May

4

The NYC Junto will meet on Thursday May 5, 2016 at the General Society Library, 20 West 44th Street, NYC (between 5th & 6th Aves). Open discussion at 7:30 PM. The featured speaker will begin at 8 PM.

The featured speaker this time will be Marty Lewinter, Ph.D., on the subject of "the joy and utility of mathematics. He is a professor of mathematics and computer science at Purchase College (SUNY). He’s the author of The Saga of Mathematics: A Brief History with William Widulski and of A Friendly Introduction to Graph Theory with Fred Buckley. All Dailyspec readers are invited!

May

3

 A cursory note of garden observations on today's walk to check the chickens. The dogwoods and redbuds are in full bloom and the fiddleheads of many fern varieties appear. It is interesting that the young dogwoods seems to be saving something and are not quite showing all the flowers they are capable of, compared to the more effusive dogwoods who are in the last half of their lifecycle. Similarly, a redbud which has been dying off is fully intent on procreating to maintain its lineage and is profusely dropping its seed.

I wonder the parallels with human life that may both be innate and extrinsic. For example, what can we learn from recollections of those at they approach or fear death? The life that flashes before the eyes of jumper who survives a plummet from the Golden Gate bridge. The person who is approaching death for whatever reason. The lessons from a man who studied 1,000 deaths to learn how to live, BJ Miller. The travels of many of a man and woman to the romance of a nubile partner.

I also wonder the parallels in markets at the end of market moves at the ends of market moves of varying magnitudes. How might they be quantified, observed, and monetized? A change in price momentum and direction after moves are exhausted. Particularly when they may not be supported by perceived or actual macro fundamentals. What are the timing mechanisms and linkages? For example, how might the recent move in oil be connected to moves in commodity currency pairs? Where might the CHANGE occur to be a catalyst, or not?

Given recent price moves in markets, upcoming economic data, geopolitical events, and market positions this may be a propitious moment to consider such factors. What about the cycles in the markets like those of certain animals, insects, and plants that only occur very few years. In that realm I would put a few broader macro-economic cycles and events. Consider most recently the Asian and LTCM events of the mid and late 1990's, the US crisis of 2008, and consider the current period and what might be happening and what is different? What might be reminded in Anna Karenina Tolstoy said "Happy families are all alike; every unhappy family is unhappy in its own way."

So what might be unhappy in today's markets in their own way? I would note that there are any number of factors to be aware of and to name a few: the comparative size of the GDP of emerging economies, the debt dynamics globally, the growth of the credit cycle in China compared to the US(2008) and Japan(1990's) and Thailand (1990's), the flexibility of EM exchange rates, the gross number of hotspots today versus previous crises, the populist political landscape and the causes thereof, the monetary and fiscal ammunition that is left and the willingness and know how to employ it, etc..

Apr

27

 It's a wrestling match today with bonds up a half from 7 down days and a 2 month low, and crude at a 4 month high, up another 2%. It is interesting to note that somehow the Fed believes that moves in oil are ephemeral and have no effect on inflation.

anonymous writes:

Here is a paper presented by Vineer Bhansali at JOIM : "Beyond the Quant Model" [36 page pdf]

I got a lot out of it even when I couldn't follow the physics examples.

Alex Castaldo replies:

I see that in late December 2015 Vineer Bhansali left Pimco to start his own firm LongTail Alpha:

LongTail Alpha is named after its strategy that "sustained portfolio performance comes from expecting the unexpected, and positioning portfolios to earn yield while maintaining convexity," according to a statement he issued. Bhansali said he is initially funding the firm himself. He earned a Ph.D. in theoretical physics from Harvard University in 1992 after receiving bachelor's and master's degrees in physics at the California Institute of Technology. He […] worked at Pimco for 16 years.

It would seem he is a convex combination of The Professor, The Upside Down Man and the Derivatives Expert. 

The talk is billed as a light talk rather than a technical one. He discusses lessons learned from hobbies and other fun activities and summarizes them in 10 points:

1.  Focus on Structure (and on the one idea that supports the structure)

2.  Let the data speak (and be Bayesian when you listen to it)

3.  Use proper coordinates and units

4.  Know the types of errors (and correct for them)

5.  Simplify

6.  Look for scaling rules (and anticipate the possibility of sharp/sudden transitions)

7.  Simulate freely (especially if you suspect path dependence) and use Gedanken (thought) experiments

8.  Identify tradeoffs (and deal with imbalance by owning free or cheap options)

9.  Don’t fight momentum (look for it and ride it)

10. Pay heed to the environment (and be flexible in adjusting to it)

Apr

25

"The Tokyo Whale Is Quietly Buying Up Huge Stakes in Japan Inc."

Reminds me of John Law and his Mississippi Scheme. Banque Royale was the central bank. What happened to France afterwards is well known…. The money supply of France was inflated to support share prices. When the collapse came many people were ruined. It also contributed to the French Revolution.

BOJ should study history.

Apr

22

 Seals are the most rugged and dependable of the military branches. The primary reasons are they are selective, draw mainly from swimmers (vigorous and smart), and their training is the most demanding with the highest attrition rate. Hence, we are protected by the best evolution offers from the U.S. military. Still, in looking over their '6 Lessons from Seal Team 6', improvement is possible. Here are the Seal lessons, and my upgrades (in italics) from experience in the jungles, streets, rails, mountains and deserts.

1. Consider a weapon not just by the traditional description but in terms of all the tools you can train and deploy, particularly your mind. Willpower is a powerful weapon.

– Willpower is a poor substitute for ability. I'm reminded of the Special Forces soldier who jumped from a plane, and his parachute didn't open. 'So far, so good,' he reminded himself. Then his emergency chute didn't deploy. 'So far, so good,' he said to himself…

2. Never attack from the same place more than twice at most, keep your opponent off-guard and move around.

– Never attack from your strength first, I might add.

3. Minimize emotions or you will have difficulty maintaining a focused mind.

–Do not attach emotion to the things you do in life, is key to the military, sports, and even business.

4. Assume there is no back up and control your risk accordingly.

- Always keep a back up, is better, implying to enter a situation without considering support, and remember it if the position sours.

5. Think outside the box, but don't chase things you can't see.

- A clearer way to phrase it, Think inside the box of tricks you've been taught, and if those tricks fail, think outside the box.

6. Nerve, stand for something every day and remember the SAS creed "those who dare win"

– Given the choice of cowardice and violence, always choose violence.

Apr

18

 Most families make the journey to DisneyWorld or Disneyland soon after they judge that "the kids are old enough now." "You haven't been to DisneyWorld?!" has the force of a shaming epithet in elementary school peer groups. Parents who have not "made the trip" are often considered poor providers.

I have concluded that Disney is a deep threat to American society. Visiting these parks is a training system for the America-to-come (and other countries where the movement has gained traction)…an America I don't think I will like.

Disney visits teach two things:

1. be an observer, not a participant …. a Disney trip is way down on the interactive scale, most "rides" are passive excursions through a terrain or story or experience over which the guest has virtually no control or input. And

2. how to wait in line politely and passively for long periods of time with tethered, exhausted, sugared children tugging on the parent…perhaps an apt experience for preparing us to endure the DMV or the post office

Disney's contribution is to make this otherwise awful experience into something that cannot be passed up. The best people mover of all time consults other companies and organizations on crowd management and control.

Is there a place for Disney in fighting terrorism?

Rocky Humbert writes: 

 I thought the original post about Disney was tongue-in-cheek — as it left me ROFL — but I'm starting to wonder whether it was a serious anarcho-anti-establishment rant?

Without opining on the misery of standing in queues under the Florida sun, Disney sells a professional, well engineered, family-friendly entertainment product. It is difficult to fault their franchise, execution and profitability. I have found critics of Disney are the same folks who hate the American Flag, Mcdonalds, baseball and apple pie. That Disney has a slightly left of center political bias is a reflection of its market research rather than agenda — I am certain that they would shift their bias quickly if it suited their profitability.

I have not been to a Disney park in many years, but it is a right of passage for most every parent with young children. My memory of it was pleasant. My primary complaints about the experience were the cost and the food quality.

If you are going there to glean a deep understanding of history, science, environmental studies, etc., it will be disappointing But if you are going there to have your youngsters smile and not be exposed to vulgarity, profanity and things that many of us consider the dark side of the work, then it is a great place.

Again, every detail of their product is micro managed and they should be saluted, not pilloried, for providing consumers an interactive product that they want and pay for. Good luck to the parents of young children who think they should go "rock climbing." See you at the ER.

Russ Sears writes: 

While I concur with Rocky's sentiments that Disney leaning left is most likely due to the leaderships belief that the left will win the future. What bothers me is not the left or right side of their politics but their marketing preference towards girls and capturing a large segment of the young girls and their mothers. I have only daughters and they loved Disney. But when 60% of the college graduating class is female, and 40% is male, a figure that was reverse in the male chauvinistic 70's, it hurts to think that the young boys' futures are so bleak that Disney doesn't market too strongly to boys or their fathers and knows where the future is. While it maybe the future, is such an accelerating trend sustainable for the next 30 years or is there a limit to how bad this can get?

Jim Lackey writes: 

 Disney world is fantastic. It is expensive, yet worth it. There are some good points that strong women and some men point out. Life is not a fairy tale and you're not a princess. However, once that statement is out of the way the experience is best if you look at it as purely entertainment and have fun.

Nothing for the boys? My best memories are when my dad said: NO RACING this vacation son! We are going to Florida. I am taking your sister to Disney. Your brother wants to do the water park. Son, I want to fish in the Keys. It is your job to navigate. Here is the map, the compass and my cc card. Plan the trip. P.S your sister will refuse to stay in a hotel without a diving board. Your mother needs, we need, for your mother to have a car and a place to shop. Love Dad.

Yes, that was a note he was off to work 7/12's to raise the funding for the trip.

I lived in Fla from July 91 until June 2006. In that 15 years I went to Disney countless times. We also hit Busch gardens, when Budweiser still owned it. I had fond memories of that park from a kid. It wasn't in the parking lot of the ball park of Disney. Once a year I was kicking and screaming about a summer Disney trip, again for my wife and small children. My wife set me up. She had paid for a full day of me driving the Richard Petty driving experience (12-1 compression aaah about 550 HP stock car.) I had to follow the instructor for 15 laps (2 cars.) Then he realized I could drive the car. They had a speed limit of about 150 on the strait so we had to coast, then right before you slam on the brakes to corner he had us go full throttle for one thousand one one thou, SLAM the brakes…. right before the apex of the turn, which is quite unnatural, you went back to full throttle. I noticed the slight delay from the full throttle to the power band of the engine. Actually I noticed a puff of fuel come out of the lead race car's header or exhaust pipe before the car slammed the apex, where a driver would normally go full throttle. Then we had it wired.

I upset him by pushing him down the strait when he was waiving his arm frantically (which meant slow down back off 3', we were 150 mph about 100 feet into the strait. I dunno if I did 50 or 60 laps. All I can tell you is I wanted out of that hot box on the 95 degree Fla day so bad the final 10 laps were work. I though damn these stock car drivers must train very hard on long distance bicycle or run many miles a week to drive 500 miles in this hot box. They must have full focus in real racing for that 3 hours and that takes endurance. I walked into Disney and the wife said, "so? Are we trading the Drag car for a stock car?" No way baby, I'll never be a stock car driver.

Disney rocks. If you can't find something to do there…send me a note. Few realize all there is to offer.

Disney is my retirement plan. That will be my job from 62-82. I'll be rebuilding engines, motors, hydraulic pumps and training young men, how to work. Did you ever notice how they take out the trash restock the concessions, or how the leaf blower/ vacuum exhaust smells but doesn't stink like your gasoline lawn mower?

I remember as a 11 yo kid asking dad, are they running vp racing gas in that leaf sucker? Pops can you smell that exhaust? That's the same sweet smell of fuel burning at the dragstrip. Only you'd notice, son. Did you wonder where does all the trash go? We could never figure out how is it that every kid that works there for the minimum is so happy. My wife, the UCF grad explained it to me. Talk to the management. Where are they? Exactly!

Stefan Jovanovich writes: 

 A trip to Orlando's theme parks would not be complete without a trip to Florida's own surf city, Cocoa Beach. We make a day trip over to CB at least 7-8 times a year, usually in spring and summer, and sometimes stay a few nights at the surfer friendly Wakulla Suites.

A typical day trip begins at 3AM with a stop at our local 7/11 for coffee and donuts. Boards strapped and secure on the top of the car, we race up I-75 until we hit I-4, take a right to Orlando where we exit and take the 528 over to Cocoa Beach. Our excitement is palpable when we get close on the 528 causeway, and one can smell the Atlantic Ocean. Pulling into Cocoa Beach on A1A, if all goes well, usually happens around 6:15-6:30 AM. Our ritual is to always stop at the Waffle House for a greasy breakfast, some good country tunes on the juke box, while rubbing elbows with working people and an eclectic mix of tourists and surfers. I love the waitresses at Waffle House, the way every customer is referred to as "Hon."

After breakfast, we find our parking spot, unload the car, set up the tent, and paddle out for a nice dawn patrol. Since we always take a couple of local kids along with us, they get the job of setting up our site. The kids are always good sports, and "Get the Joke" as Lack would say. Generally, we will surf for a couple of hours, taking time to stay hydrated (one loses a lot of water in the sun and surf), then relaxing with a quick siesta under the shade from the little tent. Waking up, we'll put on sunscreen (Bullfrog) and go back out for a couple hours.

My wife will make a run over to Publix for some excellent deli subs, some salad and fruit which we will eat for lunch right on the beach. Usually after lunch is another short siesta, then back to the waves. Since my wife learned to ride a longboard, she will paddle out for a few after lunch. Otherwise, she is content to stay under the tent, watching us surf while reading.

If the surf is really good, we'll stay out until 4-4:30 or until exhaustion takes it's toll. I have found that using a waterproof ipod is just the ticket for adding the enjoyment of good music to a surf session. My son does the same, and while my surf music tastes tend to gravitate towards Coltrane and Monk, his is more geared towards punk and hip hop. The difference in musical tastes is very common between old guys like me on longboards, and young guys who ride those potato chip shortboards. Either way, the good tunes extend the length of a surf session and make it much more fulfilling and spiritual.

After surfing all day, late afternoon creeps up quickly and we feel a tired sense of satisfaction and accomplishment. Wrapping up the day, the groms know their duty is to pack up the boards, tent, coolers, etc. We always make it a rule to park near Ron Jon's. We wander into their huge 2 level surf shop, gawking at the lobster burned tourists, the cheap "Made in China" trinkets and other souvenirs of questionable repute. We always head upstairs to look at the huge selection of surfboards, talking story with the board sales staff, who are usually grisly old guys who have as much surfing experience as Gerry Lopez. I always buy the groms something useful, as they generally come from very limited circumstances and things like no-name wetsuits, leashes, rashguards quite inexpensive at Ron Jon's. Sometimes Ron Jon will have good deals on Hawaiian shirts, the kind that I live in 360 days a year. My wife will always ask, "Are you sure you need another 5 shirts?" She's always a good sport, lets me have the shirts, and I make sure to find something good for her as well.

After an hour or so taking in the spectacle that is Ron Jon, we walk across the street to "The Shark Pit Bar and Grill," at Ron Jon's main competitor, the Cocoa Beach Surf Company. Their meals are quite delicious, with generous portions, an attentive waitstaff, and are quite filling. After dinner, we'll check out the boards and equipment at the CBSC shop, then drag our way back to the car.

Leaving Cocoa Beach around dark, we always stop at a Starbucks, where I like to get a quadruple venti cappuccino, drugging myself in order to make the 3.5 hour drive home. We usually make it home before midnight, barring some horrible traffic on I-4. The drive home finds everyone in the car passed out, leaving me to enjoy my thoughts, sense of accomplishment, and the love that I have for everyone around me.

Dropping the groms off, we make our way home, to the comfort of our beds. The car is never unloaded until the next day, usually in the late afternoon. I never unload the car myself, preferring to delegate the job as there are more pressing things on my mind, like sleeping in all day long. Still, one cannot have a day trip to Cocoa Beach without suffering one major unintended consequence, which usually manifests itself as an ear to ear smile that lasts for a couple of days. If you have never been on a surf run to Cocoa Beach, or it's sister New Smyrna Beach, your life is sadly incomplete.

Apr

16

 Slab City girls are different. They're seasoned, leery, and well-traveled. So the approach to ask for a date is different:

1. Show her your tattoos.
2. Say you've been on the road for a year or more.
3. Claim to get a monthly dole.
4. Keep the chat to a minimum.
5. Pull out a condom.
6. Don't be surprised if she doesn't have underwear.
7. Let her brag about having more stab wounds than you.
8. Let her choose a position.
9. Expect intense swiftness.
10. Accept after her speech, 'I'm sorry, I have to go get more sex.'

Apr

16

 "Forever stamps" are not forever. They just lost 4%. A long time ago a reader mentioned (in jest) investing in forever stamps as an inflation hedge. What does this deflationary move say? Are they way behind the curve as usual with everything else starting to inflate a bit now? They are us 500% since 75, so that is fairly consistent with inflation. Here is the price chart.

In Hawaii, real estate is getting hot. No rentals, immediate sales at asking. In Cali real estate has been super hot.

Apr

11

Bill Rafter and I have discussed for years the steadily growing discontinuity in the BLS's employment data versus that implied by payroll tax receipts.

A few years ago the staff economists at the Atlanta Fed got so fed up with the nonsensical BEA GDP reports that they started issuing their own report anticipating the GDP release wit their GDPNow report.

Although the media has since glommed onto the report it is treated in similar fashion to the ADP employment release.

The differences between the two is important however.

The ADP report is distinct from the BLS data and uses inputs chosen by ADP.

The GDPNow report is designed to mirror the BEA's data inputs to anticipate not what what GDP is but what the BEA will report that it is.

The Atlanta Fed staff are putting the manipulators on notice, and those in the media and at the FOMC willing to go along with it, that there are consequences.

The actions by the Atlanta Fed staff have also helped to embolden other Fed staff members to do similar work and make it public.

The Richmond Fed staff economists have now produced a model of unemployment called the non-employment index that challenges the accuracy of the BLS data.

The importance of this is that it challenges the usefulness of the U3 unemployment rate and the FOMC natural rate of unemployment (NROU) predicated on it.

The point is that data is being willfully corrupted by providers and this has engendered, finally, a push back by others.

Being aware of the totality of this, especially for a group focused on clean data is important.

Apr

11

Readers of Dailyspec normally speak of picking spots to trade S&P for brief statistically anomalous moments they identify. They do no try static timing approaches to beat the S&P by only trading the S&P. A weasel could put out predictions and escape scientific judgement by evading the selection of a benchmark for comparison of results. Since legitimate reasons exist for not using the S&P as a benchmark for taxable investors in a trading account, the skewer arrives as a dull blade. The Thomson Reuters Eikon idea holds more interest.

What strikes me is that as the competition increases, events could go the way of the cellphone data provider model. They get rid of the business model of the non-negotiable onerous bi-annual contracts first, and then they offer to pay the remainder of the competitor's contract to get clients to switch. Will that cut the margin projections for all of them and make it a lower margin business generally? The new tax inversion rules cannot help US based business valuations and might lead to foreign based lesser-market share competitors gaining in their relative profit margins as well.

Russ Sears writes:

Much time is wasted looking for static rules to sell stocks, but the converse is where the static rules apply, what time to buy stocks. I believe many investors confuse the potential to time individual stock sell indicators with the market as a whole. My battles have not been finding static ideas or getting institutions to implement ideas that beat the market. If it is static, it is not labor intensive enough to give investment department credit beyond luck. Static market ideas are simple by their nature, and therefore its easy to label them as luck rather than sophistication, and when they are 10/ 20 baggers to cash them in once someone decides they need money to lessen the "risk" because it was just lucky. The same goes with long term stock holders. The kids find a nice portfolio of stocks that the wise old deceased patriarch held forever, which made the family rich. The kids are told to sell into something with less risk because the portfolio just got lucky.

Apr

8

 Dr. Garth Davis writes:

There is a new study following over 500,000 people since 2004. HUGE study. This latest analysis in the prestigious New England Journal of Medicine is fascinating. Those people that ate fruit daily had lower blood pressure, lower blood sugar, and consequently a lower risk of heart disease. Impressive results given they did do multivariate regression analysis. Large studies like these try and control for confounders but hard to do. Regardless, this is strong evidence that fruit does a body good.

"Fresh Fruit Consumption and Major Cardiovascular Disease in China"

Apr

7

It only stands to reason that where there's sacrifice, there's someone collecting the sacrificial offerings. Where there's service, there is someone being served. The man who speaks to you of sacrifice is speaking of slaves and masters, and intends to be the master.

-Ayn Rand

Mar

28

What is the difference between the "smart-beta" index built around "momentum factor" (offered by Russell or some other index provider) and a trend-following CTA? It seems to me like a lot of smart repackaging (trend-following is now called momentum since more academic research is about momentum, trading is now asset allocation, etc.)….

Aside of fees, of course :-)

Ralph Vince writes: 

All trading systems can be represented as indexes. (even your simplest, go long here, flat there, short here, has aggregatge weightings of 1, 0,1 on the various positions — cash always 1-position weight).

All portfolio models, can be represented as indexes.

So

Trading Systems ~ Portfolio Models ~ Indexes (~ representing "equivalent to")

It's a matter of packaging.

And further building on this edifice scratched in the walls of my darkened cave….

And all long positions ~ short put + long call of same series.

And all of this occurs within the hyaline manifold of leverage space, which readily explains things that are often not so evident on the surface (such as why a short etf will have a long-term downward drift, as well as all leveraged ones, just as with any form of portfolio insurance) and on and on and on and on.)

Rocky Humbert writes: 

Ralph articulates this well.

I would add one point:

We know as a logical syllogism that the overall return from an entire market (to all participants) is the overall return from an entire market. Putting aside the mark to market paradox, if I were the sole market participant and I owned the entire market, then my return would be the intrinsic market return (i.e. cash flow, profits, dividends, etc). And if there were two market participants, then the intrinsic return is shared between those two participants. Again, mark to market paradox notwithstanding, just as it is impossible to squeeze blood from a stone, one cannot produce a total return that exceeds the intrinsic market return. The only question therefore is how to allocate the return — which, beyond the intrinsic return, resembles a zero sum game. (Some people here call the intrinsic return, "drift", but it is really dividends, retained profits, etc.)

An academically pure index must capture the entire market's intrinsic return. And it would do that by owning the entire market capitalization of that market. The S&P500 doesn't do this exactly — the index owners exercise nuance and discretion — and that process might give some opportunities to the smart-beta crowd. That the S&P is market cap weighted further gives rise to the mark to market paradox (i.e. the starting point when one purchases the entire market cap).

But if one could actually purchase a piece of the entire market on the day of the market's creation — and own it until the end of the world — that investment will produce a return that will, after taxes and expenses — beat holding any given smart beta strategy for the same duration. This is a purely theoretical point — because during any given holding period, some particular smart beta strategy will surely outperform. Again, it's a mark to market issue. So the goal is to figure out which one will and which one won't. (Assuming that this is possible!)

So yes Virginia — there is a pure index. But it is theoretical ideal.

anonymous writes: 

I used to trade and develop "smart beta" strategies back at the fund.

I don't think there is an established "this is smart beta and this is not," but I can tell you as to what people expect. The momentum strategies are a bit different than typical CTA trending strategies (not using crossovers for example). Instead momentum is tracked by other measures such as relative performance across sectors and going long/short the best/worst performing ones.

The implied idea of smart beta, which is not exclusive to CTAs, are the other benefits of using these strategies amongst others in a way that utilizes portfolio construction or a dynamic weighting strategy (like monthly rebalancing on vol).

The goal with smart beta is to not produce alpha outright, but to accept that the majority of alpha has been "sapped" and you are now using diversified strategies that have a known cyclical alpha. This is where you get into gray area but I differ the two by saying:

alpha means the sharpe significantly deteriorates as others discover the method smart beta means the sharpe has already significantly deteroriated, but because it has, you can more easily predict the regimes in which they work/don't work. For example, AQR's paper: value and momentum everywhere discusses the idea that momentum (continuation) and value strategies (mean-reversion), tend to have negative correlations, albeit both strategies have lower sharpes (0.4 to 0.7).

anonymous writes: 

Assume, all flows as dividends etc produce an intrinsic market return of zero over some point. Trader A loses 10. Trader B gains 9 (dont forget the vig). Ok till this syllogism its a zero sum game

Next,
A sold at 100, B bought at 100.
A stopped out at 105.
B stopped out at 95.
There must be a C or a CDE.. and so on and so forth.
Still sounds like zero sum. 

But if over a length of time some stay in the game, majority keep dropping out. Then it becomes a series of zero sum games.

Next, If A,B,C,D,E…. et al become very large numbers then its a zero sum game between those who stayed in the game up to the point the non participants came in. This also explains the Lobogolas.

Market therefore is a variable sum game. People vary their exposures, they vary even their presence for prolonged periods of time. No one rides an investment bus permanently the way sage does. Normal people buy stocks with an "intention" to sell at some point.

The drift in equities is explicable by a fact that it is the only asset class where reinvestment in growth occurs. For Indian equities I have had calculated in the past it mimicks the curve of (1+GDP growth)*(1+inflation). Perhaps true for other markets too. Given in the long run supernormal profits dont exist, its the ability of businesses to pass on inflation to their customers that produces the drift in their cashflows and thus stock prices. 

Mar

21

 This pic shows Vic Niederhoffer with Andrew Romay (born in Hungary in 1922) at the 50 Year birthday party for Roy Niederhoffer.

Andrew Romay survived the Mauthausen concentration camp in March-May 1945, then came to the United States where he became well known as an investor and lawyer in the Hungarian emigre community.

So careful was his due diligence work that the famous phrase was often heard "OK, I am willing to invest if I can come in pari passu with Andy on this deal".

Mar

7

 I gave in and rented An Honest Liar documentary about James Randi the other day. A rather decent documentary/biography. "The Amazing" Randi seems to have been an icon back in the 70s and 80s? Sorta the Father of Magicians and Illusionists following in Houdini's foot steps.

The movie opens and closes with Randi saying "no matter how smart or well educated you are, you can be deceived". A lot of what has already been discussed about deception over the years on this site is in the movie. Well worth watching even if for a refresher.

Through age and an almost tragic accident Randi is basically forced into retirement. He then becomes a crusader to expose those that deceive for profiting without being honest about their deception! Backwards I know. Hence the title of the movie.

He completely helps Johnny Carson foil and ruin Uri Gellar, the so-called famous psychic.

Randi exposes a Southern Evangelical that holds himself out as a "healer" fleecing crowded Civic Centers.

Randi feels that the practice of magic/illusion should be one that the crowd knows it is paying to see entertainment. To practice deception for the sake of conning and stealing is ironically morally unethical to The Amazing Randi.

The movie ends with Randi sharing personally that he was deceived and the impact it has had on him.

I feel it is worth the hour to watch. Countless market implications were in my thoughts while watching and thinking about the movie afterwards.

Mar

7

 "Family Wealth Lasts For Ten To Fifteen Generations: An Interview with Gregory Clark, historian of social mobility"

Clark uses historical records to track surnames and social status over generations, and finds that rates of social mobility are surprisingly similar—and surprisingly slow— across societies as diverse as feudal England, modern Sweden and Qing Dynasty China.

Most social scientists estimate that it takes about three to five generations for a family's wealth or poverty to dissipate, but Clark says it takes a staggering ten to fifteen generations—300 to 450 years—and there's not much the government can do about it. According to his calculations, if you live in England and share a last name with a Norman conqueror listed in the Domesday book of 1086—think Sinclair, Percy, Beauchamp—you have a 25 percent higher chance of matriculating at Oxford or Cambridge. If you're an American with an ancestor who graduated from an Ivy League college between 1650 and 1850, it's twice as likely that you're listed in the American Medical Association's Directory of Physicians.

Mar

5

Numberphile has done a nice vid on the Hawkes process and applications:

The Mathematics of Crime and Terrorism

Here is a presentation that dives a lot further into the math:

An Introduction to Hawkes Processes with Applications to Finance

The Wolfram entry

Mar

3

The NYC Junto will meet on Thursday March 3, 2016 at the General Society Library, 20 West 44th Street. The open discussion will begin at 7:00 PM and the featured speaker begin at 8:00 PM. This event is free and open to the public.

The featured speaker will be Gregory F. Rehmke , who will speak on the topic of economic freedom and its benefits. Mr. Rehmke is the Program Director for EconomicThinking.org, a Teaching Fellow at the Independent Institute, and has directed educational programs at the Center for the American Idea, Reason Foundation, and the Foundation for Economic Education. He co-authored of The Complete Idiot’s Guide to Global Economics.

Feb

26

Yesterday was one of the best days of my life. I was healed enough to be able to go surfing for the first time in months, Ceres treated me well in the market, and The Eddie went, and I watched it on a screen.

The Eddie Aikau Memorial is the most important contest in surfing. It is the World Series, Superbowl, NBA Final, Kentucky Derby all wrapped up in one. The Eddie is so important that it is not run every year, only running when the conditions at Waimea Bay are perfect. The contest was named in honor of Eddie Aikau, the Hawaiian big wave surfer and lifeguard who lost his life in 1978 during an ill fated canoe voyage from Honolulu to Tahiti. The 9-man canoe capsized around 15 miles from shore, and Eddie tried to paddle to Molokai to get help. The people on the canoe were rescued by a Coast Guard cutter, but Eddie was never seen again.

In 1985, surf giant Quicksilver put together a big wave invitational contest in memory of Eddie Aikau. First held at Sunset Beach on Oahu's North Shore, the second year brought it to Waimea Bay where Eddie was the lifeguard for many years. In 31 years, the contest has been run only 9 times, despite having a 90 day window. The last time it was run was in 2009. The surfing tribe started getting excited last week when the models showed a huge El Niño swell showing up this week. Not only was it a huge swell, it was one of the biggest, with waves reaching 30-40'+. The conditions were perfect, and the waves were well formed, Waimea at it's finest.

The contest consists of 28 invitees each surfing in two rounds of 60 minute heats with only 6 other surfers. Each contestant was only allowed a maximum of 4 waves per heat. There were 5 judges that scored each wave 1-20, with the sum of their scores being the total for the wave.  The contest started at 8AM Hawaiian Time and was finished in a little over 8 hours. It was the best big wave contest I've ever seen. The contest was very therapeutic for the surfing tribe and the contestants who last week lost a popular big wave surfer, Brock Little, to cancer. Much mention was made of Brock, and the Hawaiians attributed the good swell to him, naming it the "Brock Little Swell." Thousands of people were at the beach and the Kam Highway, watching the spectacle.

The heats were very exciting, with many good rides, and very scary wipeouts. The waves were so big that big sets would blow out the entire bay, sending jet skis racing to shore to avoid the 20' whitewater.

All the usual suspects like Kelly Slater, Peter Mel, Shane Dorian, Tom Carroll, et al, were competing. A bonus and the crowd favorite was 66-year-old Clyde Aikau, past winner and younger brother of Eddie. Clyde put on a great show, totally ripping up the waves in a very old school Hawaiian style. Ultimately, John John Florence won the contest, bringing the title back to Hawaii. Florence is billed as the next Kelly Slater, and his performance was spectacular. Incidentally, Slater came in 5th. Clyde Aikau came in 20th place. A horrible wipeout from Mason Ho deserves a look. And here are some highlights of the best waves in the contest.

The 9th running of the contest was spectacular, and was a great time for for all contestants and spectators.

Feb

26

Gut feelings matter, but not the way you think. An individual’s gut feeling is anecdotal. Chances are that even he cannot statistically study his sympathies. However many of us model the gut feelings of investors at large, and those can be statistically studied. Here are a few examples:
 
Commitments of Traders of futures. Many researchers ply a theory and then try to find data to support it. And their theory typically revolves around following the large (reporting) traders and mimicking them. The trouble is that not even the big guys are right all the time. A better approach is to examine the data without a preconceived theory. In doing so you will find that the small (non-reporting) traders are more consistently wrong than the big guys are right. That is, winners rotate, but losers are consistent. Further analysis reveals that the little guys tend to be even more wrong when they are short. And the best combination is when the little guys are short and the big specs are long. Following the hedgers should be avoided as the hedgers speculate, but on the basis, not the actual price. If you don’t know what that means, don’t play in that venue. 
 
Options data. This usually takes the form of the putcall volume ratio. Excessive levels tend to occur at market turning points. And by the way, the smart money bets against the excessive level. One problem to be mindful of is that most researchers look at CBOE data, which typically only constitutes a third of all option data. If you want to get it all, get the Options Clearing Corp data, which is free just as CBOE data and more reliable.
 
While you are looking at option data, go a step further and look at the open interest levels.  I assure you that if you like putcall volume data, you will value the open interest data more.  The latter also tends to give less ephemeral signals. 
 
Is there any way to combine the two?  You betcha!  In any given period the number of New Positions (NP) equals the volume plus the change in open interest.  Further, the total open interest divided by the backward cumulative NPs identifies a number of trading days which can be described as either the age or average holding time of those positions.  On a very broad scale that data gives a view significantly different from putcall volume, and one that is quite reliable. 
 
Polls?  There used to be a newsletter which purported to measure contrary opinion for futures. What the publishers (Mr. James Sibbet and Earl Hadady) did was rank the bullishness of various newsletters and take a percentage. The theory was that if every publication was bullish, the market was overbought. The trouble was (paraphrasing Keynes) opinions could stay bullish for longer than you had margin money for picking the top. However if a market was up in the high 90s percent bullish for several weeks, the first downturn in opinion to even mid-80s presaged a price selloff.  It wasn’t the same people each time, but when the collection of gut feelings changed its momentum, the price tended to go along. 
 
While on the topic of polls, VIX and its offshoots are surveys that are very reliable. 
 
Price alone. What do you do about a market without telltale derivatives or surveys of newsletters? If you run a regression fit of the price data and extend it, you have a forecast. The deviation of the actual price from the forecast provides a measure of the combined opinions of professionals regarding that price. Small deviations go hand in hand with low volatility which is bullish on prices of assets that go into portfolios. Large deviations are scary which manifest themselves in price discounts. 
 
So all in all, Virginia, gut feelings matter. 

Feb

24

"Invisible walls: Do psychological barriers really exist in stock index levels?"

Larry Williams writes: 

I've always thought the reason for resistance around round numbers is simply when traders decide where to place stops, targets and such they round up. The human mind naturally goes to round numbers. So it's not some mathematical magical thing happening, just how humans function. It was very clear in the old days when brokers would ask where a client wanted to place her stop that the reply, based on my research with several brokers, was always round numbers or .50.

Theo writes: 

The paper offers nothing new. They apply the exact same methodology that Donaldson and Kim (1993) applied in the Dow (you can read it for free here). The majority of the academic papers I've seen on rounds focuses on the index levels and not on futures prices. Also most of them approach the subject from the scope of clustering of particular digits whose applicability in real trading is limited instead of looking at market behavior around those levels. 

Feb

24

Now there is an announcement by the MFMP group which has been performing Live Open Science, which means that all of their methods and results are published, as well as live interaction with observers who can criticize and make suggestions. The announcement is that they have a replicable method of demonstrating the production of heat due to what used to be called "cold fusion" and is now referred to as Low Energy Nuclear Reactions.

Since many people will be able to test it, it won't be long before the effect is either confirmed or falsified. Take a look here for a trailhead. And here is an email that they just sent out, with more to come on Wednesday. Maybe they are mistaken, but it is very unlikely that they are scammers.

During ICCF-17 in South Korea, shortly following the sad death of Dr. Martin Fleischmann, it became abundantly clear to a group of fresh attendees that the old approach to science, combined with the ostracisation of the great minds that had worked in the face of ridicule, was not delivering on the promise of of what we immediately called, "The New Fire".

It also was clear that there was something to investigate and we were morally bound to do it.

We said that people would not believe, until they could experience it as if they were doing themselves and so the idea of Live Open Science was born. That was not enough, it had to be an effort that was free from commercial or government interests and that result and so it had to be conducted by the people, for the people. Our journey was made possible by the courage of Francesco Celani and we thank him profusely.

Your donations played a critical role in realising this vision, but you know that, what we know you will want to hear is what we have to share tomorrow.

We have been running and analysing an experiment live over the past Month. First for us in this experiment were:

- Parkhomov Baking of Ni(correctly done)

- Pre Hydrogenation of Ni

- Proper baking out of cell under vacuum

- Parkhomov pressure

- Piantelli de-oxygenation

- Piantelli 'loading' + proper dwell times

- Piantelli capture analogue

- Use of free Lithium

- Use of calibrated NaI

- Cycles attempting to create nano Ni distillates (inspired by "Bang!" discovery of dissolved Ni)

- Long Run

You can see that there are steps in there that came about only because of activities that were made possible by donations. The critical visits to Piantelli and Parkhomov.

Around the beginning of the month we saw what appeared to be up to a COP of 1.2, not earth shattering, but sustained and robust and in line with both observations by others and the Lugano report when adjusted for correct emissivity. Over the next weeks we tried various bookend calibrations which supported this finding.

We have said that only two paths would satisfy us:

Statistically significant Isotopic or elemental shifts from Fuel to Ash Statistically significant emissions commensurate, correlating, or anti correlating to excess heat We are happy to tell you that we believe we have satisfied our condition 2, yet of course we'd like to replicate ourselves. Actually, though, it goes much further than that. What we will share is that the way in which we discovered it and the journey of analysis that makes it virtually impossible to say that Rossi does not have what he claims. It also shows that, whilst he may have been optimistic in how fast this would play out, he has been telling the truth, quite openly for years. Not only that, nature itself has been telling the same story and it told us too.

By the 16/02/2016 we had given up trying to destroy the *GlowStick* 5.2, part of a long lineage of []=Project Dog Bone=[] experiments. After the reactor was turned off, Alan shared the remainder of the data files from the NaI scintillator kindly donated by a project follower called Stephen (Thankyou Stephen, really).

Project follower and open science legend, Ecco, first took a look at the data and found some anomalies - one SO striking that we thought there had been an equipment failure. We did not know the time that the anomalies occurred and had to wait until Alan woke to explain the time stamps so we could correlate it with the thermal and power data published live to HUGNet (Thankyou Ryan and Paul Hunt).

To our extreme surprise, the onset of excess heat followed the massive anomaly in emissions and the minor anomalies were during and only during excess heat.

This led us on a path of discovery, the sequence of which explains:

The massive count signal discovered by Francesco Celani during Rossi's first public demo

How Rossi knew his reactor had started

How the E-Cat generates excess heat

How it self sustains

How it can scale easily

That it is safe

It also showed us how replicators can know they have succeeded in triggering the New Fire and how to enhance the excess heat.

Subsequent to this, we found out Rossi had traveled the same design journey and had publicly shared it in the past.

The irony is - this was all being conducted live in the open, including discussions and graphing, whilst people were distracted with news of the end of the 1MW 1 year test. Same day…

In the past week we have been checking, cross checking to verify and this morning we cleared our last serious doubt, again live, with shared data. Because this is already in the open we want people to know so that they can start replicating based on what works, moreover, the insight will allow people to immediately start improving on our results.

Thank you for making this possible.

We did it.

We lit the New Fire Together!

Feb

22

 Dunbar's research says that on average there are 5 friends close to us and this number grows by a rule of three as we include people not so close to us, reaching 150 for casual friends. Is there a similar number for the number of relationships between markets? What is the number of markets we need to forecast cross-sectional relationships?

Dunbar's number

A good article is "The Limits of Friendship":

The Dunbar number is actually a series of them. The best known, a hundred and fifty, is the number of people we call casual friends—the people, say, you'd invite to a large party. (In reality, it's a range: a hundred at the low end and two hundred for the more social of us.) From there, through qualitative interviews coupled with analysis of experimental and survey data, Dunbar discovered that the number grows and decreases according to a precise formula, roughly a "rule of three." The next step down, fifty, is the number of people we call close friends—perhaps the people you'd invite to a group dinner. You see them often, but not so much that you consider them to be true intimates. Then there's the circle of fifteen: the friends that you can turn to for sympathy when you need it, the ones you can confide in about most things. The most intimate Dunbar number, five, is your close support group. These are your best friends (and often family members).

Feb

12

I solicit DailySpec members to write one interpretation of the phrase "ever changing cycles". Let's see what gets compiled.

My favorite one line description of what ever changing cycles are reflected most in is that the correlations of no contracts remain the same, they keep changing and often in gradual non erratic "tendency". (No please don't kill me, I didn't use the equally vague word 'trend', but only said tendency).

I also request, our generous host, the chairman of the list, and the one who coined the phrase ever changing cycles, helps elicit as many responses as he can and then shares with us his own notion of the mystical ever changing cycles.

Gibbons Burke writes: 

Two words: random walk. 

anonymous writes: 

Are the cycles ever changing?

I'm not certain, I think the cycles are always there but they get accentuated from one time to another. It is what causes them that is the great mystery which has caused me to pound my head into the wall many times late at night. That helps, occasionally I get a glimpse of something going on that is causing this.

However no clarity yet on that point.

Paul Marino writes: 

Mr. Mac, the most practical thing that you ever did in your life would be to shut yourself up for three months and read twelve hours a day at the annals of crime. Everything comes in circles – even Professor Moriarty. Jonathan Wild was the hidden force of the London criminals, to whom he sold his brains and his organization on a fifteen per cent commission. The old wheelturns, and the same spoke comes up. It's all been done before and will be again.

- Sherlock Holmes

The Valley of Fear
, Arthur Conan Doyle

I see ever changing cycles inside the big cycles, demographics, interest rate regimes, etc.

The President of the Old Speculator's Club writes: 

The inability of law enforcement to police the streets effectively provided Wild with the perfect conditions in which to build his new business. Victims of theft generally had little chance of getting back what was stolen from them, let alone catching the thief. Through Wild's new service, however, owners of lost or stolen property could apply to him for help in recovering their possessions for a fee that fell below what it would cost them to replace the objects. His business proved to be extremely popular.

Wild benefited from this policy by collecting a fee every time he was able to prosecute a criminal. His office, then, essentially served as the de facto "Scotland Yard" of the day. Jonathan Wild, the man supposedly responsible for clearing the streets of criminals, was in point of fact the head of a vast criminal empire and a well-oiled criminal machine. Wild's Lost Property Office was actually a clearinghouse for stolen goods that members of his own organized gang had themselves acquired. The thieves he apprehended, supposedly for the good of the community, were fall guys; they either belonged to rival gangs, or were members of his own gang who had tried to double-cross him, quit his business, or ceased to be more valuable than the 40-pound reward given by the government for capturing and convicting a criminal.

This new [Transportation] Act gave judges the option of removing felons from the streets and jails without having to take away their lives in the process. As a side benefit, the Act seemed to offer help with the American colonies' desperate need for cheap labor. Settlers in America faced the problem of securing labor at a cheap enough price for them to grow their businesses, mainly because anyone who had sufficient means to make the trip overseas from Great Britain to start a new business in America had no intention of working for anyone else…convict transportation killed two birds with one stone: It rid the Isles of unwanted criminals and provided cheap labor for the American colonies.

A provision in the draft of his Transportation Act aimed specifically at curtailing Wild's organized criminal activities. This provision made it a crime for anyone to take a reward for returning stolen goods to their owner without at the same time capturing and giving evidence against the thief. Failure to turn in the criminal could subject the person taking the reward to the same punishment as the thief, assuming the latter was ever caught. This provision was so clearly aimed at Wild that the Transportation Act also became known as "The Jonathan Wild Act."

Since the Transportation Act made it a crime to collect a reward for returning stolen goods without turning in the perpetrator as well, Wild shielded himself by using transported convicts to return stolen goods and collect the reward from their owners. Returned convicts not only provided Wild with protection from the provision in the Transportation Act aimed directly at him, but if they ever tried to betray him, he could easily turn them in for a large reward, and they would receive an automatic death sentence.

From Bound with an Iron Chain (The Untold Story of How the British Transported 50,000 Convicts to Colonial America) by Anthony Vaver

Feb

11

 Gold is glittering one more time.

The question that comes to mind and one not normally asked in popular press is is gold only a super currency or does gold behave sometimes as super currency, sometimes as a super asset and often in normal times as another asset, which many pundits love to dismiss as a latent unproductive asset.

If one were to run correlations of gold across these varying regimes, how can we have a logit or a probit model where a probability distribution of risk-off factor is included.

When risk is a bad word in the markets, does gold first behave as a super currency and only later as a super asset or is it vice versa? Or there is a more likely scenario that the super currency vs super asset status also has a localised idiosyncracy that can be modeled using another function?

anonymous writes: 

It is a manipulated asset. Study the structure of the Futures market, the term "Paper Gold", and the dominance of the handful of bullion banks in the delivery process. Look at the international shifts in holdings, and question the "reality" of the Ft. Knox inventories.

More importantly, who do you trust? Central bankers, governments, and economists all have biases, some with monstrous financial incentives to have bases for their pronouncements.

You might want to describe what you mean by super asset, since that is not a term used around gold that I know of.

Feb

11

Nasdaq 4000

Nikkei. 15000

HangSeng 18000

Bovespa. 40000

CAC40. 4000

IBEX. 8000

Dax. 9000

Aiken writes: 

AUDUSD = 0.71

NZDUSD = 0.67

Also, US treasuries are making big moves up today, with 30Y yield hitting an all-time low.
 

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

 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:

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

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.

keep looking »

Archives

Resources & Links

Search