12/15/2005 Briefly Speaking: Round Numbers at Year-End; Balmy Decembers; the Chairman Objects to Multiple Comps from the Firm's Stock Picker, and the Strong Letter That Ensued; A Conversation in the Woods
Briefly Speaking: Leaks and Announcement Effects
We're all aware by now that often by the time events are announced, they are widely known to bigger and more sophisticated players. The most vivid example here is the time two Libyan jet fighters were shot down by the US over the Gulf of Sidra in 1981 on a Sunday, New York time. But on the Friday before, gold went up 10 bucks. How could they have known about a cardinal event like the shooting down of a plane? One wants to say it was coincidence, the conjunction of a 1-in-10,000 event with a 1-in-100 event, which isn't too unlikely considering the number of events that occur. But then it turns out that we had been turning up the screws the whole previous week, threatening the Libyans over and over again, and telling them to restrict their flights or else.
My least favorite example came five minutes before Henry Kaufmann turned bullish on bonds for the first time based on his crackpot flow-of-funds analysis: "The amount of fixed-income supply is $200 billion greater than the demand so rates must go up by 5 percentage points to create the weltanschauung." The firm he worked for offered me bonds at a very good price, two ticks below the market (a one and only), and they rose about 4 points in the next five minutes after the announcement much to the cost of the Palindrome and myself.
The most startling example I came across was a little-noticed editorial by Caspar Weinberger in Forbes a few months before the impeachment hearings. He predicted that the day before the hearings, the U.S. would lob some missiles against the Mideast adversaries, to deflect attention and show the need for a strong imperial presidency, even if attenuated by excessive romance et al.
It is well known that the market looked like Hades in the weeks before 9/11. I received a call the weekend before saying that another 10/19/87 was predicted. The market hadn't gone up two days in a row for the previous two months, which may have been a record of some kind. The S&P itself declined from 1330 on May 22 to 1103 at the close on Sept. 10 (using adjusted futures prices). And out of the clear blue sky, volatility on options went up by 14 percentage points from 19% on June 30 to 32% at the close on Sept. 10.
Insider trading, of course, is the heart and soul of much on the Street. Before merger announcements, the acquiree often rises. Put buyers abound before the announcement of inordinately bad earnings. Indeed, when I studied insider trades in detail with James Lorie in the '60s, we found that 75% of all insider buys and sells were at more favorable prices when the insiders traded than the price prevailing when the transactions were announced.
Particularly reprehensible to me are the staged leaks that the great leaders at the Central Bank are so famous for. They leak to selected reporters what their plans are. They meet with the big brokerage houses to discuss their likely reactions to various events.
The Recent Declines.
Of course what brings this to mind at present was the decline in the market in the week ended Oct. 7, 2005. Five straight days covering 34 points, including the inordinately bullish first day of the month. What could possibly have caused this terrible and once in 50 times magnitude first-week decline? It seemed ridiculous that the three staged announcements that the Fed was near the upper band of its limit of tolerance for inflation could have caused the decline because this was a repetition after repetition of what had already been announced. The market isn't supposed to move based on historical events but on changes in anticipation. It's all so much clearer now that the story about the big brokerage house failure is becoming disseminated. It's like the Libyan negotiations. Big fund transfers occurred the previous week involving an Austrian bank. Resignations had to be prepared. Agreements to pay off debts had to be arranged. Doubtless dozens of professionals had to be involved in these and similar meetings, to say nothing of the pre-notifications to the authorities. The big owners and lenders would presumably have been given their opportunity to protect the interests of the public and themselves. There has been much notice about the planned family wine-tasting tour of the chief perp to Vienna that was on tape. Was such taping routine, or part of something else?
A classification of events.
I have long wished to classify events based on their information content and timing. The best I have been able to come up with is a three-category classification into uncertainty classes as follows:
For example, an earnings release from GE would be known as to its date, and would receive a time of announcement of 10; magnitude of announcement would be uncertain, say 4-6; seeming favorability would be 6.
An expected 1% increase in CPI would be 10 for certainty of time of announcement, 4-6 for magnitude and 1 for seeming favorability.
A future change in the fed funds rate at an unscheduled meeting would be 1 for certainty of announcement, 8 for magnitude of effect, and 10 for seeming favorability.
I am open to other ruminations on this deep subject including alternate methods of classifying events relative to their uncertainty.
Briefly Speaking, by Victor Niederhoffer
Music, Physics, Stocks, Buffett
Briefly Speaking: Incentives; Open Sesame; The Dangers of Ephemeral Information
1. The key to understanding the world of choice and decision making is incentives. One blade of the incentive scissors is that higher prices elicit increased supply and reduced demand. Today one reads that gold is down $3 because of concern that Indian jewelers will reduce usage, that oil was down yesterday on increased levels of shipments from Europe, and notes that the CRB Index is at 320 approximately where it was 6 months ago. Another blade of the scissors is that people work harder when they can make more money out of something. The Wall Street Journal article yesterday contrasting the beautiful and effective efforts of Wal-Mart and Home Depot to provide food, equipment and shelter for the hurricane victims, and the knowledge that the jails in New Orleans were emptied and prisoners released because no evacuation plans were developed by the government, reminds one of the heroism of business in responding to the profits incentives, the many escapes from jail that have occurred in conjunction with natural disasters, and the importance of developing the taste and experience of property as a necessary concomitant of civilized behavior, and of Martin Anderson's the Federal Bulldozer in which he records how public housing, residents of whom again constituted an inordinate residue of the remaining occupants of NO after the flood, leads to looting and inhuman behavior.
2. What is the magic bullet, the golden key, the "Open Sesame" that will open the chest for market prediction? Is it the movement of a certain market in a certain hour? The market sentiment that arises from the happiness of people, the nearness of releases of energy from fixed decision makers like the trend followers, or those lacking in margin, the changes in uncertainty and a priori risk, the influx of liquidity from monetary injections, corporate buybacks, the changing mix of money being raised by equity versus debt, the flows of money from into money market funds versus stock funds, the liquidity of the public based on money received, the prospects for future profits, inflows from abroad, the strength of the existing holders of stocks, the path of least resistance, et al.?
Yes, all these are important. and all can be quantified. But if there is one single lozenge, that I like to hang my hat on, one that's not always discounted, it's the relative moves of fixed income versus stocks. Yes, there's always a relation, a feeding relation between them, a substitution that is the golden key, ... but the problem is it's always changing. (One attempted to reduce the fogginess of same in his chapter on Kira's education about the evils of regulation of health lozenges, and one's own amiable idiocy, in chapter 16 of ones worst selling book, a book reviewed most recently as "feeding on each other's insecurities and inadequacies, .. lack of success as a trader, ... stupidity and embarrassment, ( with ) an empty message from an empty mind," that one can hardly refrain from a sense of satisfaction.
3. If there's one key mistake that traders make it's to base their decisions on information that is past or ephemeral. The former has been discounted many months ago, and the latter, like the employment last month, or PPI last month has nothing to do with the value of stocks. Of what moment is it that PPI in August was up 0.6% when the CRB is down 10% since then except for those who would spur friction to cover the costs of the market firmament or as Bacon would say, cause the public to lose so much more money than they have any right to lose.
Briefly Speaking: A Big League Query; Buying the Dollar; Post-Tax Day; Genesis
1. A big league query. Given the market has been down three days in a row and the current day is up, what are the chances that the current change will be above 5 points? The answer is very surprisingly 4 to 1, but this is the kind of useless query that we encourage you never to make. Always look ahead not at the random probabilities of a previous event occurring.
2. Trim Tabs has been beating the bush saying that smart buyers like corporate buybacks, and acquirers and dollar holders aboard are having a field day buying the hades out of the market while hedge funds sell it to them with abandon regardless of the price. They wish that when the hedgies are forced to cover, there is not much carnage like occurred in oil and foreign exchange. Let us hope they maintain a proper humility and can walk the tight rope of making money on shorts that no one ever has before.
3. The average move for the second day after tax day is surprising and well worth investigating with a pencil and envelope.
4.For want of a nail a war was lost. But for the column that the collab and I wrote on April 20, 2000, up on site, we all wouldn't be here and the world would be so much different. You see we were both out of work, and Markman saw that column and said "it was the best column he ever read" and then he hired us. And if he hadn't, my goodness--- don't finish that sentence.
Briefly Speaking: The Magic DAX Number; Momentum Investing; Market Cycles
Briefly Speaking: The Sage's Troubles; Fountain Patters; Happiness and Markets
Briefly Speaking, by Victor Niederhoffer
The oak is well described in its contributions to civilization and survival strategies in the book Oak, The Frame Of Civilization by William Logan. While the oak is not the record holder in any niche, it seems to survive in all niches. "They are so successful because they never found a niche". They can survive everywhere, and their distribution throughout the world seems to be coterminous with civilization and trade. Further the oaks preceded the growth of trade and civilization everywhere rather than the other way around. In short, they are generalists that seem to survive with many of the same flexible strategies that humans have.
I was led by reading this book to conduct a study on generalist strategies in stocks in the OEX 100. I looked at the two months with the largest declines over the last 2 years: July 2004 and Jan 2005 (both about 6 percent). I next looked at the 10 companies that showed the greatest rise during those months. I found that during these two months, the average rise of the 10th largest gainer was approximately 5 percent. A list of the companies with their subsequent performance over the next five months to yearend for the July gainers, and the next six months for the 10 best January gainers is as follows:
|July 2004 Gainers||Jan 2005 Gainers|
The gains for the average stock for the next 6 months in both periods was approximately 12 percent. The gains for the July gainers appear to be about 1.5 as great as the average stock during the subsequent period. Note that this is a hand study, made during the period of the spec party, when invariably this firm loses considerable money but it is suggestive nevertheless and I believe the extensions of the strategies of the oaks to stock research with related more extensive studies might be fruitful.
Briefly Speaking: Unrest in Europe: History of Science in England
1. There is a sense of febrile unrest in Europe, driven by indicia of hopelessness such as declining populations, rising unemployment, costs far and above the value of their currencies in dollars or hours worked for goods, rising crime, incredible congestion on roads even with congestion charges, a move for national identity cards to preclude emigration, taxes above 100%, and growth rates well below inflation. Who would choose to live there or start a business there unless there were Draconian restrictions enforced by the kind of world state apparatus that the Sage and the Palindrome prefer?
2. Chain Reactions by Adam Hart Davis talks about all the vertical and horizontal links between sciences in England from the time of Francis Bacon in the 16th Century to the present. It is highly educational to see how scientific societies and friendships combined with philosophic businessmen. Mentoring and friendships based on business lead in a direct line to so much of our personal material well-being. Particularly important have been the Lunar Society, the Royal Society, and the amateur scientists' experiments for practical and scientific advancement.
Briefly Speaking: Body Snatchers
Two of the reasons given for the market's fall yesterday bring to mind the body snatchers. It went down because oil fell below $50 and the oil stocks account for 1/3 of the S&P index decline. But just a few days ago, the reason posited for the market decline was that oil was high and it would bring consumer spending down. Similarly for the decline attributed to retail sales twice as high as expected. "Well," as one manager said, "it's perverse. That's bearish because now the Fed will have to raise rates faster." Finally, the dollar increase: the Euro was $1.36 at 2004 year-end and is $1.26 today. Wasn't the decline in the dollar last year one of the major planks for why the Buffetabelsons couldn't find any stocks they like?
Briefly Speaking: Spartanism
But like the machinations of the Sage, such as his selling ABC to Disney without a brokerage fee (ain't Disney happy) and similar cost savings and knockdowns in all his other transactions and serial acquisition fees (apparently it was common to boast in the old days that through shrewd accounting, in the Caribbean, an acquisition could boost the reported earnings of the acquirer by 25%), such maneuvers are finite and do nothing for the long-term prospects of the companies, which are embodied in the expected future growth rate, and discount rate-adjusted for risk.
Please understand that one has nothing against economism, or the great Scrooge McDuck®, or Carl Barks, his heroic creator, and never should the Sage or the Palindrome be compared to them
Briefly Speaking: Behind the Form
1. The market awaits the minutes of the Fed meeting of March 22 with bated breath to see how hawkish they were on inflation. Since March 16, and March 22 , the CRB index has gone down respectively 6% and 3% respectively. Talk about the public being behind the form.
2. The market down today additionally on record trade deficit of 61 billion compared to 59 billion estimate and concomitant weakness of dollar. But dollar actually up about 3/4 percent on the news. Reminds one of all the times that market down on fixed income rate hikes when interest rates actually going down.
3. One reflects on tax payment week of April 2000 when market dropped 160 points. That's S & P points. Many other years grotesque also to non-random extent. Reminder of who owns most of our lives.
4. Interdisciplinary studies often give most incite to a field as they bring up universal factors and fresh perspectives. The book Regression Methods in Biostatistics by Vittinghoff et al Springer, 2005 I find helpful. Nice discussion of exploratory techniques for physicians including the LOWNESS Smooth and survival statistics, the most neglected useful method for our field.
Briefly Speaking: Monster Oil
It's guaranteed to happen that on the last day of a quarter a brokerage house will disseminate a model that shows that one of their major holdings is due for a 100% increase in price imminently. Also, that the model will be generated by an agrarian reform-loving mathematician who does not understand the first theorem of economics: the higher the price, the greater the incentive for increased supply, and the greater the incentive for reduced consumption.
The brokerage house model should be understood in terms of Ben Green's "Horse Trading" rather than considered a legitimate economic exercise.
Briefly, the attention given to the nice Monster numbers reminds me of a truly proper exercise in "forecasting " undertaken by the great Paul DeRosa. He polled the 10 major banks, to get their deposits, then put them thru a Bureau of Labor Statistics census adjustment seasonal program to come up with an estimate. How beautiful. So good that he had to stop it, as the edge was embarrassing.
But because of these adjustments, and the unholy politicking going into the employment number release (do they want people to control their own retirement, or do they want the government to decide, not that the relatively non-government administration has been elected), it is shameful to use a series like Monster to predict employment since the random components are paramount, whatever one part of the numerator may be estimated to be.
We today inaugurate a new feature, "Briefly Speaking," in honor of all CEOs who were not "briefed" beforehand in conjunction with any activities that subsequently were investigated by authorities.
Briefly speaking, the WSJ article about Maurice Greenberg's "Last Tumultuous Days" at AIG should have appeared in a Harold Robbins novel. Some excerpts.
He called and yelled at several directors.
He had his own elevator guarded by his own security detail, his living living room adjoining his office and private chandeliered dining room.
At monthly management meetings, he was served hot tea in a china cup by his butler [while other execs sat around in coats and ties without refreshment].
"That would be stupid!" he said when asked if the board should lessen the conflict between AIG and related entities essentially controlled by Mr. Greenberg
"You couldn't even spell the word insurance," Greenberg, calling from a speaker phone aboard his boat in Florida, told a group of outside AIG directors assembled in their attorney's office to discuss subpoenas from the SEC and the New York State Attorney General. The group included a former U.S. secretary of defense, a former U.S. ambassador and a Harvard economics professor.
"Let's go home now," he replied after an awkward silence to a board toast on March 15 to a "great, great friend, the man who made AIG what it is today."
Goodness knows, the staff of his own operation will never be allowed to serve him lunch ahead of the others ever again.