One of the qualities by which a client rates his bank or broker on is the ability to work things "quietly" — execute an order in a discretely to achieve a good fill. This is because participants are generally unaware someone out there has a buy or sell order and won't strive to squeeze you. In that respect, anonymity is a good thing.
Yesterday I was booking a hotel on a website, and came across a variation of this, where top hotels are willing to unload inventory at knockdown prices, but they do so "anonymously" through an intermediary website. They want to sell a few extra rooms, but don't want to publicly quote the price because it will impact their pricing power.
I considered going with one that offered a reasonable rate and gave general details about location and specs of the room, but at no time before paying would I know they name of the hotel. It mightn't sound like a big deal, but if I were handing over a few hundred Euro, I'd like to know more about the premises. In the end I didn't pull the trigger — I went for somewhere a bit more expensive, where I knew what to expect.
Afterwards, I thought about it and asked whether I lost out on a good deal and whether this anonymous selling is a good idea and will succeed. My own view is it won't, because hotel rooms are among the most expensive transactions people make regularly on the Web, and travelers are quite risk averse when booking. They want reassurance — number of stars, brand name, location — before paying, and are quiet skeptical about descriptions (I can tell you from experience there is nothing regal about the "Royal Hotel" in Tipperary town).
Moreover, the hotels are over a barrel, because if an anonymous five-star hotel is offering rooms at 75% off, people think it can't really be that good, of there is something fishy; and if they are only slightly under a similarly priced but known hotel, people will pay that slight bit more to avoid uncertainty. So they are also looking for information in the price.
Sam Humbert writes:
When I've used PCLN for hotels, I've gotten, broadly speaking, good value for money. Generally there's been a reason a particular hotel traded cheap-to-the-curve — construction noise from building a new wing, or the pool's closed for repairs. Also I've found desk-clerks exude bad juju when you check in/out on a PCLN reservation — they don't view you as a "real customer" who's loyal to their hotel brand.
Craig Mee adds:
Reminds me of a friend who was a manager of a world-renowned hotel chain. Two things he told me –
1. He told his hotel counter staff never to give poor service, even if there are discrepancies with the bill and customers are disagreeing. What he said made perfect professional sense, "once you're committed to not charging the customer for the said amount from a business standpoint wear it on the chin and be as nice to that customer as any other." Then he added quietly, "besides, it's usually the cleaning staff taking liquor from the mini-bar, not the patron."
2. Specials are special on the menu for a reason; don't go near them. They usually jazz up something that is "on the way out."
There is a nice interview with Nick Faldo that mentions his "dark years" in mid 1980s after a series of blowups. He had to relearn his swing, endure his sponsors dumping him and pass other golfers at the airport on his way to a B list event, while they were heading to the Masters. He said, "But you have to turn it into motivation. Either you crumble or you go."
One thing he did was practice, practice, practice and then practice some more. "I worked really hard during some of those winter spells in Florida, hitting 1,500 balls a day." That's 10 hours of standing on a practice ground hitting a golf ball every 24 seconds, a mind-blowing regime. "I used to go and swim in the afternoon. Then, like an idiot, I would think, 'There is another hour's daylight so I'll go and hit some more.'"
January 25, 2007 | Leave a Comment
What a terrible title for such a good book, but what else could you call it, I suppose.
Felix Dennis is a wealthy publisher and an unlikely poet whose book is a highly enjoyable read on what it takes to 'make it.' I respect his admonishing that most people won't make it, and that in order to get there you must take big risks, step on a few toes, but also remember to treat it as a game.
His writing style is fluid, sincere and self deprecating. He comes across as a no nonsense type willing to share insightful stories about his experiences in business & life.
I would recommend this to any spec. It probably won't change your life, but it is worthy of whiling away a few hours on.
Amazon: How to Get Rich, by Felix Dennis.
Sunday Times Review: This is a three page blurb by the author who gives a flavor of the book.
If you want to be rich, first stop being so frightened. [Read more here]
Incidentally, he also shares a few stories about his excess, reckoning he spent around $100m on living the high life over the years. This reminds me of the George Best quote on what he did with all of his money over the years:
well, I spent a lot on birds and booze and fast cars. The rest I just squandered.
Unlike G.B., Dennis was smart enough to know when to call it a day.
January 23, 2007 | 3 Comments
Hunter and hunted or predator-prey relations are pervasive in the animal world. We're accustomed to observing and reading popular summaries and videos of the dynamics and techniques of survival for such pairs as lion & gazelle, wolf & squirrel, fox & lynx, coyote & seal, osprey & smelt, pike & minnow, and spider & fly. Such studies have been extended to romance and health among humans. Predator-prey relations are also common in markets. For example, the relation between market maker & day trader, dealer & ephemeral trader, flexible & inflexible, large trader & small trader, informed & uninformed, vig taker & vig payer.
Many studies in the field are based on the Lotka-Volterra model. This is a set of simultaneous differential equations relating to the rate of growth of the predator and prey populations to each other. A typical set of equations relating rabbit growth to fox growth states that dr/dt = ar-brf and df/dt = ebrf-cf where a is the natural growth rate of the rabbits, c is the death rate of the foxes, b is the death rate of the rabbits whenever they meet a fox and e is the proportional gain in growth that a fox gets from eating a rabbit.
Such equations do capture the main idea that as the rabbit population increases, the foxes gain in number because rabbits are easier to find and eat, and this provides a homeostatic mechanism to stabilize the rabbit population. Similarly, as the rabbit population declines, the number of foxes decreases because they have less food, and this helps increase the rabbit population which in turn tends to increase the fox population. As might be guessed, small changes in the assumptions of the model, such as time delays, lead to widely divergent behavior involving cyclicalities, instabilities and sharp changes in the dynamics that do not correspond to what we observe in most real-life populations.
A similar critique could be made of the two other standard methods of studying predator-prey relations, which are the functional response curve and the optimal foraging theory. The basic regularities there are that the costs and benefits of gaining prey vis a vis future reproductive success determine the extent and energy with which the predator seeks the prey. The key dependent variable is how much the predator eats as a function of the difficulty of converting the prey into food. An increase in the search time, handling time, or consumption time, reduces the predator's desire to eat. Certainly this leads to insights. The problem here is that all these parameters are subject to estimation, and they are interrelated and subject to different hypotheses as to their function.
Methods of studying the factors that enable predators to be successful have always been important to me as I, like other numerous individuals not at the top of the food chain, are often prey to much larger predators. I have often wanted to learn how to avoid capture, and even considered the possibility of sometimes turning the table on the predators and bagging them once or twice just to make the game a little more even sided. Thus, when I came across a cover story in Outdoor Life titled "Predators' Deadly Tricks," which describes how hunters go about capturing the most elusive predators in real life such as the coyote, the bobcat, and the mountain lion, I was very attentive and decided that I should try to devise principles from the practical and theoretical literature that might help other prey like me in their incessant battle with those who would devour them.
- Signaling is key.The signals that the prey send out to show that they are not easy to digest prevent the predator from even considering attacking, and this saves much energy for the escape. Colors and scents indicate that the prey contain poisons. Stotting, the jumping behavior of gazelles when about to be chased by a cheetah, indicates that they are very mobile and not worth eating. Indeed the essence of the article is that the best way to attract a predator is with an electronic duplication of the distress call of its enemy. Amazingly, the coyote will often show himself within one minute of hearing the rabbit's call, especially when it's made with a "Foxpro FX5 that has a 200 sound capacity, one gigabyte of memory, recall buttons to switch between sounds, remote control functions, and a 700-yard range. Less than a minute later (after the call), a pair of coyotes charged in and we handily dispatched them." Market prey often indicate that they are ready, willing and able to defend themselves by the placement of limit orders in large size, but cancel if they are near just to prevent the larger predator on the other side from even thinking of going after them. The talk with your counterparts is how much more is available for adding to my line when you well know that one more grain of salt would be enough to topple you over.
- Vigilance is essential. The herding animals all find that 100 pairs of eyes with 50 always awake are enough to warn them of danger. Noses are always sniffing, ears are listening, and the antennae are always feeling. Indeed, some ducks can sleep with one eye open so as to never be victimized by a surprise attack. The hunter uses a telescope so that he can always perfectly see the adversary. He never lets the prey's vigilance work to his advantage by approaching stealthily, parking his equipment a mile away from where he's going to hunt, and setting up in a blind with proper camouflage. The prey in the market doesn't leave the market for a moment, as that might be the time that the enemy attacks.He cancels all orders when they don't get filled so that a surprise news announcement that's worth a limit move won't catch him just a few ticks from the last price. He has his computer set to wake him, which buzzes around in his private area so he never sleeps through a dangerous situation or lets the predator devour him totally.
- Deception is essential. My goodness, the moth blends in with the bark and orients with the grain of what he's sleeping on. The flies disguise themselves to look like bees, and the octopus can change 100 colors in one second. The spider uses a million deceptive lures to entice the fly into its web. The golden orb weaving spider spins a web that's so enticing that even when a bee breaks free, it will dive right back into it after it has escaped. (I am reminded here of the system player who, after a very bad trade on one side, doubles up on the other side for the next trade.) The chapter on deception in Education of a Speculator details other areas of deception in the world. "Quality camouflage is a must; select the pattern that most closely matches the foliage and landscape." Whatever you do, don't make any news. As a prey trader, I don't even like to type out that I'm thinking of exiting a trade, for fear that a predator might have my screen bugged or that the keystrokes are programmed to signal my intention. I never let the other side know what my stop point is because I know that it will always be hit. If I'm really hurting, I'll try to act 5,000 times stronger than I am, and I won't even begin to reduce my position by one contract for fear that my camouflage will be found out.
- Proper equipment is a must. Predators are constantly sharpening their claws and teeth. Prey must always practice escape maneuvers. Over many generations, most prey have adopted advanced techniques of escape that include the full range of methods used by individuals in their cohort from the beginning of time to elude capture, be it poison, scent, or cry. Their bodies are perfectly suited to the escape in size, color, speed and strength. The properly equipped hunter, in addition to his Swaroski binoculars and Foxpro FX5 caller, currently has a Gerber Epoch Pack, a Stoney Point bipod, Cabela coverup pants, and, of course, the obligatory Ruger bullets in a Browning rifle, a Bushnell scope, motion decoys, and a set of shooting stocks.
- If all else fails, try the unusual. Be prepared to shout if the predator attacks. The proper equipment for the trader starts with a proper price feed, perhaps one that's within a foot of the source of the prices so as not to lose out by the speed of light that it might take to get to you one-thousandth of a light second away. Next, one should have a computer that's always set to trading and that isn't interfered with by email. Finally, have an office where no one can distract you from the job of survival with the cares of the world or a bill from the Service.
- Never give up. The cries of animals often save them from death. If nothing else, they serve to alert family members. The squirting of poison and the enlargement of the body is a common tactic of the caterpillar, and the gyrations of the weasel in extremis are often enough to ward off death. The hunter is told to scream if a predator attacks him and to have a spare set of guns and knives. As a trader, I try to follow the rules of a good competitor in sports who never gives away the last point of a game if there is still an iota of energy left in his body. There is always someone you can call on to help you fight back. On occasion, I've even asked a'la the Boy Wonder for the other half to help me out in a time of crisis, and so far the trust funds are still intact.
- I would recommend studying the literature on predator-prey relations by reading a few good books, following up on some of the hundreds of thousands of citations on the search engines, reading the Outside Magazine article in the December-January double issue and then trying to apply these techniques to make yourself impossible to detect, fruitless to waste energy on, and impossible to digest when caught. If all else fails, fight to the death.
J. Klein adds:
One Predator - One Prey; if it was ever so easy.
It is more like Many Predators - Many Preys - Many Parasites. Symbiosis. Competition among different parasites - how to maximize exploitation without killing the organism parasited. How to use a competing predator to one's benefit. Mixed situations: One is a predator and a prey at the same time but to different kind of critters. How a steady state equilibrium evolves.
In my opinion, however, we humans have already won nature's battle and rule the ecology to our benefit. We easily see through the animal world's tricks and catch them as we want. But the market is wholly made up by humans, who presumably have all been exposed for generations to nature's tricks and have become resistant to them. Situations like those that nature presents to us are no longer relevant, and we have moved to a higher level. It is a different game here.
Since we are part of the game, it is very difficult to see what is going on and much more how to manage it. It is said that even the big winners know how they did it and why they succeeded. It seems to me that those winning have more useful memory, are able to calculate more precisely, see the present and the future more clearly, can formulate better plans, and execute more rapidly and precisely. In the market, nature's tricks don't work any more. This is a play of pure and cold intelligence.
Scott Brooks comments:
I've thought about this predator/prey relationship for many, many hours as I was sitting in a deer stand and I have several thoughts on this issue. I'll share some in this post.
One of the biggest things to recognize in a predator/prey relationship is the opportunity that exists. One of the biggest things that we need to look at is the difference between instinct and reason. Whether prey or predator, if you are instinctual, you are acting out of some deep seeded genetic conditioning that causes you to run when faced with adversity.
Think about it. If there are seven lions chasing a herd of 200 gazelles and the gazelles had the ability to reason, they would say, "Lets stick together and as a group go over there and trample those seven lions to death." The 200 gazelles would win that battle, and probably over time could condition the instinctual predator lions to leave them alone. The cost of messing with those gazelles is just too high.
Think of an instinctual predator like a bear. Almost any bear could take a human if they wanted too, especially the bigger varieties like Grizzlies. Humans are simply not equipped to deal with them physically. But for the most part, we've conditioned bears to stay away from and fear us. That's only because we have the capacity to think and reason at a level that the Grizzly doesn't. We've figured out a long time ago that taking some animal gut and stringing it on one bent stick, and then taking another straight stick and putting a sharp tip on it, gave us the advantage. Then along comes names like Remington, Browning, Winchester, Anshultz, Benalli, etc. and the odds are stacked in our favor.
When I played poker back in the 80's, I looked for certain types of players to be at a table before I would play. They were the prey. They weren't thinkers. They were gamblers. They let the cards fall as they may and "hoped" that things would go their way. But they had no real system or methodology to identify when to hold'em and when to fold'em. Most of them could not name three cards that had been played and subsequently folded (I'm talking seven card stud). So they had no idea what cards were still available to be played or not. I can't even count all the times when I could tell what hand someone was trying to build or bluff me into thinking they had and yet had no idea that the key card was already burned in the deck because someone had folded earlier. I guess I was a counter of sorts even back then. I'm not sure that qualifies me as a counter yet, maybe it just makes me someone who paid attention and kept track of things.
These "gamblers" were hopeless gazelles at the table. I'm not saying that to be braggadocious. They simply didn't know what they were doing … they were nearly instinctual prey. They "needed" to win. They were always one card away from catching a break. They relied on luck. The reality for these guys was that the only way they could truly win was to quit and stop playing. Otherwise, ruin awaited them all.
Those are the guys that I played against. I did not play against other good players. If there was more than one other good player at the table, I would find another game. I had nothing to prove by beating another good player. I was there for one reason and one reason only: to win money.
For the same reason that lions don't usually attack other lions to eat, I was not interested in paying the price associated with trying to win money from other good players. The cost and risk/reward was just too high.
To apply this to the markets, it is important to figure out where the instinctual investors are playing and those that don't have a thinking system, and use that to one's advantage.
What are the masses going to do when "X" event happens? What is their likely "non-thinking" irrational emotion based response ("quick, run, the lions are coming").
Unfortunately, as I've said before, the masses left the markets after 2000, 2001, and 2002. They were burned so badly, and fear chased them away from what was very likely the greatest buying opportunity of their lives. It was like gazelles drinking from a stream and some of them getting snatched by an alligator. It seems to me that after a few have been snatched, that's the time to go get their drink … the alligators have enough food to last awhile now … and if nothing else, there is a few less alligators now patrolling the shores for food. The odds of success have gone up for the gazelle … but that's when they leave in fear.
So I will be that thinking predator. I will only fight battles that I know I can win. My goal is simple. To make money! That's it. I've got no ego in this and no axe to grind. I'm not going to challenge Prof. McDonnell in the world of options, or Prof. Haave in the world of commodities, or George Zachar in the arena of bonds or Vic in the world of index futures. They are simply more skilled and knowledgeable than I am in those arenas. I could be a predator in those worlds, but I would be like the Grizzly bear, and they would be the thinking human up on the ridge 200 yards away pointing a Win, and a 300 Mag at my vitals. That's a battle I can't win.
But there are things that I'm good, and there are arenas I can battle in. Since I only want to make money, I will only play in the arenas with the best risk/reward ratio for my success, and I will stick to those arenas (but I'll still learn the other arenas … and who knows, I may show up there one day and dip my toe in … but only when I think I'm ready … and then only with a small amount of money to make sure that I'm really ready).
So, Phil, Gordon, George and Vic, be careful, I may show up in your arena one day … and I'm a good stalker who knows all about how to properly deceive with camouflage …
Tim Humbert comments:
Over Christmas I heard a wonderful recipe for pike:
-preparation: gut and de-scale, rub rock salt and pepper onto flesh, squeeze some lemon juice, insert some herbs into fish, wrap in aluminum foil and cook for 30 minutes
-consumption: throw pike in the bin and eat the foil
Rick Foust adds:
The largest predators (e.g. lions) are much smaller than the largest grazers (e.g. elephants). The largest grazers have much longer life spans than the largest predators despite having inferior camouflage. Certain large houses come to mind.
Small grazing animals (e.g. rabbits) do not survive long despite having excellent camouflage. Their numbers are maintained by fertility (replenishment). New, poorly bankrolled traders come to mind.
Professor Sorin Solomon, of the Racah Institute of Physics, has produced some very interesting market models based on Lotka-Volterra. Here is his homepage.
He showed that a generalized Lotka-Volterra model for the market yields a truncated levy distribution for index returns!
See for instance his 1998 paper: "Stochastic Lotka-Volterra systems of competing auto-catalytic agents lead generically to truncated pareto power, wealth distribution, truncated levy distribution of market returns, clustered volatility, booms and crashes."
There are simpler explanations for TLFs, such as a random-walk with time increments that are variable rather than fixed, just like with real-world transactions … but I thought this was topical.
There could be one way to check the above, and that is the impact of random time between transactions. On Euronext, we've got a mechanism for trading very small stocks. It is called "fixing." One could compare behavior of such stocks to behavior of other stocks that trade continuously. One could also check the behavior of stocks that have moved from fixing to continuous trading or the behavior of the whole French market as it moved from all stocks fixing to most stocks continuous in the mid-eighties. There's also a possible comparison between London Gold fixing and NY COMEX.
Todd Tracy comments:
Market Set Ups
While reading Victor and Laurel's article on Predator-Prey Relations, my mind exploded with visuals: foxes hiding in the bushes waiting to pounce, predictive and instinctual reactions to events, finding myself trapped in currency positions, panic driven searches for exit strategies. I realized that I am the prey. I am the new blood that greases the gears. I am the greedy trader who walks into the trap set by smarter, quicker and more thoroughly financed predators. As with much of the information gleaned from Daily Speculations, I found corollaries not just in the markets but also to life.
But wait, I've been here before. Where have I seen these deceptive techniques in use? Spy fiction. Yes, I have read all the Greene's, the Amblers', the LeCarre's, the Clancy's, the Forsyth's, the Flemming's, the Weisman's, the MacLean's, the Harris', the Buckley Jr.'s and a lot of the Ludlum's. The spy, leaving a trail, using cut outs, drops, proprietary tools and the most diabolically elaborate set ups imaginable. Institutionalized deception, deception as a way of life, and tradecraft so efficient as to make the prey oblivious to the fact that they have even been caught.
War is serious business whether or not it be cold, which brings me to the non-fiction. The Secret History of the KGB, the History of the Mossad, the development of the Office of Strategic Services, The Wall Jumper, the techniques of SMERSH, Stalinism, Churchill's autobiographical books and one of the greatest historical accounts on the subject, A Man Called Intrepid by William Stevenson. Control will leave no stone unturned to reveal facts. Control will sacrifice lives to perpetrate false information.
Why should the markets be any different? It's scary to think that once I feel like I'm playing the charts like a marionette, it is I whose strings are being pulled. I am a novice speculator, but my eyes are widening. If only I had Victor's booklist before I read all those novels. All is not lost however because I am learning to tie strings from my life experience to the experience of the markets.
This week’s Barron’s plugged GaveKal’s idea of the “platform company”. This is a polite illustration of Bacon’s concept of the public’s being always behind the form, as pointed out by Victor and Laurel. GaveKal has been on this theme for at least three years. I’ve been a subscriber to their services since the late 1990s. GaveKal is smart. I’m talking super smart. They are a small team of French, English and Americans based in Hong Kong and I have met the team a few times. It amazes me how their output is consistently informative, rational and timely. They beat the pants off the big guns on the Street like Steve Roach et al.. It shows how a small team of highly motivated individuals can outperform their much better capitalized peers. There is a lesson in that for all of us. By the way, I highly recommend their book Our Brave New World. The tome is a cage match between market memes and logical quantitative thought. I am in no way associated with the authors, other than being a regular subscriber to their services and do not in any way benefit from increased sales of their book, etc.
Gabriel Ivan replies:
There is no doubt in my mind that Charles Gave is “super smart” but his Barron’s interview is riddled with half-truths, smoke and mirrors, which shows crystal clear he’s got an agenda. Just a few remarks were:
Reading his comments on the “platform companies” I experienced a NASDAQ 2000 deja-vu all over again. Back then, the smart folks that run Legg Mason today, also had a pretty compelling argument on how dotcoms can generate cash flow indefinitely through working capital and low Capex layouts. The “new economy” model, and we know how that story ends. Furthermore, he presents the valid r&d expenses argument, but conveniently forgets to adjust the Motorola capital to cash flow example accordingly.
In the current-account deficit argument he starts by anchoring the reader in the 7% of GDP as being a banana republic level, but then he switches immediately to the net worth comparison where the 1.5% looks better. This jumping around between income statement and balance sheet would make any Shenanigan CFO blush.
Including the volatile stock and bond holdings in the U.S. net worth calculations, (although a favorite shill of the Fed. Reserve), is not comforting if the trade policy is based on it.
He claims most of the U.S. consumption goes towards healthcare and education like it’s a positive thing per se, with no regards to the return on that capital spent. The quality of healthcare and education (esp. undergrad) per $ spent might have been a better read.
The nail in the coffin is the play-down of the real estate problem. It is the true mark of poor salesmen — lying about the obvious. The growth in real estate prices, in other countries says nothing about their affordability, own to rent analysis, etc., nor do the interest rate increases have an effect, when such increases have much lower impact due to central banks’ lower reach onto business cycles, the absence of mortgage markets, etc..
More workers now are ensconced in the recession-resistant service economy and have the additional security of a working spouse and the prospect of parental financial assistance in a pinch. This, perhaps, explains why consumer delinquencies have dropped so drastically.
Ronald Weber offers:
I couldn’t agree more with Mr. Humbert and Jonathon Lang (below) regarding Gavekal. There are indeed few research boutiques and brainstorm platforms that manage to bring much needed original views and help stretch your brain in the process, Daily Specs being one of them.
Regarding the US C/A and accounting deficits, I recommend reading the article from ex-fund manager turned author Andy Kessler on the iPod economy entitled We Think They Sweat.
Mr. Kessler describes the iPod statistics flow between China and the US:
- Apple send an email file to China (zero value in the statistics)
- China assembles the iPod for close-to-zero margins
- China sends the iPod to the US (= 200USD trade deficit)
So would you rather be Apple with its enviable margin, unique brand and soaring market cap, or would you rather be the (no-name and easily replaceable) manufacturer in China?
Regarding analysts, I am constantly amazed how much of a quasi oligopoly on views and ideas Wall Street still exercise. That a Stephen Roach still manages to be in business is a riddle, maybe he is just a good investors’ crowds entertainer? I have nothing against getting the market or the economy wrong, but I do not understand how you can remain stubborn in your narrow views for so long without even questioning them or admitting that you have missed something. Notice also the Wall Street fallacy on the link between the USD and the US trade deficits, the state of the economy or the savings ratio — the totally missed estimates on the Yen is another one of my favorite.
As we all know, at the end of the day it is all about “opinions follow price” and “career risk” (more about analysts and their careers). It may also explain why one of the few respectable analyst, Andy Xie, was fired for being to outspoken on his ideas, (where is he now by the way?).
But, thanks to God, this is the beauty of our business: it is mainly a function of the brain, not scale (save for marketing, administration and distribution functions), and one unknown individual may get it right while another respectable 100 analysts may get it wrong.
Speaking of ephemeral matters, the Fed obviously knew before their statement what the retail figures would say, and thus maintained their neutral stance in the face of a wall of negativity. The Fed announcement was a non event, so when the retail numbers came out, again pre-market, the boys gapped them up 6 points. Why some random manipulated inaccurate guesstimated revisionist government numbers should affect the true state of the economy and the market predictions by half a percent does not make sense.” The equity market agreed.
Secondly, commenting on how strikes operate as round attractors, would not structural pressures of the various strike holders competing try to drive the price to the middle strike — say the current 1425 in the case of the ES option — and create a range on either side. The 1430’s would be bearish, the 1420’s, 1425’s would be spit bullish and bearish, and divided, and drive the price to the middle where we’ve been swinging around for a week now. Study of options as cycles change to augment the arsenal and battery seems worthwhile, and it is a deep subject, so we may need to draw on the expertise here.
George Zachar comments:
Index futures/options are a special case because their sub-components themselves have options. The round/attractor/pin dynamic is most likely to show itself in “solids” like individual stocks around non-quarterly expiries, and commodities, (un-tested). There are epic stories in bonds and currencies about “wars” at strikes at expiry.
Tim Humbert offers:
One of these epic stories is recalled here, in the Bill Lipschutz Market Wizards interview, reproduced on his website. It starts with the line, “Were there any other trades that were particularly unusual for one reason or another?”
December 7, 2006 | Leave a Comment
This paper has an interesting comment:
We find interesting systematic shifts over the business cycle in the size of the market betas of so-called value stocks relative to growth stocks, suggesting that the former are systematically perceived as more risky than the latter, which may help to explain the puzzling ‘value premium.’
Of course, if value stocks were not perceived as more risky, their risk premium would be lower, and hence the stocks would be higher priced and no longer value stocks. Nevertheless, the overwhelming majority of investors believe that growth stocks are more risky than value stocks.
Allen Humbert comments:
Steve Ellison’s post reminds me of a study I have always wanted to conduct, but have failed to get around to (I don’t know why, I guess I have ADD) that would look to adjust returns by the underlying leverage of the companies (I suspect the debt to equity ratios of the average value stock are significantly higher than a typical growth stock). Since debt increases the probability of bankruptcy, since a low profit company with no debt cannot be driven into bankruptcy, value stocks are in fact riskier. I therefore hypothesize, and experience suggests, that value stocks outperform the most coming out of a recession when default rates are high. It is this fact, that I think makes high flying stocks, no matter how inflated the prices, poor shorts. A debt heavy company in trouble leaves everyone fighting for the last piece of flesh, hence the massive declines in the last dying days like when I lost $1 a share in the 15 minutes before the Enron bankruptcy (at least I didn’t loose the final $2.85).
December 6, 2006 | Leave a Comment
Here’s the header:
New EIA Outlook Reflects Energy Market Shift towards Nuclear, Biofuels, Coal-to-Liquids, and Accelerated Efficiency Improvements.
Despite the projected rapid growth of biofuels and other non-hydroelectric renewable energies and the expectation of the first new orders for nuclear power plants in over 25 years, oil, coal, and natural gas are nonetheless projected to provide roughly the same 86 percent share of the total U.S. primary energy supply in 2030 as they did in 2005 absent changes in existing laws and regulations.
And in Julian Simonesque fashion, prices will be very much the same in 2030 as they are now. For just about all forms of energy except natural gas which will be cheaper.
An interesting read with the only disturbing factor being the number of times the EIA must qualify its predictions with the potential impact of “Possible future changes in energy or environmental policies…”
Along those lines, the Senate today pulled the bill meant to make more of the Gulf available to oil and gas companies — largely as August members being hammered by the Greens lost their nerve. And, my wife tells me, Mr. Green himself, the man who would president if he could have carried his own state, Al Gore, is spouting off on Oprah’s daily piece of puff.
November 8, 2006 | Leave a Comment
If you asked me would I recommend Hedge Fund Masters by Ari Kiev or buy it for someone, I would have to respond weakly with a shrug of my shoulders and a non-committal “I don’t know”. I’m torn because I felt the book was reasonably expensive at >$50 (for a book with no pictures) and I just didn’t get what I hoped to get out of it.
Kiev lures unsuspecting traders with the title above and subtitle: “How traders set goals, overcome barriers and achieve peak performance”. Stirring stuff indeed.
The book is subdivided into three parts, “What is mastery?”, “How do you get there?” and “What comes next?”, and takes the form of interviews/case studies with 70 hedge fund managers.
This is where I had a slight problem. Often, the traders in question are not masters per se. In fact, they are having some difficulty in their trading, and they talk to Kiev, who prescribes a pretty inoffensive remedy- “cut your losses and hold onto your winners!”.
This isn’t a book where you are reading interviews with Market Wizard types where you can learn from their mistakes…or how they overcame obstacles and disciplined themselves: no such luck! To me the interviews and the running commentary all seemed a bit vague and muddled by the end of the book, and I don’t think there was much follow up with the interviewees as to how they got on…certainly nothing of a verifiable nature.
The message he keeps repeating is not one without value: that the best traders, the masters, are the ones who are the most committed. Moreover, in taking risk, he says that one should shed one’s inhibitions and if one has done the work then in the long run, it’ll pay off. Messages not without value, but I didn’t feel the the price or length of the book (298 pp) was worth it.
Finally, looking it up on Amazon, there appeared to some diverse opinions on the merit of the book, such that one reviewer pointed out 11/14 reviews at the time were 5 stars, and all posted over two days!
Dave ‘Surf’ Goodboy adds:
I met Marty Whitman a couple of weeks ago when I was in New York City. Fascinating guy. At 80+ he’s in better shape than I am. But I think Curtis Jensen has a little too much tech focus. Balance sheet analysis doesn’t work as well; techs can have a ton of cash on the sheet and just run through it over time. He’s good, but he ain’t Marty. Also, I hear Marty’s real big in Hong Kong real estate right now.
Here’s something I’ve just noticed GOOG is doing. Page Rank originally looked at how many other sites linked into another site. Their new tool, Custom Search Engine, allows them see which sites people specifically want searched every day. If I were still playing the search engine “optimization” game, I’d be hard at work on this angle, as GOOG no doubt uses this info in the current version of Page Rank. The more times a site is searched, the more valuable it is.
Japan is in play. Largecap stocks are languishing in 2006 after outsized gains last year. Smallcaps, however, are down 50% in 2006. That’s right, 50%! Japanese smallcaps indices are called “MOTHERS” and “HERCULES”. Plus, no one has a clue about the BOJ. It seems that they want to hike rates again but persistent worries about deflation still haunt them. We’ll see. Anyway, I did a little counting last night. The weather in Tokyo has been horrendous. Typhoon type rains and winds for three straight days and nights. I took a cab from my gym in Otemachi to the Grand Hyatt in Roppongi. It’s a 15 minute ride. The cost? Y660, or about $5.50. Further, I counted more than 200 empty and available cabs on the road during my short journey. I’ve lived for long stints in NYC, London and Paris. There is no way to get a cab in those cities on a rainy night. Certainly not for $5.50. The point is that a shrinking population has all sorts of negative consequences on growth and prices. Where will the drift come from — or should it be a negative drift?
My high school electronics club would visit neat destinations on weekends: SLAC at Stanford, or Lawrence Berkeley National Laboratory at Strawberry Canyon, or help work on the MOOG synthesizer at SF State, or hear Tom Dolby talk about audio frequency shaping…
One Saturday, our trip was to "an electronic hobbyist" and we found ourselves in a garage filled with a tangle of wires, instruments, tiered bench shelves, and a cleared open space on which sat a box connected to what looked like a video terminal..
So these are my "Ten Great Observations about Big Bank Internships". Having just endured this miserable joke, I thought some of ye older and wiser specs would enjoy a laugh at my right of passage.
For a little context, I am studying a double degree in Law and Finance. I have been trading stocks and options since I was 15 and have been lucky enough to have some success largely because I have devoted myself to the study of what can go wrong in trading (i.e. studying crashes, crash/blowup participants, behavioral finance etc) rather than reading hyped up "How to Trade for Millions!" type tomes. As a result, I'm a quiet, introspective, respectful and humble kind of guy; so imagine my shock during my foray into Wall Street. These are my tongue-in-cheek observations of the whole internship joke:
If you have any kind of ingenuity or entrepreneurial pizzazz teamed with some market-taught smarts about you, you will instantly be ahead of the game. Paradoxically, this will do you no favors at all as an intern — most likely you will be ostracized for it. MD's do not like you consistently outperforming them, or poking a hole in their "Great Investment Thesis! ™" because you happen to internally appreciate the concept - and have first hand experience - of a Leptokurtotic distribution coming to bite you in the ass. Well, that or they have never heard of NPV. Or, disastrously, neither.
99% of "professionals" are deeply insecure about their views. Lean even moderately hard against any trader or sales person to good-naturedly criticize their idea or test their thesis and they will crumble. They will then lash out at you for being a dilettante amateur who has no experience of real market conditions. Best to just nod and smile at that.
Strange economic phenomena/paradox: Sycophancy is much more highly valued than skill / results despite its absolute and relative over-supply on grad programs. So much for Economics 101. Thanks University, for nothing.
It is difficult to respect men who plough their cash into limited edition Ferraris and long liquid lunches at the local strip club and then demand your respect for their integrity, decision making skills and level-headedness under pressure … when they are only five years older than you. I cannot predict the future, but I have never come closer to seeing a man's future downfall than when said MD buys a new Ferrari, then invites his desk to come down and look at it. Admittedly, we were all gagging to. But to then see his face flush with pride at us "ooohing" and "ahhhhing"….never has such a grin of self-satisfaction and hubris so clearly indicated a very hard fall just over the horizon.
As it turns out, reducing weeks of research / investment analysis down to a single Bloomberg MSG screen so as to explain an idea to someone who has the attention span of a gnat is a "value-adding skill". This is actually sensible. It is not particularly intellectually satisfying when you basically come up with 5 bullet points that say "Buy XYZ because a) it is going up (b) soon (c) because there are forces in the market right now (d) that will make it go up (e) er, that is it. Trust me on this one, boss." but it will surely give the illusion of you being a switched-on kid though!
Stupidity and Parochialism. It is what is for breakfast. I think a certain degree of stupidity is actually hoped for in intern traders. One's boss wishes to demonstrate his superior skills, knowledge and insight. He wants your fawning praise and wide-eyed admiration for his well thought out plan to buy oil because of Middle Eastern instability (yawn). At your suggestion that current prices may perhaps already reflect this not-exactly-cutting-edge bit of analysis, you are scorned and your tickets to the next big sporting event are given to your assistant.
Markets are correlated. Except as far as anyone on your desk is concerned. If your job is to trade energy closed-end funds, who gives a rat's arse if natural gas is rallying 50% in just a few days? (Seriously, this happened to me. I remarked that a strategy we had going on was going to be materially affected because of whipsawing energy commodities prices. I was given a curt "Don't care". They then scratched their heads at the next NAV report and wondered why they did not see it coming.)
Have a clever arbitrage idea that you have painstakingly modeled, backtested and synthetically traded? It works? Great! Do not tell your boss. Just go start your own hedge-fund.
The bad bosses cannot stand to admit you might know something more than they do and just squash you. The good ones just steal your idea as their own. This is fine. Infuriating, but fine. The good ones will at least admit that your idea "was, in fact, good" to you before doing you over. At best, you will get a promotion, or not be as disappointed with your bonus. Such is the price of rising the corporate ladder, apparently.
Internships are a waste of time. Why spend millions on campus recruiting, throwing cocktails and dinner in nice hotels round the City, making you have thirteen interviews and cause kids deep anxiety about achieving a 3.8 GPA from the University of GreatMerit just so you can do what any 15 year old high school cheerleader could do? Because getting initiated into a culture of self-importance, delusion and self-aggrandizement is a must if you are going to last on Wall Street baby. All the recruiting propaganda about integrity, results-driven cultures, entrepreneurial environments, etc., etc. is just a joke. In reality, desks want frat boys. This is fine, just do not lie about it! Save your shareholders some money and openly do your recruiting on Facebook — most of you do anyway
Bonus: If who you are is synonymous with what you do… I cannot wait to trade against you.
Edward Talisse responds:
What an erudite and illuminating essay! Ned luckily caught on quickly. It took me 20 years to figure out the ins and outs of the Street. Maybe I can help by offering mid career types some observations after a long career at the bluest of the blue blooded trading firms:
1. There is massive confusion and misunderstanding between the concepts of skill and luck. Traders which collected bid-offer spreads for years discovered the painful truth once dealing spreads collapsed. They are left with no skill and no luck. Make sure you always study and keep ahead of the pack. Don't count on luck.
2. Pay and promotion is solely based upon current performance. It has nothing to do achievement in relation to opportunity or potential. That's why turnover is so high on the street. Get yourself in the best seat. Go for the hot areas if you want the highest pay.
3. Senior management generally does not know the difference between risk measurement and risk management. Middle office risk monitoring functions are not involved in the business. They simply are there to provide regulatory and legal cover when something goes wrong. You need to be your own risk manager.
4. There are very few real risk takers at the big Banks. The real emphasis is on collecting fees, collecting bid-offer spread where available and front running large client transactions. The real risk takers are purged at the first sign of trouble. The best ones go to Hedge Funds. Get out if you really believe you are a great risk taker. There are fewer constraints and bigger rewards outside the big Banks.
5. There is no more lethal combination than ignorance and arrogance. It usually leads to disaster. You'll encounter plenty of people with that combination. Avoid them like the plague.
6. You have to manage your own career. There is no real mentoring in the big Banks. Turnover is just too high. Beside, your appointed mentors are too busy worrying about their own careers to help you with yours.
7. There is a shockingly low level of basic finance knowledge in the big Banks. Sure there are plenty of very smart people in the banks but there is an abundance of knuckleheads too. It's about the appearance of knowing what you're talking about. Accountants call that form over substance and it's a great skill to have on the Street. Learn to shoot the bull.
8. It's important not to overstay your welcome. That was my mistake. I turned down repeated offers to sign on with smaller less "prestigious" firms. I still regret those decisions. Go with the Firm that best allows you to develop your skills, not the one that looks best on a business card.
9. Take advantage of everything the Bank can offer you, particularly ex patriot assignments. The experience may change your life and there are enormous opportunities for personal betterment.
10. Don't dismiss back office jobs. They are well paid and you can sleep at night. It's an annuity and you can ride the wave for many years with little or no pressure.
Honore de Balzac, the famous French author, once famously quipped that "behind evey great fortune, there is a crime." I think that is only partly true. Rewards will always be there for diligent, hard working risk takers.
I grew up with an atheist dad. He digs math and problem-solving and his middle name is work. I married into a Christian family. I was in Gulf being a scud-stud (Garry Trudeau, the Doonesbury dude, gave me the cartoon scud-stud button in Kuwait after the war). Anyway, I found myself praying to something.Always back and forth with my father in law. He is a MD and Bible salesman. For years I just appeased him, went to church yada yada. I figured if I kept it to the basics it would be cool to have G-d back me up as a dad for the kids. Well, sometimes everyone takes things too far. I just had to put my foot down on a few things. One was guilt and I refuse to lay it on heavy and raise my children to feel guilty about too much. Must be balance is the gist. Funny, my wife studied child psych in college. Yes, she busts out the textbooks and I lose 10-1. However I don’t put up with the shades of grey mumbo jumbo when it comes to science and my kids.
But today I just went ballistic. There is a book called SOZO: Survival Guide for a Remnant Church. The author, Ellis Skolfield, paints a picture of what the next few years may be like for Christians everywhere, then outlines what believers need to do if they wish to survive the “Satanic holocaust that will soon engulf us.”
Okay, so the Bible salesman sent me this book maybe three years ago. I flipped through it and it reads like the Prudent Bear site, At the Crest of the Tidal Wave, Debt Disaster, and any other bearish Wall Street publication you can think of. I do not need that nonsense in my subconscious, so like all things repugnant, I listen to little and put it down. When I am sad I read a bit about Africa and I usually “feel better about the good ol’ USA.”
Point is, around the Christian campfire, SOZO is really making the rounds. From Nostradamus, “a Persian madman will start the end,” to Revelation “when the desert blooms,” every time there’s a conflict near some mystic place or some terrible storm hits: “the end of the world, are you ready?” Heck no.
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