Furthermore, even experienced sellers frequently list items at round numbers, suggesting it is an equilibrium behavior best modeled by rationality rather than seller error. It appears that impatient sellers are able to signal their impatience and are happy to do it, even though it nets them a lower price.

One concern with the analysis is that round-number pricing might provide a signal about the good being sold, rather than the person or firm selling it. To address this issue, the authors use data on goods originally posted with prices in British pounds. These prices are automatically translated to U.S. dollars for the American market. Hence, the authors can test what happens when goods intended to be sold at round numbers are, in fact, sold at non-round numbers. This removes the round-number signal while holding the good's features constant. In this setting, they find that buyers of goods priced in non-round dollar amounts systematically realize higher prices, though the effect is not as a strong as that in their primary sample. This evidence indicates the round numbers themselves have a significant effect on bargaining outcomes.

The authors find additional evidence on the round-number phenomenon in the real estate market in Illinois from 1992 to 2002. This is a wholly different market than that for eBay collectibles, with much higher prices and with sellers typically receiving advice from professional listing agents. But here, too, there is evidence that round-number listings lead to lower sales prices. On average, homes listed at multiples of $50,000 sold for $600 less.

˜Andrew Whitten

Sep

2

In the past six years, we have basically seen two phenomena in stocks: 1. etf growing use, and 2. share buybacks. My theory is that these two forces combine to totally drain liquidity from the stock market. The general downward trend in volume is the proof, also probably explains persistent small upward march of stocks, and the tendency for "corrections" to be much more like "flash crashes."

With one, we have something like robotic superfunds who accumulate mass quantities of stock and hold, rebalancing based on volume in the etf. With two we have drastic reductions in float.

A bear market in that environment will bring a certain violence and toxicity never seen before. Down days are almost forced to be large. So when we talk about a bear and months of down days, it will probably be something truly awful. Etfs will dump stocks on a reduced float market that is largely composed of funds anyways.

The size of the exit is determined by volume and float. Door is getting small…

Ken Drees writes: 

This article explains ETF mechanics well.

Almost as important for the ETF are the authorised participants, or APs, which act as marketmakers. The APs, most of which are banks, help to keep the share price of the ETF close to the value of the underlying assets. Imagine that one big investor in an ETF with, say, a 10% stake, wanted to sell its holding in a single day. There might not be ready buyers for such a large holding, causing the ETF to fall to a price below the value of the assets it owns.

To avoid this, the APs act to balance supply and demand. If the ETF is expanding (more people want to buy shares than to sell), then the AP puts in an order to the fund manager for a block of new shares, dubbed creation units, in the ETF. In return, it transfers a bundle of securities, based on the index the fund is tracking, to the manager (this bundle is known as the creation basket). If the ETF is shrinking (more people want to sell than to buy), then the AP sells creation units to the fund manager and receives in return a bundle of securities known as the "redemption basket".

The AP can also keep the price of the fund in line with its assets through arbitrage. The asset value of the ETF is published on a regular basis during the day; if the price of the ETF is higher than its underlying assets, then the AP (or any big investor) can sell ETF shares and buy the underlying assets. If the price is lower, they can buy ETF shares and sell the assets.

The AP can also keep the price of the fund in line with its assets through arbitrage. The asset value of the ETF is published on a regular basis during the day; if the price of the ETF is higher than its underlying assets, then the AP (or any big investor) can sell ETF shares and buy the underlying assets. If the price is lower, they can buy ETF shares and sell the assets.

So how might this process go wrong? One obvious danger might be the role of the APs. If they fail to make a market in the security, then the price could get out of kilter with the asset value of the fund. Alternatively, they might go bust in the middle of the creation or redemption process, which takes three days to complete. That might leave the ETF short of the shares needed to top up the fund (and match its benchmark) or the cash to pay its investors.

anonymous writes: 

Larry, your analysis seems reasonable. I'm curious if you or other folks here think the lack of liquidity applies more generally than just the stock market (e.g., in the banking and currency markets). See for instance:

"Into The ‘Dollar’ Run Now More Than Illiquidity?"

"Volatility As ‘Money’; Or Really Rising Vol As Anti-Money
"

Ralph Vince writes: 

And the fact that leveraged and short ETFs must move stock exponentially with a drop in prices. That is to say, the more the underlying securities in the ETF drop in price, the more shares must be sold and this is not — a a drop of 2d takes more than twice as many shares to be sold as a drop in 1d. This would seem not such a big problem except that it is likely to occur during times of vacuous liquidity. 

Sep

2

The Junto on Thursday, Sep 3rd will feature Adrian Bejan, Professor of Physics at Duke, inventor of the constructal theory, one of the most important and wide ranging scientific discoveries and principles of the century. It starts at the Mechanics Institute 20 west 44th street at 7:15 pm. All invited.

Aug

31

 When searching for regularities, it may be helpful to start with things like this. This is a chart of the world's countries scaled by the size of the equity market.

One could look at many things including:

1. Size: does big influence small or vice versa?

2. Time Zone: is there a wave from the East, or have today's almost 24 hour markets mitigated this?

3. Latitude or longitudinal prediction? Neither?

4. Isolation from or clustering with other markets as a measure of under/over reaction?

Amongst much else.

Aug

31

 The ever investigative Nanex informs us that last Friday:

Some 18 billion options 'quotes', or put another way, some 3 years of quotes for ALL 8000 U.S. stocks, were processed by the infrastructure in one day.

Regrettably, many fewer bargains actually were sealed. The deleterious impact of all this, manifesting itself in many ways, continues to compound inexorably higher in a non linear fashion.

Fascinatingly, to me anyway, is that the coming discontinuity may not be a decline in prices. I begin to speculate and think about how to deal with what this 'event' may entail.

1. A precipitous decline in prices. Well, this would be the consensus for a technologically motivated event.

2. A precipitous rally in prices. A more intriguing possibility. Much thought into how and why.

3. My favorite guesstimate would be the 'bookie's choice'. Something in the order of a 48 hour event with the market starting at X, falling until the final of the three circuit breakers hit throughout the day then next day rallying a similar amount back above X and closing that day back at X.

Take out the longs, take out the shorts, close the period unchanged. Beautiful.

It is important to recognize that these modern day robber barons have no interest–assuming no James Bond villain 'destroy the world' complexes amongst them– in killing the Golden Goose, as it were.

I am reminded of similar sentiments from the Palindrome about markets going to the edge and him not wanting to push them over the edge…

I speculate that the probability of what this post is speculating about varies directly with the probability that the regulators belatedly move in for the kill (via either direct means or pernicious taxation). This may be like Waiting for Godot because, as it currently stands, many ex- regulators now work within these groups so… (I must decide whether to laugh or cry about this ).

One thing comes to mind from all this:

Technology has no memory.

Aug

27

Monty Python had a classic "Olympic Hide and Seek Final" in which the first seeker took 3 years, 27 days, 11 hours and 42.23 seconds to find the first hider. Then they reversed roles, did it again, and the result was…a tie.

Similarly for "value" and "growth" over the 23-year lifespans of the Vanguard "Growth" and "Value" index funds.

anonymous writes: 

The feud has been going on for far longer. In 1970s, Nifty Fifty stocks claimed victory with an average P/E of 42, and then crashed by 1974. It looked like growth was a bubble and has lost. Twenty years later, Siegal claimed victory for growth. As long as one diversified and got Walmart in the portfolio, it turns out that Nifty actually did OK.

The next 20 years as your graph suggests shows the Dot-Com and Biotech booms for growth.

Aug

25

I have this serious cheap problem, where my brain has a hard time grokking what the market is capable of. Sometimes as an exercise I will compare the current market to some other market/year, to try to force my brain to see what the possibilities are. Right now my lizard brain very stubbornly has its teeth in the idea that 2015 will wind up looking a lot like 2011.

Aug

25

 Jon Moen and Ellis Tallman wrote a wonderful paper on the Call Loan Market in December 2003.

It explains in detail how and why the Federal Reserve system originated as a further extension of the New York Clearinghouse.

The Central Banks and their own intermediaries (IMF, World Bank, et. al.) are now what the Federal Reserve was designed to be - the people who will never let the markets run short.

The premise then was that the demand for specie (what Friedman called "high-powered money) was an inescapable part of any national banking system and international trade. Settlement ultimately had to be in gold, even if, in a crisis, the clearing of trades would be done Bagehot style - using the central banks' own credit.

In another few years it will be half a century since gold was the ultimate currency for international settlements.

It is now credit turtles all the way down.

Aug

24

 ASK the CHAIR!

Q: Can anyone explain why I am constantly reading posts about possible entry points, buying times/conditions, number crunching stats as to undervalued situations, etc., when it has been absolutely clear to me that we are in the midst of a secular bear market? Mind you, this has nothing to do with personal sentiment or opinion; it is simply interpreting what I am seeing each and every day and trading accordingly. I am not a doomsday bear, nor do I have any biases; it is just amazing to me how many established professionals are still trying to buy buy buy at every possible juncture day to day. Does anyone who calls themselves a trader ever short overvalued stocks/markets/moves? How many rallies do you need to see fizzle into oblivion to prove what we are in the midst of? (Obviously, there are specific sectors and stocks that rise at specific times or under specific conditions and certain short term trading styles where you can be as bullish as you wish; I speak of the market condition in general.) Why have I been able to count on one hand the number of times I have read of any bearish play or overvalued situation? Doesn't this market call for at least some posts of a great short on some overvalued garbage? I am aware that everyone has their own style, but I find it incomprehensible as to why I continue to hear predominantly of bullishness. I'm open to your reasons.

Chair's response:

A personage who is absolutely convinced that we are in the midst of a bear market inquires why he finds so little company on our list besides those obviously talking their book. The reason is that most people on this list have read "Triumph of the Optimists" and "Practical Speculation," and both books emphasize the long-term 10%-a-year upward bias in all stock markets in all countries. That's the reason at a theoretical level. At a practical level, I would add, and this is just personal based on my observations of many years in the business, as well as exposure to almost all major hedge fund managers, including one who hates enterprise as much as Buffett — yes, I would add that the reason we don't hear from those absolutely convinced that we are in the midst of a bear market is that they have been, are or will shortly be, broke, morally and financially, metaphorically speaking. Drinks on me.

Aug

23

In such a technologically influenced trading environment, one is used to instant co- and counter movements in markets.

Without thinking too deeply about it and with respect to Arnold Zellner's 'keep it simple' mantra, one is compelled to ask the following:

Why the heck didn't TYU5 and USU5 trade way higher on Friday given the SP500 move?

anonymous writes:

During a run on Thursday night east coast time I thought about the market and the potential opportunities and pitfalls that may lie ahead in the next 24 hours. Basing my thesis on several factors, the most direct I will elaborate on below, the others too long to espouse upon at the moment. My conclusions consisted of some of the following all of which I acted upon reaching a telephone after reaching my phone:

1. the front end of the curve in the US, namely EDH8 or the like, should rally and have minimal short term downside risk as a continuation lower in equities, the general drift higher in the front end over the past several years, lower commodity prices, stronger dollar, sub-par US growth, etc. supported the view…this is in my view is a slightly cleaner trading on expectations of Fed to less than market expectations based on recent data and markets than the back end, particularly given the flattening in place since around July 13 led by the back end, looking at a simple regression I don't see a meaningful difference between the US 2yr or US 10yr to SPX either

2. the U.S dollar would probably weaken and be led by the JPY given market positions, albeit correlations are not that great to the Nikkei or US 2 year rates, but one thing to consider is newly dirty float of CNY which is somewhat based on "market rates" so I expect that to stabilize or strengthen possibly next week allowing some downward pressure off of Asian FX, including the JPY, I also sold the British Pound on the thesis that there is too much tightening priced into the front end of the curve and the market is long GBP on expectations of the BOE and FED leading the tightening charge, let alone the somewhat mixed UK data of late and the "economic surprise indices" I watch are on the high end of expectations of the past few months

Having said this I made the large mistake of not hedging properly my Euro puts versus the US dollar over the past few weeks and that is a greater lesson of many mistakes to be improved upon.

Aug

23

I am re-reading something about Long Term Capital Management. The way they added leverage intrigues me. It says that without leverage their annual return on asset would be something like 2.5%, but by adding leverage, they got it to 46%. So, the borrowed money had to charge much lower than 2.5% interests. How could they always easily find that low cost loans in the 90's?

Aug

19

Sadly we lost a local doctor Saturday who was trying to set a new world record for depth—1,200 feet. He never came back. [News Story ].  More experienced divers have posted these comments that ring true to many of my trading errors.

lw

Four Attitudes Characterize Leading Tec Divers

In considering your growth as a tec diver, it’s worth noting the characteristics tend to typify leaders in not just tec diving, but in most areas of exploration:

Humility. They realize that they don’t know everything, and that there may be more than one right way to do something. Their ego doesn’t get in the way of learning, doing or teaching.

Open Mindedness. They never reject something just because it’s new or different, and they listen to other viewpoints. They don’t fear change and they’re not threatened by differing opinions.

Analytical. They accurately and realistically weigh the merits of a technology or procedures for themselves and never accept something just because it’s new or because someone else thinks it’s better.

Competent. While they’re open to change and alternative ways to do things, their own methodologies are solid and they can demonstrate a rationale and realistic basis for each. They’re quietly confident about how they dive.

Aug

18

Imagine a world where:

You can observe 'n' prices :X1, X2, X3…..Xn occurring at times Y1, Y2, Y3…..Yn - all in real time and the next day, incredulously, the 'officially provided' information does not agree with this. One should think about what this means for testing and what adjustments might be efficacious.

Almost all information transmitted to subscribers of the major industry standard news / data platforms is of no use whatsoever. One should think about how information gets to the flashing screens in front of you and how many layers of 'flexionic ether' it passes through en route.

The things that work make no sense and are non intuitive. For many years , say between 1990 and 2005, one rejected much because it 'didn't make sense'. A great personage on this list cured me of that most debilitating of trading ailments.

Imagine that world… I'm just saying, is all!

An anonymous old time trader adds:

In the real world, at the exchange, right after the close there is the last price after which the settlement price is determined. The settlement price usually, but does not always agree with the last price, and that is due to the power of the pit committee or whatever they call it nowadays. Things have gotten much better since the closure of the pits, but there are still very rare occasions when the committee will override the last print and adjust the settlement price. There's a lot of money changing hands with a cent and the orders difference for a contract that has an open interest of a million contracts. The rule of thumb is that the committee will move that last price to inflict as little damage as possible to the members and insiders. For what it's worth, this happens more frequently in the grains and meats than the financials but it must be noted that it's a very rare occurrence in these electronic days. Nowadays, there might be the rare occasion where it will differ by a quarter cent, but a couple of years ago, it was the wild West. In 2012, I complained privately to the Chair that my legal limit position at the second largest wheat market, was subject to an average of a 2 cent adjustment everyday at the close, always against me. I knew what they were doing and as a former member of a couple of pit committees, I understood what was going on but still didn't like my pocket getting picked every day. Once after a week straight of their shenanigans, my complaint to the exchange, and threats were so vociferous, they changed the settlement price in my favor…..an hour after the close….on a Friday. As an aside, a meal for a past lifetime, my mentor taught me to watch the pit committee's adjustment and listen to the conversation right after the close and hear the number they gave the reporter. This gave an excellent indicator as to whether the pit was long or short. But that was then and this is now.

Aug

11

The Haloid Company went public on April 17, 1936. The company name was changed to Haloid Xerox Inc. in 1958. Here is the chart of its full rise to being the stock of the first technology "bubble". From its effective IPO, when it was listed in July 1961 on the NYSE, the company's stock price increased 15 to 20-fold to its height of the early 1970s "Nifty-Fifty" bubble (a period of a bit more than a decade). By then the company was so worried about the inestimable value of its name that it paid to run ads telling people that they should not call copying "xeroxing".

During roughly the same period of time (a dozen years) Amazon's stock price has increased 29-fold from its initial offering price of $18 on January 2, 2002.

 So what did Xerox do differently than Amazon?

Aug

11

Is it a coincidence that I can't find any canned algo type orders that allow a limit price to get hit and then add in a time delay before they start executing? Who would wish to put in a limit order when there could be a news spike that will only get filled well beyond a news shock adjustment price? I'd like a canned order that lets me put in a time delay after limit price hit before it starts to execute. This sort of thing could make a fellow a conspiracy theorist.

Aug

6

Bo's new Executive Hobo website

Aug

5

 Rogue waves can be defined in many ways, yet the one I prefer is "a wave of extreme severity that appears unexpected even to an expert". Given that definition, rogue waves do exist, yet there is no evidence that they would be globally more frequent than conventional (non-linear) waves theories predict, they just don't happen where and when — i.e. in the most extreme sea states — one would expect them. There is no evidence either that the "modulational instability" theory that my colleague Prof. Akhmediev puts forward to explain them would not apply: the theory was validated in wave tanks, optical fibers and plasmas. It is just impossible to know whether the necessary boundary conditions are satisfied in nature. Several points may be noteworthy to the Specs:

1. A recent article shows that rogue events can be empirically predictable, but that for ocean waves the delay would be of the order of the time needed to shout "Buddies, grab something and hold on to it!"

2. "Normal" extremes are at least as frequent as "special" ones, and all indicators based on breather theories such as Akhmediev's have false alarm rates of at least 90%, perhaps 99%, and still fail to warn of about 10% of actual rogue waves.

3. Experienced sailors deny having met "rogue waves". They say that they encountered waves that were rogue, they capsized or broke some ribs (Roger Taylor, Isabelle Autissier), but when you discuss it directly with them, nothing that they were not expecting and had not prepared their ship for.

4. Only a very small percentage of fatalities occur well off the coast (Nikolkina & Didenkulova), most of them happen at the coast or in shallow waters where victims feel wrongly on safe ground or in safe waters.

William Weaver comments: 

Your fourth point is similar to many car accidents happening within a small area from home. People make more mistakes when they feel comfortable. I'm not sure how this changes when accounting for activity though. For example, you could normalize accidents per mile driven and then compare close to home versus far from home, or do a similar normalization for the study mentioned with at sea fatalities, which I have not read. It might be helpful to measure after splitting into bins for types of vessel (cargo ships might have more miles, farther from home travel and less fatalities), and by type of mariner, which might be self defeating as it is more likely less experienced seamen would stay close to shore ( which is not the case for drivers staying close to home).

It seems like a data set prone to torture someone. But do we make more mistakes when we feel safe? The opposite might be true too. My observation is the difference between good and great traders is often the number of mistakes they make. Bring back the checklist posts?

Jeff Rollert writes: 

I see some sample issues. Most sailors (N) do not venture more than 20 miles from the coast. The ones that do are orders of magnitude better prepared (boat) with experienced crew. So I suggest the distribution is bimodal.

Also, there is more than one kind of "rogue" wave. One is an overtaking wave, which is when two waves combine; the second, and more deadly, is when the wave comes from a direction that is unexpected. In my experience, these are the most deadly, as they roll (or broach) the boat. They are also the hardest on the structure of the boat and hit the weakest points harder (deck access from the stern, control or bridge room windows and electrical systems). For fisherman, they dread losing engine power, as the boat becomes exposed in the same way, as fishing boats have the windage at the bow, which turns the boat and presents a breaking wave to the stern.

Lastly, looking at single vs combined storm fronts also messes with their structure.

IMHO, they oversimplified their model.

Jim Sogi writes: 

Surfers expect at least 1 wave each day that will be 3-5x the smallest wave. It's called the wave of the day. In a random sequence this would be one of the far tails. They tend to come with the incoming tide as there is an extra push from the moon.

I think the rogue waves in the ocean might be 20x or more if there were a number of storms with crossing wave trains which could combine. It's the cross chop that creates these large events through random combinations. Rogue is often and mistakenly used as unexpected. Sailing through large parallel swells on a calm surface is quite easy. Sailing through a cross chop is very tiring and rough. Refraction and reflection from shores often make coastal sailing rougher than in the mid ocean.

What always surprises me is how calm the ocean tends to be. You would think it would be rougher given how big it is. 

Aug

5

The link below shows where we stand on data security. Of concern is the fact that what we 'the public' read is likely behind the form i.e it surely extends well beyond this. It is likely that any 'commercial' information is obtainable by those at the sharp end of this kind of work. ( With some degree of risk attached to be sure). One gathers that military and security services have protections (errrr Edward Snowden notwithstanding). One genuinely does not begrudge occasionally losing in organised markets to those who are smarter, have found a new edge, or have deeper reserves/staying power . However, what grates somewhat is losing to technology cheats. ( That is to the extent that it is actually happening, a point on which I have zero proof other than excellent anecdotals from nanex.net et.al.)

From Reuters News:

"U.S. researchers show computers can be hijacked to send data as sound waves"

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