Notes, from Steve Leslie

October 29, 2008 |

I know to many this is very basic commentary but it may prove helpful to some here: This explains in one paragraph why things go down a lot faster than they go up. Hedgefunds, mutual funds and pension funds must sell on the way down. They have no choice. They must meet margin requirements and other technical requirements. This forced liquidation scenario is the most wicked of wickeds that the unfortunate fundamental investor faces in their education.

Remember near the end of the movie Trading Places where the Duke brothers (Ralph Bellamy and Don Ameche) are approached by the exchange with their margin calls. Their comment was “we don’t have that kind of money!” Same thing there as here. This is the cataclysm when people trade with OPM (other people's money). They are universally more cavalier and reckless than if they have their own capital at risk. LTCM in 1998 suffered the same fate when they had a famous decoupling of their spreads. Their models, suddenly and evidently without warning, [stopped working; the firm faced margin calls and] had to liquidate. Then, the Investment Banks and Commercial banks came to the rescue because they saw ultimate value in the spreads. Otherwise they would have not gotten involved and the Fed would have had to step in and take over the company. At the time, they controlled over a trillion dollars of assets on their books. Whereas with an intangible to go up in price it takes many months to build up a position and to trade ahead of the fundamental estimates.

This scenario is very well described by Dr. Hersh Shefrin in his book Beyond Greed and Fear: Understanding Behavioral Finance. He eloquently describes how it takes a fundamental analyst approximately nine months for their estimates to catch up with a stock price. What we see today especially with the stock market is pure technical trading. It has everything to do with liquidity needs in an environment where credit is non-existent. Until this picture becomes clearer when Investment Banks and Commercial Banks will give up their new found capital and help companies thaw out from this very arctic deep freeze credit crisis, we shall continue to trade in a black hole of confusion. I actually heard a “professional” comment, “It has been three weeks since the Federal Reserve and the Treasury put forth their solutions. How long do you think it will take for these things to start to work?” Summary: It took years for us to get into this mess, we are not going to get out of this one overnight.





Speak your mind

20 Comments so far

  1. david st. hubbins on October 29, 2008 12:02 pm

    you obviously know nothing about the ltcm situation.

  2. D. K. Goodwin on October 29, 2008 12:35 pm

    It would be a worthy goal, to explain “why things go down a lot faster than they go up”, if indeed they did. Over the history of SPY, the top 20 up months averaged +6.9%, and the top 20 down months averaged down 7.1%. These numbers are equal to within statistical uncertainty. So things DON’T go down a lot faster than they go up.

    DailySpeculations is supposed to be about “deflating ballyhoo”, not promoting it. Data on market returns is now widely available over the web, so today even the common man can test simple propositions like “things go down a lot faster than they go up”, but Mr. Anonymous must not think that’s worth his time.

  3. Anonymous on October 29, 2008 1:02 pm

    “It would be a worthy goal, to explain “why things go down a lot faster than they go up”, if indeed they did. Over the history of SPY, the top 20 up months averaged +6.9%, and the top 20 down months averaged down 7.1%. These numbers are equal to within statistical uncertainty. So things DON’T go down a lot faster than they go up.”

    And who said that you are presenting data that proves your point? Averaging monthly gain and losses does not say a thing about the speed of decline!

    Somebody help this man that does not know a thing about numbers…

  4. steve leslie on October 29, 2008 1:10 pm

    Mr St. Hubins then why dont you explain it in detail so all may benefit. take your time and formulate a retort. make it a research paper if you like rather than one half sentence blather . I was there in 1998 slugging it out with "Charlie" working at MS that was involved in the takeover. That coordinated effort was directed by Sec Rubin of the Treasury. Perhaps you know him personally and can unzip your vast knowledge. As Judge Smails said in Caddyshack "Well? We're waiting!!."

    Where have yu been on mars? What happened in the last two months. Explain Bear, Leh, Mer, Ms, GS and other stocks that drop 30 50 percent or more before the open because of not meetings earnings. It wipes out years of appreciation of a stock in one moment in time. I could list hundreds of individual situations. Here a but a few. Imclone, Biogen to name bnt two. LVS from 140 to 5 in less than a year. My small cap portfolio down 50 percent in 2 months.

    Don't give me that 20 best vs 20 worst and dismiss everything else noted above. And then put a back handed slap afterward.

    As the great Justice Anthony Scalia said "Others have their opinions. However mine happen to be right."

  5. jim on October 29, 2008 2:28 pm

    I have also seen a few studys that suggest the old “markets fall faster than they rise” scenario is just not true. However it doesnt bother me if thats what people/competition want to believe. jim

  6. Craig Bowles on October 29, 2008 3:26 pm

    We used to get reward potential vs risk with a 35% growth line for bull markets and a 25% growth line for bear markets. Look at the 2000-2002 bear market and draw a line. It’s -24% rate from peak to low. Then the first year and a half rebound is nearly 38%. Then the bull slowed down the growth rate. This bear market using a 25% bear market line points to around 800 on the S&P a year from now for risk potential and 1100 for reward. Depending on where we are between 800 and 1100, you can get the reward potential vs risk.

  7. nigel tufnel on October 29, 2008 5:29 pm

    Mr. anon: are these your opinions or did you copy them from the “conversing like a know it all who blows his top whenever someone disagrees with him” wikipedia page?

  8. Jeff Watson on October 29, 2008 5:36 pm

    I remember in Eddie Murphy’s movie,”Coming to America,” where Murphy gave two homeless guys, the Duke brothers, a whole wad of cash. Handed the money, Ralph Bellamy exclaimed to Don Ameche, the classic line, “Mortimer, we’re back in business.” That line illustrates a good description of the tenacity of a serious trader who will try to overcome all adversity and losses, and get back to business. I’ve known a lot of Mortimers in my life, and they are usually much better for the experience.


  9. derek smalls on October 29, 2008 7:54 pm

    mr. anon, your writings intrigue me. Can I subscribe to your newsletter?

  10. vniederhoffer on October 29, 2008 8:13 pm

    would people on this site please follow the Franklinian spirit of giving the other personage the benefit of the doubt and not attacking them personally lest drinks be on them. Mr. Leslie posted something thoughtful and there are many ways to test that declines are more violent than rises, including tests that take account of a 25% decline in two weeks in October. True, the Lobogola up will follow the same path. But those are all meals for a lifetime rather than meals for a day. Most of what is put up on the site is tested in one way or another, and consistent with the teaching to fish theme without completely dissipating whatever there is of regularity in what the author has averred. Certainly Mr. Leslie's post is in that spirit and that's why one has moved it from comments to a lynchpin. vic

  11. D. K. Goodwin on October 29, 2008 9:28 pm

    Whether on a daily, weekly, or monthly time scale, over the history of SPY, there has been no significant difference between the magnitudes of the biggest (i.e. the top N, using a range of reasonable values for N) up moves and the biggest down moves. On a quarterly and yearly basis, the biggest N up moves are significantly bigger than the biggest N down moves. So what basis is there for this folklore, and how do you catch fish from an armchair?


  12. Adam on October 30, 2008 12:15 am

    A ten year chart on yahoo shows the DJI dropping from 14,000+ in Oct 2007 to 8990 in the space of a year. The drop from over 11,000 to the current level in a little over one month. The rise from ~8900 to 11,000 took about three years. Call it an outlier if you must but the velocity of the recent drop is multiples of the velocity of the rise. A similar argument could be constructed for the 1920s.

  13. Mr. Skeptical. on October 30, 2008 8:05 am

    Mr. Goodwin,
    in no way shape or form your stats address “why things go down a lot faster than they go up”. You are measuring apples and comparing it to oranges.

  14. vniederhoffer on October 30, 2008 9:36 am

    Mr. Skeptical asks from the armchair for some stats on table. How about 76 declines of more than 30 points in last 12 years and 57 rises of more than 30 points ————————– from the armchair. v

  15. acetrader on October 30, 2008 9:41 am

    who’s the wiseass posting here as all four members of Spinal Tap?

  16. steve leslie on October 30, 2008 10:22 am

    In my opening sentence I cautioned the reader that this is not a formal research paper or one worthy of nobel consideration.

    I sent this in with the intention of helping out maybe a small minority who may have wondered as I have why I wake up in the morning and my normally stable stock suddenly gets repriced with a 30% haircut. This can be after they either met earnings or exceeded them. A news event usually plays a part. The technical dynamics take over. Now I bought the stock and in most cases grinded it out so I could get that 30 or 50 percent gain to get there in the first place. This takes some time. Rarely do I catch a scalded dog as the brits say. Those in my experience are few and far between.

    Then I get assailed for offering something that i thought might be helpful. Mr. Ace Trader notices that these jokers are using names from the movie This is Spinal Tap. Quite childish and insulting for such a generous website as My great friend and mentor Dr. Niederhoffer has built and offered for free for many years. In fact, for the uninitiated honorariums used to be paid out of Dr. Niederhoffers account for the best postings for the month. I and others received some of this. The very eloquent Mr. Sogi esq. probably the most.

    Personally, I could not care what is said about me or the things I write. I welcome genuine criticism. Even if you want to make it personal go ahead. Just don't pollute this website with it. Look me up offline, I will share my personal email with anyone who wants to dialogue.

    Now I said all that to say this. What will ultimately happen is that this fine offering will disapear and mostly due to contributors leaving viewing their work to be wasted here. So for all you mindless bloggers who consider your work here cutesy keep going and see what happens. Or take up my challenge and be men or women of character and use real names and real email addresses and stick to intellectual sharing so all may benefit.

  17. D. K. Goodwin on October 30, 2008 10:32 am

    What were the biggest magnitude 1-day SPY moves THIS MONTH, October 2008? They were:

    October 13 +14%
    October 28 +12%
    October 15 -10%
    October 9 -7%
    October 20 +6%

    The biggest moves were UP moves. Things went up faster than they went down, though obviously they went down more often.

    A short-seller who comforted himself with the platitude that “things go down faster than they go up” would not have been ready for October 13th.

  18. Curmudgeon 5349 on October 30, 2008 11:21 am

    vniederhoffer and d.k.goodwin may both be right in their own way

    unconditionally, and over all stock market history, vniederhoffer is i believe right that there is some asymmetry in big one day returns, with big negatives favored over big positives

    but in a period like now, with the disasters of the past several weeks or few months now behind us, i believe d.k.goodwin may be right that there there is a tendency for big ups. these periods are rare in history, however.

    all this is just hypothesis but could i hope be demonstrated rigorously with appropriate stats

  19. Mr. Skeptical. on October 30, 2008 11:32 am

    I’m astonished that one cannot still view the horrific mistake of comparing apples with oranges. The fact that the SPY rose some 12% in one day does not mean that rises are faster than declines. There is such a thing called path dependency. For instance, the SPY can open flat and then rally 12% in an orderly manner during most of the day or rally the entire 12% in the last 2 hours or 30-minutes of trading. Does the fact that the SPY rallied 12% for the entire day is the same thing as rallying the 12% in the last hour or two?

    The same thing can be said about measuring monthly average rises and declines. Even though on average they might be of the same magnitude it does not mean that the speed of a rise and decline are the same. Prices can rise slowly for most of the month or decline sharply in a few days.

    Pull out recent weekly charts of commodities, emerging markets, equities or currencies. Tell me how many weeks did it take to erase most or all of the gains since the 2003 market bottom? Nearly 4 years of rising markets and how long did it take for the Logabola to unfold?

    By the way, the proper way to measure what you are trying to measure is to quantify rises/declines of the same % magnitude
    and then gather data on how long it took for the rise or fall to occur.

  20. vniederhoffer on October 30, 2008 12:20 pm

    This thread has been illuminating but has become too contentious so we'll stop it here. There's always a reason aside from the fact that 90% of the contentiousness on this site, seems to in some way be associated with Mr. Leslie. The main reason for the contentiousness is that everyone's skirting around the proper question which is what to do when moves of a certain exacerbated magnitude occur conditional on veracious underlying conditions? Since answering the proper question would be inappropriate here, we'll close the thread. vic


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