Jan

19

Here is the original thread.

All of the agents show their reasoning so you can see how they work.

1 • Market Data Agent: gathers market data like stock prices, fundamentals, etc.
2 • Quant Agent: calculates signals like MACD, RSI, Bollinger Bands, etc.
3 • Fundamentals Agent: analyzes profitability, growth, financial health, and valuation.
4 • Sentiment Agent: looks at insider trades to determine insider sentiment.
5 • Risk Manager: determines risk metrics like volatility, drawdown, and more.
6 • Portfolio Manager: makes final trading decisions and generates orders.

Here is the GitHub repository.

Why would this work or be good at? Why would it not work? I don't think it will work since the same model will be used my many if successful and the gains will be cancelled out.

Larry Williams comments:

Ultimate curve fit - wait a year to know.

Hernan Avella writes:

This is absolutely the way to go, but there’s a bit more to what we get to call “Agent”. Also his quant module is looking at dumb shit.

Julian Rowberry responds:

horses had a good track record before cars. AI is making key opinion leaders redundant too.

Dec

21

An Investigation into the Causes of Stock Market Return Deviations from Real Earnings Yields
Posted: 6 Dec 2024
Austin Murphy, Oakland University - School of Business Administration
Zeina N. Alsalman, Oakland University
Ioannis Souropanis, Loughborough University

This research demonstrates that the simple difference between the current earnings yield on the S&P500 and the long-term real TIPS yield has significant forecasting power for excess returns on that stock market index over both short-term and long-term investment horizons. For all time frames, deviations from that theoretical identity for the equity premium are positively related to current economic slack in the economy. Over annual horizons, those excess stock return deviations are negatively (positively) associated with recent inflation rates (money growth). Inflation is found to be positively (negatively) related to monetary policy restrictiveness (long-term real profit growth) in the future.

Vic asks:

is this bull or bear?

Dec

17

In a few books I have noticed a pattern of the author insinuating people not to conform to the herd. Here are some examples:

"My resistance to conformity has been the bedrock of my speculative persona." — Education of a Speculator, The Chair

"Copper the public opinion" — Secrets of Professional Turf Betting, Robert Bacon

"The most contrarian thing of all is not to oppose the crowd but to think for yourself." — Zero To One, Peter Thiel

"Whoso would be a man must be a nonconformist. " — Self Reliance, Ralph Emerson

"If you suggest a doubt as to the morality of these institutions, it is boldly said that “You are a dangerous innovator, a utopian, a theorist, a subversive; you would shatter the foundation upon which society rests.” " — The Law, Frederic Bastiat

Are there any other books you know of that advise their readers not to be conformists?

Vinh Tu adds:

A connected concept is the minority game.

Humbert H. writes:

In markets, simply being contrarian is a recipe for losing money because "the herd" is often correct and markets are almost always efficient. Unlike the El Farol Bar problem, to be successfully contrarian one has to have insight into either something fundamental "the herd" doesn't see or anticipate a change in direction for whatever reason while having a correct insight into the timing. Game theory in its basic form doesn't seem to be very useful.

Asindu Drileba responds:

Yes, the minority game (El Farol Bar Problem) is just a toy model. So it may seem to be detached from reality at times. There is an ecological model that zoologists have come up with. I don't know it's exact name but it is described as follows.

Environment 1: If you're a buffalo and feed on the same grass plains with 1,000 other buffalos (herd members). The quality of grass you will feed on will be lower, since your competing with 1,000 herd members. Fortunately the odds of being eaten by a predator are lower. If a lion/cheetah attacks, your individual odds of being eaten are 1/1000.

Environment 2: If you're a "contrarian" buffalo, i.e move alone without your 1,000 friends. The quality of grass your eating will be higher since you don't need to share with anyone. But the odds that you are eaten, on the condition that the predator is successful are 100% i.e 1 in 1, cause you're the only target and possible victim.

So to the prey: The contrarian buffalo should figure out a way to not be eaten if it is to enjoy higher quality grass. To the predator: Education of a Speculator, describes retail people like me (the public) as the primary food for superior predators. Remember the more buffalos that join a herd the bigger it becomes and the higher the probability of a predator catching a meal.

Hernan Avella offers:

Conformity in Large Language Models

The conformity effect describes the tendency of individuals to align their responses with the majority….In this paper, we adapt psychological experiments to examine the extent of conformity in state-of-the-art LLMs. Our findings reveal that all models tested exhibit varying levels of conformity toward the majority, regardless of their initial choice or correctness, across different knowledge domains.

Humbert H. comments:

There are a couple of reasons why I like my own version of buy-and-hold, but really buy-and-hold in general: whatever happens you're not food for any predators in the market. You can be a victim of financial shenanigans, but when diversified that's not a big problem. The other is the drift. Same reason I never became a physicist: I always found physics really easy, and was always good from my high schools in the USSR and the US where I was the physics teachers' "pet" to college. But early on I figured out that to really make it in physics you needed to be a genius, and I was not, so there was not point in going that way. I don't feel I can beat the predators in the market because the top ones are both smarter and have more resources, so I don't even want to try. I admire those on the list who are trying, but to quote Dirty Harry "a man's got to know his limitations". I do have a couple of strengths for my version of buy-and-hold: I like to buy falling knives, which very few people like, so that's contrarian, and I can lose (or gain) value without any emotions other than "this is fun to watch".

Nov

24

Contrary to what has often been repeated on this esteemed list over the years, the art and process of trading is fundamentally the art and process of setting the right stops. Simpletons may claim that adding stops to a system (trading ES) reduces profitability, but that's only because the system itself is flawed, with laziness baked into its design. Setting the right stop is an integral process—it involves gauging current and expected volatility, weighing potential paths, and accounting for the bias.

Steve Ellison writes:

One of my best experiences with this list was that at the sparsely attended Spec Party in summer 2009, the 20 or so of us who were there had a very spirited discussion in Victor's living room about whether it was advisable to use stops or not. Many excellent points were made both pro and con.

Speaking for myself, I usually don't enter stop orders because they become part of the market, but I have mental stops. On the rare occasions when I actually have a profit, I am determined to not let it turn into a loss. And if a trade goes against me (by a nontrivial amount), that's new information that apparently my original analysis missed; in that case I am determined not to let a small loss turn into a big loss.

To put it another way, I entered a trade because I thought I had an edge, but the market moved in the wrong direction. Maybe something bigger is going on than, say, my analysis of the last 10 post-options-expiration weeks.

Big Al offers:

Stop Orders in Select Futures Markets
Nicholas Fett and Lihong McPhail
Office of the Chief Economist
Commodity Futures Trading Commission
August 29, 2017

This paper analyzes trade and order book audit trail data to provide a detailed summary of the use of stop orders in select futures markets; specifically E-mini S&P 500 Futures, Ten Year Treasury Note Futures, and WTI Crude Oil Futures. Recent flash rallies and the ever increasing speed of futures markets have called into question the appropriateness of traditional stop order strategies. By utilizing metrics related to both placement of and execution of stop orders, we show that stop orders are being used in these futures contracts with varying frequency and the strategy of stop order placement varies greatly by participant. As expected, trades involving stop orders are found to be highly correlated with intraday price volatility. Existence of stop orders is generally unknown to market participants as stop orders are not visible in the orderbook but must be triggered by a trade in the market at the corresponding price. More importantly, our analysis indicates that many traders are not only using stop orders for hedging purposes but also using them for latency reduction strategies. We provide a background on the usage and depth associated with stop orders in selected futures markets.

Larry Williams responds:

THANKS FOR THE POST. This should dispel the notion "they are going after my stops."

Asindu Drileba writes:

I don't actually use stops at all. My position size is my stop. I only bet a maximum of 3% of my bankroll. I really only get out of the market when I am liquidated. I sleep knowing that if I am to loose, my maximum loss is capped at 3%. I don't even respond to margin call emails. I often want to capture the moves between the daily open and the close. So what happens in between is something I usually ignore.

Oct

24

Spec variety pack

October 24, 2024 | Leave a Comment

Hernan Avella provides a quick book review:

The Biggest Bluff is a decent book, light enough to enjoy in audiobook format. The book follows a simple narrative, weaving decision theory and cognitive biases into the context of the author’s journey learning poker while being mentored by one of the best ever. There are many useful nuggets for the discretionary trader throughout. In today’s markets, where speed and computational power are abundant—much like the solver and GTO approach in poker—the wisdom of the great Eric Seidel can be distilled as follows:

• Focus and pay attention
• Emphasize the decision-making process, iterate, and improve upon it—don’t obsess over results.
• Don’t complain about bad beats; take randomness stoically.
• There’s always something to learn, and always be humble.

David Lillienfeld on GLP-1s and Alzheimer's:

It's rare that one can say much that's definitive about Alzheimer's–other than that we don't know much. However, it seems there's some reason for hope coming from the GLP-1:

Ozempic predecessor suggests potential for GLP-1 drugs in Alzheimer’s in early trial

A small clinical trial suggests that drugs like Ozempic could potentially be used not just for diabetes and weight loss but to protect the brain, slowing the rate at which people with Alzheimer’s disease lose their ability to think clearly, remember things and perform daily activities. The results need to be borne out in larger trials, which are already underway, before the medicines could receive approval for the disease.

Kim Zussman on happiness, money, and "olfactory enrichment":

The Price of Happiness
What is the shape of the relationship between money and happiness, and what are its implications?

People typically think about money in raw units such as dollars. Yet research on money and happiness typically examines the association between happiness and the logarithm of income, or Log(income). This logarithmic association between income and happiness is frequently either overlooked or misunderstood. To help address this, the present report examines this association and makes five key points….

Overnight olfactory enrichment using an odorant diffuser improves memory and modifies the uncinate fasciculus in older adults

Conclusion: Minimal olfactory enrichment administered at night produces improvements in both cognitive and neural functioning. Thus, olfactory enrichment may provide an effective and low-effort pathway to improved brain health.

Jul

3

I found this to be one of the worst books I've ever read; I couldn't even finish it. It felt like a disjointed collection of blog posts, miscellaneous information, and ramblings about catastrophes. However, the topic of portfolio protection through options trading does have its merits. Here are a few observations:

Spitznagel's Track Record: While Universa has shown good results, its success could be attributed to the specific sequence of market events. It raises the question of how it would perform in a more stable, long-term market environment.

Leveraging Equity Risk: The argument that paying a 3% annual "fee" allows for taking on more equity risk is compelling. This is reflected in the fund’s CAGR relative to the S&P 500.

Options Trading During Crises: As someone not deeply versed in options, I'm curious about how traders manage to capitalize on positions at the peak of a crisis without losing the hedge if conditions worsen, thus maintaining their investment mandate.

Relationships with Dealers: Effective trading in size in options seems to require solid relationships with dealers.

Further Reading: I plan to revisit Safe Haven: Investing for Financial Storms to pinpoint other intriguing aspects.

Asindu Drileba responds:

On the contrary, I liked Chaos Kings. Scott Patterson is not a financier so I understand it when you read him expecting him to sound like a financier but he doesn't. He is just a story teller. You can tell this in his earlier book, The Quants. Which was not really about finance but just a story about financiers.

Reading "The Quants" for example reinforced/confirmed my suspicion on the relationship between gambling & financiers. I found it to be a very beautiful story. A beautiful beginning & a beautiful ending.

Quick overview of "The Quants":

- It's starts with this poker tournament organized amongst financiers.
- During the tournament, the author describes the characters traits of the financiers by outlining their attitude towards playing poker
- The book then talks about their character when there are in the market. (mostly when they are winning)
- The financial crash of 2007/08 humbles alot of the cocky characters. Previously humble financiers remained humble (also made money). (By cocky I mean hubris)
- Another poker tournament was held after the 07/08 crisis. And the attitudes financiers had towards each other actually changed.

To me, Chaos Kings is a continuation of The Quants. It has 3 central themes. 1st theme is the human story behind the characters.
- Didier Sornette & his love for motorcycles (whom some people in this thread think is useless)
- Yaneer Bar-Yam getting heart broken by famine in Ethiopia
- Mark Spitznagel's love for goats

2nd theme is about the disconnect between how "non chaos kings" think about markets & "chaos kings" think about markets.
- Mark Spitznagel's philosophy on risk for example is that risk management should not simply be to cap your down side, but to actually increase returns. But predicting crashes is impossible.
- Didier Sornette thinks some huge market disasters can be predicted & tactically mitigated.

3rd theme is seeing how people apply inter disciplinary research to markets.
- Didier Sornette uses techniques used to predict mechanical failure in rocket engines. And applys them to classifying the nature of bubbles in financial markets and when markets are likely to fail.
- Yaneer Bar-Yam has his background in modeling epidemics & pandemics (Ebola, COVID). And he uses the same tool box to predict the likelihood of crashes in the market. One of the tools described in the book is a statistical indicator described as "mimicry".

So, my take away is that Chaos Kings is not really an "investment book". It's just a story about how a certain group of financiers approach market crashes. I found it to be a great source of potential research topics.

Jun

26

Bonds, especially long-term bonds, seem to be the most disliked asset class at the moment. However, they are not only great diversifiers but now might also be an opportune time to start investing in them or increase your current allocation. Here are a few considerations from my perspective:

- Duration Matching: Align the duration of your bonds with your investment horizon. Being relatively young, it makes sense for me to opt for longer durations.
- Capital Efficiency of Futures: Utilizing the capital efficiency of futures can be challenging with current borrowing rates. Nevertheless, if leverage is used productively, it can still yield benefits.
- Inflation Protection: Enhance your fixed income exposure with assets that are protected against inflation.
- 12M Stock-Bond Correlation is at max (as of 17 June):

There's a fourth dimension that complicates implementation. When examining term premiums, such as the spread between 30-year and 5-year yields, the benefits of long-term exposure are minimal—aside from the potential convexity benefits if rates significantly decline.

Furthermore, historical data indicates that long bonds have a lower Sharpe ratio compared to short bonds. However, short bonds lack sufficient volatility to effectively diversify an equity-heavy portfolio. Consider the hypothetical performance of buying short-term (~5 years) versus long-term bonds, adjusted for volatility:

Strategy CAGR Stdev Max DD Sharpe Corr w/ S&P 500
Short-Term Bonds 4.19% 4.81% -14.45% 0.39 -0.06
Long-Term Bonds 4.86% 11.11% -45.29% 0.27 -0.07
Leveraged ST Bonds 6.03% 11.11% -38.11% 0.37 -0.04

The question remains: Is it possible to 'have our cake and eat it too' by leveraging short bonds?

Big Al asks:

In your model, what is the implementation of "Leveraged ST Bonds"?

Hernan Avella answers:

Long VFTIX 2.35x, short 3M Bills as proxy to futures embedding financing costs.

Jun

10

I use a slightly modified version, I think is apt to use a rolling vol adjustment. Using VFINX (stocks) Long, VUSTX (long bonds) short. The stock bond ratio is higher than it was in 2000. the chart will show whatever you want; however, if you make the assumption that stocks and bonds have similar RISK ADJUSTED returns, mean reversion should be expected….at some point, but I don't think there's an actionable point here other than stay diversified. Here's a visual:

Stefan Jovanovich writes:

In the 40 years between the return of the dollar to the Constitutional standard (i.e. all paper issued by the Treasury had to be redeemable in coin) and the creation of a central bank that guaranteed that call money would always be available, the returns on the stock and bond markets had similar risk adjusted returns. For investors it was a choice whether to buy the common stocks of railroads with their wonderful but variable dividends or the secured bonds of the same companies.

A reversion to the mean could be a return to a period when cash, bonds and stocks all competed with one another in a connected equilibrium. That world saw creations of extraordinary fortunes; but against the one successful oil trust one had to measure the losses of all the enterprises that were unable to compete with Rockefeller's price-cutting for kerosene. What if AI means that sourcing for semiconductors only needs a few large relentlessly successful companies?

Vic asks:

how about no roll, no averaging on the bonds stock ratio?

May

29

A Fresh Look at the Kalman Filter

In this paper, we discuss the Kalman filter for state estimation in noisy linear discrete-time dynamical systems. We give an overview of its history, its mathematical and statistical formulations, and its use in applications. We describe a novel derivation of the Kalman filter using Newton's method for root finding. This approach is quite general as it can also be used to derive a number of variations of the Kalman filter, including recursive estimators for both prediction and smoothing, estimators with fading memory, and the extended Kalman filter for nonlinear systems.

Big Al adds:

Forecasting with the Kalman Filter
Mike Mull, PyData Chicago 2016

The Kalman filter is a popular tool in control theory and time-series analysis, but it can be a little hard to grasp. This talk will serve as an introduction to the concept, using an example of forecasting an economic indicator with tools from the statsmodels library.

Apr

23

Looks like someone in Can Gov was listening in for ideas (Tax rate to rise from 50% of reg to 67% of reg):

Capital gains tax change draws ire from some Canadian entrepreneurs worried it will worsen brain drain

In the 2024 budget unveiled Tuesday, Finance Minister Chrystia Freeland said the government would increase the inclusion rate of the capital gains tax from 50 per cent to 67 per cent for businesses and trusts, generating an estimated $19 billion in new revenue. Capital gains are the profits that individuals or businesses make from selling an asset — like a stock or a second home. Individuals are subject to the new changes on any profits over $250,000.

Big Al is sanguine:

No worries - it only affects a few:

The government estimates that the changes would impact 40,000 individuals (or 0.13 per cent of Canadians in any given year)…

H. Humbert writes:

With 67%, the government clearly thinks that either it both needs and deserves the profits of some people more than they do OR that those people need to be treated like one would treat an enemy, without any regard for their needs or feelings. Let's see, would a Communist think that way (both ideas) about his or her class enemy?

William Huggins explains:

It's a move back towards the status quo ante 1980s tax cut. The idea that tax cuts are only good is just silly. As silly as the notion that government is efficient with those same taxes. This isn't revolutionary, simply the slow reduction of a subsidy we -thought- would lead to more investment. Turns out future demand is a larger determinant of that than current taxes. We gave too much to capital back in the early 80s when we rebalance last time and now were rebalancing again. Cap gains will still pay less tax than working folks. No need for enemies or "communists".

H. Humbert replies:

I apologize William, the problem was my reading comprehension as I wasn't familiar with the meaning of the term "inclusion rate" in the Canadian tax system and interpreted it incorrectly after, to be honest, spending about 20 seconds to "read" the article. With your explanation and the tiniest bit of research, this makes sense. As I mentioned before, I'm against special cap gains rates, but only if (a) the losses aren't capped (b) there is no special "investment gains" tax as currently exists in the US.

Asindu Drileba adds:

David Graeber once mentioned that the most productive period in American industry was when the tax rates were highest (65%). The referenced the advances made by Bell Labs as a example. He claimed that the productivity occurred because corporations were nudged by the high taxes to invest more money into research and development.

H. Humbert provides context:

Very few people paid the top marginal rate as tax shelters were highly prevalent and a lot easier to use than they are now.

Hernan Avella comments:

True MMT’rs would argue that rates should be 0 and the tax rate higher, as needed to curb inflation.

Mar

24

An alternate understanding of a market being at all time high (market reaching new prices it has never encountered) is this: "Everyone that has ever bought that stock or instrument is now in profit". What might be the psychological implications of this?

Kim Zussman comments:

It is possible (and probable) to buy, then sell after a decline and stay out only to see it reverse and go up further. This (timing) is one reason it is so much easier to do better with B/H than trading.

Big Al adds:

The other advantage to B&H is that the opportunity cost viz time/attention required is basically zero. I have looked at various index timing approaches and have not found anything that beats B&H, especially when considering the vig and opportunity cost. However, should one need to scratch the itch, timing strategies may work better with individual stocks. But again, opportunity cost.

Humbert H. writes:

I've always been believer in B&H vs. trading. But even in B&H the debate between indexing and individual stock selection never dies. I don't like indexing, but I don't have a mathematical basis for that. It's a fundamental belief that buying things without any regard to their economic value has to fail in time, at least relative to paying some attention to it.

Zubin Al Genubi adds more:

Another aspect of buy and hold that Rocky pointed out is the capital gain tax severely eats into returns. The richest guys hold for years and have only unrealized untaxable gains.

Art Cooper agrees:

There was an excellent article in the Jan 7, 2017 issue of Barron's by Leslie P. Norton on VERY long-lived closed end mutual funds which have surpassed the S&P's performance. They have all followed buy and hold strategies.

Michael Brush offers:

Far more money has been lost by investors in preparing for corrections, or anticipating corrections, than has been lost in the corrections themselves.
- Peter Lynch

Steve Ellison brings up an important point:

And yet trading is one of the focal points of this list. The way I square this circle is to keep most of my trading account in an equity index fund at all times. When I think I have an edge, I make trades using margin.

Larry Williams writes:

B&H is the keys to the kingdom, but…the massive fortunes of Livermore were short term trades despite his comment about sitting on your hands. Even the current high performers, Cohen, Dalio, Tudor etc use market timing. When I won world cup trading $10,000 to $1,100,000, it was all about timing and wild crazy money management. One approach wins big the other wins fast. A point to ponder.

Bill Rafter writes:

What we found in studying only the SPX/SPY is that in the long run a buy-and-hold yielded 9.5 percent compounded annually. That was from 1972 to recent. Our argument is that studies before 1972 are flawed. That 9.5 was great considering there were several collapses of ~50 percent. However if you could just eliminate the collapses you could raise the return to 13.5 percent compounded annually.

Eliminating the down moves did not involve prescience. You did not need to forecast recessions, only identify them when you were in one. That was not difficult, and timing was not a critical as one might think. We identified several algos that worked well.

When you were out of equities, you could either simply hold cash, or go long the 10-year ETF. The bonds were better, but not by much. Interestingly, long term holding of bond ETFs yielded low single-digit returns. Best avoided. Which also means that the Markowitz 60/40 strategy was a sub-performer.

Taxes are investor/vehicle specific. For example, if you use a no-tax vehicle, there are no taxes. Regarding turnover, there are very few transactions, as there are very few recessions. The strategy is basically B&H, but with holidays.

Asindu Drileba has concerns:

My problem with buy & hold Is that it has no risk management strategy. If you bought the S&P 500 in 1929 for example during the wrong month. It took you 25 years i.e until 1954 not even to make profit, but just to break even. The real question is, how do you know your not investing in a market path that will take 25 years just to break even?

Humbert H. responds:

That’s why, dollar cost averaging. I don’t think anyone thinks buy once in your lifetime and never interact with the stock market ever again. I think if you had averaged in monthly or quarterly from the summer 1929 through summer 1959 and then held and lived off dividends or cashed out/interest in retirement, you did well.

Art Cooper adds:

The year 1954 is almost universally given as the "break-even" year to recoup losses for buy & hold investors who bought at the 1929 peak. It's wrong to do so. First, it ignores dividends. Had dividends been re-invested the recovery year would have been much earlier. Second, it ignores the deflation which occurred during the Great Depression. In this column Mark Hulbert argues that someone who invested a lump sum at the 1929 peak would have recovered in real economic terms by late 1936.

I'm not arguing against dollar-cost averaging, merely pointing out a historical falsehood.

Hernan Avella writes:

What people should do while they are young and have human capital left is to leverage!

Life-Cycle Investing and Leverage: Buying Stock on Margin Can Reduce Retirement Risk

The most robust research, incorporating lifecycle patterns and relevant time horizons for long term investors tells us that the optimal allocation is 50/50 all equities, domestic and international. But most ppl don’t have the gumption to be 100% on equities.

Jan

26

Daily sd's 1 (1,1,1,1,1,0,0) mean variation .71 PL 2
Daily sd's 2 (0,0,0,0,0,0,5) mean variation .71 PL -18
Correct forecast, but went bust anyway, due to lumping of volatility.

Asindu Drileba asks:

What would be the best strategy to capture the return of this distribution? How would the position size be computed? Say you have $10.

Zubin Al Genubi replies:

OTM option? Don't know which direction so maybe a strangle? Its an example of a fat tail event surprising someone expecting a certain variance. Like the LTCM guys. $.20? 2%? As a hedge. Depends if its hedge or a trade.

William Huggins comments:

what you're picking up on is that variance alone doesn't describe non-normal distributions very well - you need additional tools like skewness (possibly kurtosis) to pick up on those differences. despite having a better description though, there is the presumption that the data generating process is stable across the sample period, and going forward. I've generally found (despite my poor timing record) that money is to be made when the distribution is changing, not stable (the computers rule those waves imo) so detecting breaks may be more valuable than fixed descriptions.

Peter Ringel writes:

I can confirm this from the math-undereducated trading side. Stability is boring, and boredom can lead to undisciplined trades. Shocks and short-term exaggerations are great.

Art Cooper points out:

Stability is boring, and boredom can lead to undisciplined trades. It's Minsky's Theory when this becomes widespread.

Zubin Al Genubi responds:

Thank you Dr Huggins. That is indeed the point that variance, regression, sd, means, should be used with power law distributions with extreme caution or not at all.

Hernan Avella questions:

Why is all that mumbo necessary when all you need is good entries and good stops? The house never closes and there are so many opportunities ahead. f you need that big of a stop, or it gets triggered so frequent that ruins the profits, your system sucks! It’s not a stop-loss problem.

H. Humbert comments:

I think he is saying the system did suck because it relied on improper statistical analysis, using gaussian distributions for prediction when it should have used a more sophisticated statistical analysis that doesn't make such assumption. If you know of good entries reliably without using statistics, more power to you! And maybe he needs volatility swaps in addition to variance swaps and then his system will be A-OK because that could be a simple way to hedge the fat tails. Since I don't trade, I'm just trying to interpret what's flying by.

Humbert H. writes:

Var swap vs. vol swap would be the purest expression. You could also buy a call on realized variance, by buying an uncapped variance swap and selling a capped variance swap (for historical reasons, the cap is struck at 2.5x the variance swap strike, the cap level acting as your effective call strike).

For 100k vega notional and uncapped strike at 22, and capped strike at 20, and realized vol over the period of 80:

100,000/(2*strike) = var notional = 2,272.72 var units uncapped, 2500 var units capped
Pnl uncapped 13.4mm
Pnl capped -4.1mm
Net 9.3mm for ~0.2m cost, not bad (approx (22-20) * vega not).

Some payouts were on the order of 2000:1 during March 2020. Pre 2020 you had some active sellers:

‘Amateurish’ Trades Blew Up AIMCo’s Volatility Program, Experts Say

H. Humbert responds:

Interesting. And an interesting article. You'd think that after LTCM people would realize that 100 year floods are just named that for convenience. That's why I never buy stocks in insurance companies. He whose name shouldn't be mentioned (not the fractalist but the Middle Eastern guy) always advocated buying black swan options, but I think the Chair didn't think he made money on this.

Kim Zussman links:

The hedge fund titan who’s been watching for ‘black swans’ for decades says the ‘greatest credit bubble in human history’ is set to pop—but he’s not worried

Jan

25

People have said that the reason fundamental physics has slowed down is that we have picked all the lower-hanging fruit, but that's not true. There is more lower-hanging fruit than ever before, it's just that picking it is stigmatized.

- David Deutsch

The full podcast is here.

This reminds me of what Brian Arthur insinuated in his book, The Nature of Technology. Brian Arthur describes technology as a combination of other technologies. An example is smart phone being a combination of battery technology, wireless communication technology, a microprocessor technology etc. A common statement I hear often is that we will not see much more technological progress because all the lower hanging fruit (or important things to be invented) are gone. Brian Arthur in his book asserts that if technology is a combination of other technologies, then the invention of new technology should increase the possible space of new technologies that can be invented. For example an AI breakthrough (the invention of the Transformers Model that underlies ChatGPT) will make it easier to invent new products, discover new phenomena which will also make it easier to produce even newer technology. Could this insight be a a good conjecture for always being long technology companies, since we expected technology to grow almost boundlessly if this is true?

Peter Saint-Andre comments:

Although it's seemingly true that technology always grows, that doesn't necessarily mean that technology companies are always a good investment. Various technology industries (crypto, Internet, semiconductors, chemicals, automobiles, radio, railroads, etc.) have experienced cycles of over-investment and hype. I worked in Internet tech companies from 1996 through 2022, and plenty of the companies I worked at either went bust (returning nothing to the investors or employee stockholders) or never approached their former highs (can you say Cisco?). It's not clear to me that, on balance, technology companies provide above average returns. But my perspective is qualitative, not quantitative.

Zubin Al Genubi responds:

That is the Lucretius Fallacy. Thinking the prior highest or best is the top. There will always be something new, bigger, better. That is why NQ is good over time. The old fades out and the new rises ever higher.

Asindu Drileba replies:

It is true that most tech companies actually fail without ever yielding a profit. How ever if your are diversified i.e have a very broad portfolio of investments. You don't have to be successful very many times. You can do very well with a 90% failure rate. Fred Wilson (of Union Square Ventures) claims that half of all VCs beat "The Stock Market" (I am assuming he means the S&P 500).

Big Al writes:

Important, too, to notice the improvements in ordinary things we might otherwise take for granted. A lot of this progress happens in basic materials. A quick search produces:

9 Material Discoveries that Could Transform Manufacturing

During Covid, our dishwasher broke. It was at least 35 years old and possibly older (amazing the use we got from it!). Because seemingly everybody was remodeling while they were stuck at home, it took us 3 months to get a new Bosch (during which time I washed a *lot* of dishes). But I was amazed at what an improvement the new Bosch machine was: it's so much more efficient, with energy and water, and effective, as well as quiet and very smart. That experience woke me up a bit to how much things get improved, and without any central planning authority being responsible for it.

Hernan Avella warns:

Yet, the new Bosch won't last 1/2 of the old one.

Dec

18

Edison believed that the human mind solves problems best just after a person wakes up from sleep. When he was working on a difficult problem, he would nap in his office armchair and hold a steel ball in his hand. When he would start to fall asleep, his arm muscles would relax and the ball would drop from his hands and land on the floor. This would wake him up and he would find that he had the solution to his problem.

Salvador Dalí, the painter, also believed that interrupting the onset of sleep could make him more creative, and he held a heavy key rather than a metal ball.

Now, more than 100 years later, a scientific study has shown that people can solve problems better just after they awake from a nap as long as they wake before they fall into deep sleep (Science Advances, Dec 8, 2021;7(50)).

Edison was right: Waking up right after drifting off to sleep can boost creativity

Zubin Al Genubi suggests:

Why We Sleep: Unlocking the Power of Sleep and Dreams, Matthew Walker. Great book. Lack of good sleep is really bad.

Hernan Avella warns:

Matthew Walker book is ok in spirit, we all know sleep is good. I'm an athlete and try to get 9-10hrs, but on closer inspection, the book is full of omissions, misinterpretations and overstatements. See: Matthew Walker's "Why We Sleep" Is Riddled with Scientific and Factual Errors.

Nils Poertner writes:

when waking up during the nite more than once, it may be my position that I kept overnite. and during Asian times, mkts turned and I got wrong footed and next day will be brutal too. could be something else of course too but I give it some reflection when it happens. like Elias Canetti says: "All the things one has forgotten scream for help in dreams."

Easan Katir adds:

Not that I've solved any problem as great as Edison providing electric light for the world, yet I've found that pre dawn time between first waking and getting up best for solving business and life issues. I write down the solution so I don't forget amidst the daily cacophony of market news.

Dec

7

Since 1985, looking at the Vanguard 500 Index Fund, there have been 20 years where the cumulative return up to November was greater than 10%. Of those, only in 3 years (1986, 1996, 2014), the fund experienced negative returns in the month of December.

1985: 4.67%
1986: -2.64%
1988: 1.66%
1989: 2.38%
1991: 11.41%
1995: 1.93%
1996: -1.96%
1997: 1.72%
1998: 5.81%
1999: 5.98%
2003: 5.22%
2006: 1.39%
2009: 1.95%
2012: 0.90%
2013: 2.51%
2014: -0.26%
2017: 1.10%
2019: 3.01%
2020: 3.84%
2021: 4.47%

T-Statistic = 2.04, p-value = 0.048

Oct

28

It seems a misnomer to call longs bonds risk free. Indeed the default risk is near zero, but the interest rates risk is wilder than a bronco at Montana rodeo. Credit risk is also a factor with potential downgrades. Which begs the question will risk premiums decrease equity vs bonds. Which asset class is actually carries more "risk"" on an annual basis.

Big Al asks:

Are long bonds (UST 30s) referred to as "risk free"? I think of the "risk-free rate" as Treasury bills. Whereas with bonds, doesn't longer duration equal greater risk?

William Huggins responds:

the risks of a long-term contract are mostly in getting out early at a bad time (and thus having a holding period yield lower than YTM), default, and of course inflation. if you hold to maturity (liability matching for instance) then the first risk vanishes but the last two remain. in gov bonds, the second risk also vanishes but the third becomes all important since a gov can promise to give you 1000 currency units but makes no reps about what that will buy at maturity.

Hernan Avella writes:

Interest rate volatility is only a problem for people who don't know how to immunize the risk. One should always match the investment horizon to the duration of the bond holdings. To quote Campbell and Viceira:

In financial economics a one-period indexed bond is usually thought of as riskless. Over one period, a nominal bond is a good substitute for an indexed bond, and thus by extension the riskless asset is often identified with a short-term nominal asset such as a Treasury bill. In a world with time-varying interest rates, however, only the current short-term real interest rate is riskless; future short term interest rates are uncertain. This makes a one-period bond risky from the perspective of long-horizon investors. For such investors, a more natural definition fo a riskless asset might be a real perpetuity, since this asset pays a fixed coupon of one unit of consumption per period forever.

In practical terms, given that we do live in the most powerful country in the history of the world and this country issues indexed bonds. For a long term investor, a TIPS ladder to finance your long term consumption is the riskless asset. Which should be 100% of the portfolio of the infinitely risk averse investor with zero intertemporal elasticity of substitution.

Kim Zussman reflects:

The most risk-free state is death because nothing worse (or better) can happen to you. Less severely one likes to lay on the floor. The cool hard surface is good for back pain and there is no further to fall.

Sep

18

remember the hype about Chat GPT some weeks /months ago? def for trading /investing - I doubt using that or any other program will help to master time ahead - prob a recipe for disaster at the end.

Peter Ringel writes:

I am still hyped! Hyped for boost in efficiency of the economy via AI. Not hyped for AI-trading systems! So far the training data set seem too small for AI - trading, thankfully. Together with what the Senator and others posted here: humans still beat skynet. Yet, I like to remind myself every day: the bastards are coming.

Hernan Avella responds:

So far the training data set seem too small for AI - trading , thankfully.

How do you figure this? Each trading day probably produces more than 100's million rows between trades and quote updates for all levels and exchanges, if you include futures, equities. I don't think lack of data is the issue here.

Peter Ringel replies:

I know even less about AI-coding, than about trading-coding. So everything is based on perceived experts. Thankfully, so far they are pessimistic.

Hernan Avella continues:

So everything is based on perceived experts.

The set of experts in ML-DL is very small, and the set of experts in trading is also small. I imagine the intersection is even smaller and more importantly, secretive. My suspicion is that the training set is more than enough, but the problem of ergodicity and stationarity (lack of) of the ever evolving competition are the culprit.

Peter Ringel responds:

I hope, you are wrong with this. But at some point you will be not. I speculate, that the "small" existing universe of trading history data + some sort of data - > model on human psychology - will be enough - will make us traders obsolete.

Peter Saint-Andre writes:

In my limited, non-trading experience with LLMs, I've found that their output reflects conventional wisdom. That might leave plenty of room for creative strategies outside the mainstream.

Peter Ringel agrees:

yes, they are regression x1000 on speed. so far feedback loops/ "reflexivity" kill it. As far as I understand.

Hernan Avella warns:

I would abstain from making any statements about the state of the art ML applied to trading, specially from a place of ignorance. Whoever works in this field (which there are only a handful in this list), and interacts with just the basic chat GPT 4.0, realizes immediately the productivity boost and immense potential to improve one's process. Only a moron would expect a good output from just feeding prices to the engine or asking simple questions.

Peter Ringel agrees again:

nooo! especially if you are ignorant in a field , better check if that poses a risk to your systems. I believe AI is a risk to traders. Here is a fact already reality: ChatGPT empowers people to do substantial back-tests.

Big Al adds:

And doing backtests poorly, or being improperly overconfident in backtests, is a threat to one's trading.

Humbert K. wonders:

With reference to the skynet, it is hard to guess if and when fully autonomous weapons will happen. My 2 cents is: Fully autonomous weapons will happen. There are debates as to whether we should let machines make kill decisions. I can say though our adversaries' weapons developments will not be bound in any way by any moral or ethical standards. If the bots can communicate with each other and collaborate to perform. When will they no longer need human inputs or interventions?

Eric Lindell writes:

There's a limit to what computers can do with the massive amounts of data available in countless categories. To find the perfect mix of factors to plug into a formula — if there is such a thing — would require a number of operations that increases exponentially with the data-set size.

Humans are good at intuitively navigating such complex search spaces. Computers using brute force just aren't powerful enough yet — and may (in principle) never be. That said, if a human comes up with a plausible conjecture relating stock picks with subsequent price performance, computers can certainly back-check the theory.

I'm working on one now regarding immediate post-IPO performance of stocks selected by certain criteria — criteria that aren't widely (or even narrowly) recognized for their relevance — pertaining to historical research of a revisionist nature.

Sep

7

talented musicians often have support groups, family, friends, even fans. Whereas in trading, when we screw up even a little bit (after many good yrs) the spouse will just throw us with tomatoes and if we are employed - our risk capital cut or we are fired. am half-serious here - being a trader is bloody hard. Very much under-appreciated.

Zubin Al Genubi points out:

We traders have the Spec List!

Jeff Watson writes:

In the late 70’s, I made it a firm and fast rule to never, ever discuss my P&L with my wife….or anyone for that matter. She has no clue as to my positions, and has no idea whether I made or lost money that day. Most successful guys in the pits were the same way with their wives. We saw too many guys complain to their wives, the wives got pissed and nagged them to death, and the negativity provided a catalyst for more losses. Many on this list adhere to the same rule.

H. Humbert comments:

As usual, Jeff speaks wisdom for the ages. The problem is that spouses typically can't determine whether fluctuations are short term, long term, relevant, or irrelevant. A few years ago, my wife logged on at the end of a quarter to get the account value for estimated taxes. It had been a very profitable quarter, but the account was nose-diving that day. I'll never forget her calling out "306, 304, 305, OMG 301, 299!!!" like some panicked automatic altimeter reading. Instead of "pull up, pull up!" she was saying "get out, get out!"

Hernan Avella asks:

To what extent can one really hide one's P&L with a life partner? It's evident when one is thriving. Savings balances, new properties, ventures, new toys, travel, charity contributions. Short term fluctuations are irrelevant, but at the end of the day you are making a bundle or not and your wife knows it.

Jeff Watson replies:

It works for many of us at this dinner party. When one is thriving, does one spend all that money, or does one keep their powder dry for the inevitable big hit?

Hernan Avella agrees:

Absolutely, cash management is an often-overlooked aspect that really demands attention. Think about it: How much opportunity cost are you incurring by running an extremely volatile trading operation that demands a surplus of cash? And man, those big hits? I've been there. It just makes the whole trading thing feel pointless. Ever wonder how many traders, even some big names we're familiar with, end up with lifetime records in the red? Imagine someone starting small, compounding at 40% for a decade, then raising assets 20-fold… and after all that, takes a massive loss. Poof! That trader hasn't earned a cent in profits. Sure, in the real world, they're pocketing yearly fees and stashing money away, but in the grand scheme of things, their investors are at a net loss. High Watermark agreements? Always a gray area. This industry has its shadows. At the end of the day, CAGR should be where our focus is.

P.S. As of now, even the most conservative brokers are offering intraday leverages around 15x for Spu, with a major chunk of the cash invested in bills. Despite a VIX hovering around 13-ish, in just the past five days, we've seen 6 moves that are 25 points or more.

Sep

6

Do markets lead recessions or do recessions cause markets to drop? I think Larry had a chart on this. Consumer is going to be spending less on discretionary spending. Retailers have already warned us of this.

- Student loan payments are due starting September
- Savings rates are down
- Employment situation is weakening a bit
- Consumer credit is slowing
- Interest payments rates are up on credit cards, cars, homes, etc.

Jeffrey Hirsch responds:

We had our U.S. recession on 2022 with back to back negative quarters of GDP Q1-Q2 2022. "They" changes the rules during Covid. Generally, markets lead recessions. This last time they ran concurrently.

Larry Williams comments:

No recession in sight with the indicators I keep…

Yelena Sennett asks:

thank you Larry, in sight means a few months or so? or a few quarters?

Larry Williams answers:

A year or so I would say.

Hernan Avella writes:

When was the last time the yield curve inversion (with the specific configuration by Campbell Harvey at Duke) didn't precede a recession in the out of sample period? It's a 8 out of 8 record I believe. While one would be foolish to act solely on this, this might be the best of all the bad recession indicators we have. Especially because it was conceived in 1986, has some rationale and we are experiencing the out of sample, Unlike Larry's drawings that are constantly overfitted to the data.

Larry Williams responds:

Me overfit data? Try my best not to but you Y-curvers refuse to acknowledge times of negative curve and massive stock rallies. Here is just one DJIA in red:

Hernan Avella replies:

But Larry, kindly stop straw-manning. The gist of the yc indicator, is the out of sample track record of preceding 8 out of the last 8 recessions. There's no controversy about this. Nobody serious has related this to stock returns. So you are trying to disprove a point that nobody is making.

Larry Williams writes:

Two points: (1) To say the curve has accurately predicted recessions you have to acknowledge it as often lead by 2 years. Wowsa!! Now there’s a real helpful tool. Gee those negative readings are not so precise. but maybe you are happy with that I am not. especially when there are so many better tools. (2) And if the YC and recessions don’t mean much to stocks, why would I care?

Hernan Avella responds:

Who said “predicted”. You keep making stuff up!. I can’t find the source, but the lag for the indicator is 12 or 18 months after 2 consecutive quarters of inversion of 3m-10y. Ignore it if you want. Just don’t straw-man the thing.

Larry Williams responds:

No straw man here—just look a the data its very poor indication recession is coming. now what did I make up???????

Hernan Avella states:

I don’t get it. 8 out of 8 within 18 months after 2 consecutive quarters of inversion….it could be luck, but let it at least fail once. Go to the source: Harvey’s 86’ dissertation.

Larry Williams says:

Curve went negative last April. you are the end of the time zone…better get ready for the sky to fall!

Michael Brush writes:

Yardeni charts yield curve inversion against stock returns. It has a good record but not quite as good as forecasting recessions. Agree no recession in sight.

Gary Phillips writes:

Not every yield curve inversion has been followed by a recession; however, every recession has been preceded by a yield curve inversion.

Larry Williams replies:

Agree but with a massive lead time. I want/need more precise timing and then—its not always market relevant.

Gary Phillips responds:

The clock doesn’t start ticking from the inception of the inversion, rather than when the curve begins to re-steepen.

Larry Williams offers:

Sure just like this:

Yelena Sennett writes:

Thank you for sharing your graphs and your concise points. “And if the YC and recessions don’t mean much to stocks why would I care?” Indeed, YC and recessions don’t seem to be very helpful or timely tools.

Peter Ringel comments:

highly subjective: the last break since July did not felt overly bearish. Low volume , a little deeper than I would like yes, but no gusto. Maybe a big range is developing, but more likely the drift kicks in and carries us higher. The AI - story is alive.

H. Humbert adds:

I agree with Larry that this time the YC inversion will not have forecasted a recession. It usually sparks a credit crisis which then causes recession, the normal procession of events. This time it seems to have only sparked the mini bank crisis which seems to have wound down. Of course we do not know if there will be another crisis that gets sparked. But so far, no, and to Larry’s point it has been quite some time now.

Jul

29

I see in media and real life so many people from Latam trying to get to the US (or Turkey to Europe). that said, local stocks indices and currencies of those regions perhaps present the better options than the US or European mkts? Check out some of the Brazilian stocks yielding up 20pc and lowly valued (trap?) - also Brazilian Real vs USD (or Turkish Lira vs Euro). Just an idea could be half-baked at this stage.

Hernan Avella responds:

Right now Latam represents a minuscule portion of the market cap of international markets, which itself is about 40% of world equities (float adjusted).

Chile .2%
Mexico .8%
Brasil 1.5%

This becomes a highly idiosyncratic bet, mostly on the currency. Unless you have some special edge, it's not a risk you are compensated for.

Nils Poertner replies:

maybe some of the indices can be looked at, and over time one can develop a bit of expertise, too. I kind of like the idea that Latam as a whole remains in a sort of chaotic state. unpredictable and a bit dangerous too. it works a bit as an entry barrier (not for all, but for some).

William Huggins offers:

jacob shapiro of cognitive investments does a good job following latam markets, which could help build some of that expertise over time. they have a free geopolitical newsletter each week with a macro edge to it. he used to have a latam focused newsletter but there wasn't enough uptake apparently.

sample of recent newsletter:

Brazil’s lower house approved a proposal to overhaul the country’s tax rules. Lawmakers voted 375-113 to advance the bill in a second round of voting. The plan still has many hurdles to clear. As a proposed constitutional amendment, it must win two votes in the Senate, and may have to return to the lower house in the second half of the year if senators make changes to the bill, as Speaker Arthur Lira expects. We expect it will happen. Indeed, I can safely say that we are the only geopolitical and macro sources I know of that has been talking about the importance of Brazilian tax reform — both to Brazilian voters and to the trajectory of the Brazilian economy — with such depth and passion. All credit to @Rob Larity here who has been on this from the beginning. De Gaulle was purported to have said, “Brazil is the country of the future…and always will be.” It’s not clear he ever said exactly that, but more important is that the future looks like it is finally here.

John Floyd comments:

Valuations in equity, Valuations in FX, Idiosyncratic commodity drivers, Brazil softs, etc. Political slide left all around, Monetary cycle was first mover up and now first mover down is a tailwind, reshoring FDI flows in Mexico (I know NA and not LatAm). Low index weights does indeed limit some larger flows.

A few liquid country ETF’s or ADR or local expressions of views available. Always the episodic risk both ways. lets see how Argentina may play out next 6-24 months for example.

Nils Poertner writes:

In a way, those countries are good to study for a number reasons. in a way they remind me of the future of US and Europe (money printing, elites playing ever more shenanigans, ordinary people not sitting in their own seats, completely hypnotized what is front of them, endless distractions). re investing/trading- yes, ever-changing cycles - I agree.

Jul

28

1. While individuals in this list may prefer chess or checkers, it is the game of Go that best mirrors the seemingly infinite combinatorial power of market moves. Let's set poker aside for now.

2. "The turn," rather than the tick, is the fundamental unit of market analysis.

3. There's an elegant interplay between Jeffersonian and Hamiltonian stocks. However, to capture it, an expert model seems more appropriate than the usual regularities work.

4. An additional reason to consider playing the long side on equities is this: when the market rises and volatility is low, you fare well. And even when the market declines and volatility increases, the numerous rebounds still position you advantageously. It's never wise to become enamored with the short side, as I did in 2008-2009. I made a considerable profit, but it took over two years to rid myself of the bearish bias.

5. Physicist Sean Carroll conducted an insightful interview with David Krakauer of SFIan insightful interview with David Krakauer of SFI. The topic of complexity is very relevant for traders, yet only those with strong fundamental technical skills can fully appreciate it.

6. Cattle Kingdom is a compelling book to listen to, replete with fascinating stories about the boom and bust cycles of the cattle business, which underscore the basic structure common to all cycles in the US. We have a knack for creating bubbles, and overall, this is a positive aspect that should be safeguarded.

7. Does anyone have a comparison of the fundamentals between the peak in January 2022 and now? The current prices in relation to interest rates appear somewhat unusual. However, we need to examine the situation more closely.

8. 10 years later, but here's the python version of An Introduction to Statistical Learning. I'm glad that when I had to choose between R and Python, I chose the latter.

Jul

14

like Sidney Homer used to say- "sooner or later every generation is shocked by the behaviour of interest rates."

Hernan Avella disagrees:

I don't think many people can be shocked, given the data we have from the 80's. Most asset holders are older folks anyways, that have the memories of the Volker era deep in their heads.

Stefan Jovanovich offers:

Edward Chancellor interview

High Interest Rates To “Slay” Zombified Companies | Edward Chancellor & Joseph Wang

Kim Zussman adds:

America’s Retirees Are Investing More Like 30-Year-Olds

At Vanguard, one-fifth of taxable brokerage account investors aged 85 or older have nearly all their money in stocks

William Huggins responds:

i suspect a good part of that boils down to how one's asset portfolio is defined. most studies of brokerage accounts don't account (haha) for the real estate, pension, insurance, or physical assets of those being studied. if most of my income is derived from a secure pension, its (mathematically) a pretty good approximation to drawing the yield from a large investment grade bond portfolio (less the liquidity). owning your home (usual by 85) would similarly constitute a "housing cost equivalent" yield, as would any reliable health benefits being drawn. seen in that way, one's discretionary funds being kept in equities would be quite reasonable.

Zubin Al Genubi reminisces:

Sure would have been nice to own 17% bonds. 5% not too bad though.

Nils Poertner offers:

Big investors rush into bonds after ‘cataclysmic’ year

Capital Group predicts $1tn will flow into debt markets in next few years as investors move to lock in higher yields

Henry Gifford writes:

In the 1970s my father bought some New York City municipal bonds. At the time there were rumors that the city government was going to go broke. I heard my father say “How can the government go broke? When they want money all they have to do is send people bills.”

The city government defaulted on the bonds. It was widely reported in the news as a disaster, with various solutions to the terrible problem proposed. I was only a teenager, but didn’t see a problem with the government not being able to borrow money any more. I still think it would be great. But, most people believed it was a terrible problem, with disaster looming.

My father reacted by buying more of the bonds – “default” meant they mailed his checks one week late. The bonds were triple tax free: no federal income taxes, no NY State income taxes, and no NY City income taxes. The bonds paid 28%. It was the only time in my father’s life that he borrowed money – to buy more of those 28% bonds. I have no idea for how many years he was collecting 28%.

I started buying apartment houses in Manhattan when I was 20. It was normal to pay 12% interest. One time I bought a small building – only four families – with the goal of replacing the 12% seller-financed loan with an 8% bank loan on an owner-occupied property. I moved into the building, fixed it up, but never managed to get a city inspector to come inspect and remove all the violations without inventing some new ones, as I never bribed an inspector. But for a long time I dreamed of refinancing a little bit of my real estate at 8%.

Nils Poertner responds:

tangentially speaking . we would need to have experience from bond traders of the 1970s and 1980s, today is more leverage though and we have more complex system so not sure how much that would really help. collective mind has been in a long mental bear mkts as well. we need nerves of steel in coming yrs and imagination.

Jul

6

how has the evolution of regularities in markets made it much harder to beat the 52% accuracy that no sports better can achieve to break even? one way is the ever changing relation between bonds and stocks between years. what else?

Larry Williams writes:

Crude's influence on stocks [has changed over time]

Alex Castaldo offers:

The Great Financial Crisis of 2007 and 2008 revealed a number of regularities that (I believed) would be very profitable in the future, but careful monitoring of them after their discovery proved very disappointing to me. For example, trend following that would have gotten you out of stocks and back in during that decade did not work well in the Covid crisis with a faster decline and faster recovery.

Nils Poertner comments:

a mystery indeed - some folks have lousy accuracies (say sub 25pc) and still do well - since a few things they do on top turn out great, eg, the lousy equity trader who got into ethereum early enough (and out when others got into it).

Kim Zussman adds:

Yield curve inversion from 3 months and 500 points ago:

Hernan Avella comments:

Like sports, the evolution of markets is guided by the fitness of the players. We are not competing against prospective cab drivers trading in the pits anymore. But armies of highly talented people that invest thoughtfully and systematically in every step of the process: Infrastructure, trading business practices, research, execution, recruiting. I have a friend working in one of these highly capable groups. Around 70 people. All markets 24 hours, every single approach possible.

Very few of us from the old days survive. The Chair might be the oldest and longest lasting point and click trader. Such a great competitor!!! Ray Cahnman, founder of Transmarket Group is up there as well.

Vic replies:

the point-and-click survivor owes it all to Lorie and Dimson who taught there is a drift. also one learned not to succumb to conspiracies to margin one out.

Jared Albert writes:

Modern technology, particularly around real time customer segmentation and portfolio correlation, squeezed more value from the 'customer as the product' than before.

May

29

in what other areas, apart from financial markets and sports betting, is there vig? and what is really relevant for everyday life? and how to avoid it?

maybe we don't see it that way because of Gell-Mann Amnesia affect.

Hernan Avella responds:

There’s a rich literature on rent-seeking behavior. It’s pervasive, Pharma, Telecom, Agriculture, Natural Resources. Not all lobbying is RS but the majority is.

Vic asks:

is there a universal law of vig where it goes to 2% in all activities like sports betting?

Jeff Watson offers:

I wrote this in 2009 about vig:

The Vig Keeps Grinding Away, from Jeff Watson

Steve Ellison comments:

Games that advertise that they're commission free usually charge the highest vig of all …

Mr. Watson's statement was written well before all the retail brokerages offered commission-free trading, which I contend simply means convoluted execution that costs customers much more than the $7.95 commissions that existed previously. "Where are the customers' yachts?", indeed.

Separately, the way the CME evolved is a good example of the Professor's constructal theory that all systems evolve to increase flow and velocity.

Hernan Avella disagrees:

Your insights on electronic trading seem to lack sufficient grounding. Abundant evidence disputes your hypothesis, highlighting the significance of the percentage extracted rather than the total volume. The evidence is clear that more opaque markets, like credit and emerging debt, are more expensive, for everybody except for a selected group that invests heavily in keeping the status quo. Electronic markets are more transparent, more anonymous, standardized, continuous, centralized, offer multilateral interaction and informationally more efficient.

Zubin Al Genubi responds:

Give the evidence then, if its so abundant, rather than your usual vague negative comments.

H. Humbert comments:

The beauty of long term investing is there's no vig and there are no taxes, other than once or twice in a few years.

The origin of the word is interesting. It's a Yiddish corruption of a Russian (or some other Slavic) word pronounced "vi igrish" or "gain", but it's more like "winning in a game", and the root means "game".

Alex Castaldo adds:

Interesting. The word can be found in online Russian dictionaries.

"vigorish" has a similar pronunciation, though the meaning has changed to be the fee for the game instead of the winnings.

Nils Poertner writes:

we want to battle against vig in all aspects of our lives. almost build a register where there is vig and share it with family and friends.

Henry Gifford comments:

Vig is one of the many things I find it helpful to view with an understanding of the laws of thermodynamics. The laws of thermodynamics describe the movement of heat in the universe, and because all energy is either heat now or becoming heat, they could be called the laws of heat.

The idea of “follow the money” to understand a system or organization or relationship is closely parallel by “follow the heat”, and heat follows clearly defined laws.

In approximate inverse sequence to importance, the fourth law says that if things A and B are at the same temperature, and things B and C are at the same temperature, then things A and C are at the same temperature. This is also called the zeroth law because it is so basic it should have been thought of first. The fourth law reminds me of the unlikelihood of much true arbitrage existing.

The third law says nothing can be cooled to absolute zero, because that would require something colder to absorb the heat, and nothing can be colder than absolute zero.

The first law says energy can neither be created nor destroyed.

The second law, most analogous to vig, says that heat always flows from hot things to cold things, and never flows the other way on its own. This law is the most profound, with many implications.

For example, one implication of the second law is that a car engine cannot convert all the energy in gasoline to mechanical energy - some will leave as heat that is not useful (except for heating the passenger compartment during the winter). Vig. A utility power plant burns fuel and about 31% of the energy in the fuel gets to the customer’s electric meter - 5 or 10% transmission losses (heat escaping from wires is “lost” - see first law), the rest is waste heat at the power plant. Vig. Various devices can reduce the amount lost to heat, but these devices have too high a vig themselves.

Big Al adds:

The first law makes me think of markets (not the Fed or banking) where money is neither created nor destroyed. For example, in the FTX collapse, the media talked about all the money that was "lost". But of course it wasn't lost, it was simply transferred from one group of entities to others.

Hernan Avella critiques:

This line of thought fails empirically when looking at deflationary crises, loss of crypto keys, central bank operations, bad loans, bankruptcy.

Henry Gifford responds:

Loss of crypto keys and central bank operations both follow the first law - printing money leads to inflation (if inflation is defined as a lowering of the value of money), destroying some of the money in circulation by losing keys, or destroying a dollar left in the pocket of clothing getting washed, increases the value of the remaining money.

I have heard the term “deflationary crisis” before, but don’t believe there has ever been a crisis whose root cause is the increase in the value of money.
In the saving and loan crisis of the late 80s, lenders sometimes asked borrowers to make sure they borrowed enough to make the payments for two years, as it was taxpayer money being lent out, and the lenders were collecting enough vig to make it worth going under I s couple of years.

A bankruptcy stops wasteful behavior, and the threat of bankruptcy causes people to take steps to prevent it. But I guess the waste in a government can continue forever, apparently violating the first law, while also proving that a perpetual motion mechanism really can exist, violating both the first and second laws.

Larry Williams comments:

printing money leads to inflation—data does not suggest that to be true

May

18

What are the most basic market states traders might need to model?

1. Going up
2. Going down
3. Reversing

Ranges, trends are subsets of the 3.

Next step is modeling what simple mechanism causes the 3.

Hernan Avella writes:

There are no “simple mechanisms”. But I would start with the microscopic dynamics of “the turn”. Yesterday [2 May] was a good day to study.

Big Al offers:

An interesting thought experiment is to imagine that you have a chart of a random walk but you still have to trade it. Money management, trade sizing, stops, limits - could you still trade it?

Zubin Al Genubi responds:

Random walk with drift would be the default basic state (S) with random factor u say with sd2. What simple rules might model market activity. Like ants and bees following simple rules but building coordinated complex structures. Adam Smith first mentioned emergence in his invisible hand.

Hernan Avella responds:

Isn't this the basis for most uniform trading that occurs?. While the other big chunk of participants "think" they have a model, "think" they have patterns, but are essentially doing a version of the same?

This reminds me of the infamous Kirilenko paper:

We examine the profitability of a specific class of intermediaries, high frequency
traders (HFTs). Using transaction level data with user identifications, we find that high frequency trading (HFT) is highly profitable: 31 HFTs earn over $29 million in trading profits in one E-mini S&P 500 futures contract during one month. The profits of HFTs are mainly derived from Opportunistic traders, but also from Fundamental (institutional) traders, Small (retail) traders and Non-HFT Market Makers. While HFTs bear some risk, they generate an unusually high average Sharpe ratio of 9.2. These results provide insight into the efficiency of markets at high-frequency time scales and raise the question of why we don’t see more competition among HFTs.

Zubin Al Genubi adds:

Yes HFT guys probably have done it at market maker level. Chair says yes you can trade random walk with drift with buy and hold due to drift. MM and HFT may also have order flow info they buy which may or may not be a different process.

Adam Grimes writes:

Absolutely and of course… that's why the hurdle rate for any test has to be the baseline (unconditional) drift in the sample.

[Re the "thought experiment"] Unless I'm missing something, not profitably (over a large sample size). All these other things are important, but they, at best, keep you at breakeven in a RW environment (i.e., no "signal" or "edge" possible). In real life, a comparable approach keeps you paying the vig with consistency. As for the thought experiment, correct?

Big Al responds:

For me, the thought experiment doesn't have a correct answer but forces me to think more rigorously about issues such as money management, trade sizing, stops, limits.

Andrew Moe writes:

Chair often advised that rather than considering just up/down or above/below a given threshold, one might look at "up big"/"up small"/"down small"/"down big" as classifiers. This is particularly salient in information theoretic calcs (ie, entropy) but interestingly moving to deciles offers little or no improvement.

Zubin Al Genubi adds:

I've been interest in agent based modeling of complex systems using simple rules. A new wrinkle would be adding a random factor following power law distribution in tails which stock data displays.

Jeff Watson responds:

That sounds like a perfect task for ChatGPT.

Gary Phillips adds:

Absent from the previous post on modeling was any mention of time frame. There is greater model risk the shorter the time frame you’re trading in, because price action is more random. Realized volatility, liquidity, gamma, and 0DTE options can and will, shape the trading environment. And, has been demonstrably evident the past 10 weeks, each day has its own ecosystem and market structure. This makes modeling in a short time frame a fool’s errand, and its participants useful liquidity providers.

As one moves to a higher time frame, positioning, money flows and sentiment become most important. Fund flows and positioning, along with cross asset flows, target dated funds, corporate buybacks, seasonal factors, and factor flows take on more meaning.Yet, even if one could ascertain the above factors with certainty, he wouldn’t know if the data was priced into the market or not.

And finally, while there may be a lag or even a disconnect on a long term time frame, macro economic factors, geo-political factors and CB policy, will inevitably exert its influence on the market. But, we don't know if we have experienced the event(s), nor know how traders will react to the event(s), that will finally move the market out of its current trading range.

A pragmatist's model then, is to know the market one’s trading, and to have a well defined process. Then one can make (bias free) observations and accurate, probability-based assumptions.

Apr

22

Caught a discussion of the benefits/drawbacks of international diversification for US investors, so I had to do at least some basic counting and found that over the last 10 years, using weekly % changes, SPY and VXUS (Vanguard ex-US ETF) have a correlation of +0.85. But SPY provided twice the return (155% vs 74%).

If you want an uncorrelated asset, EEM (MSCI Emerging Markets ETF) had about a zero correlation with SPY or VXUS…but a return of about -10%!

Hernan Avella responds:

This is a rather unsophisticated way to look at the issue of diversification. How about you extend the lookback period, run some simulations, perhaps including a withdrawal rate. Anyways, to some extent I agree with the idea that US investors might be ok with a bit less international diversification vs investors from other countries. 20-30% should be ok. I believe all cap funds for international might not be optimal, I prefer to use cheap multifactor funds. Mother Vanguard is recommending 40+% in foreign.

Starting period is a bit unfair to US equities, but it's the longest overlapping period of the 4 funds. Since Jan 1999, cagr and correlation:

S&P 500 +6.97%
International value (DFIVX) +6.02% cagr .82 corr
Emerging value (DEMSX) 10.52% cagr .75corr
China (MCHFX) 10.79% .53 corr

The framework on a forward basis should be robust/agnostic to globalization - deglobalization, war, currencies crisis. Passive, Cap weighted is a good starting point.

Big Al replies:

Yes, different lookback periods and different funds give you different results. My point is that it's hard to sell people on diversification given the last 10 years.

John Floyd adds:

How do we best consider this on a forward looking basis?

1. What about a reversion given massive US outperformance vs ROW past 10 years plus led by tech mega caps?
2. What about massive reshoring to NA (Canada, Mexico, US) of US and non-US firms given COVID, geopolitics, etc.
3. China had one of the greatest credit booms in history with the speed and size (beyond Japan in 80s, US in 2000s, etc.), that game is over.

H. Humbert writes:

The Sage has Japan in his sights:

Warren Buffett’s trip to Tokyo is seen as a ‘stamp of approval’ for investing in Japan

“For Japanese institutional investors, this really is now the stamp of approval that Japan can deliver superior returns,” Monex Group’s Jesper Koll told CNBC’s Street Signs Asia.

BTW, I had owned exactly one Japanese stock in my life prior to last year, and obscure bra maker, and it hasn't gone anywhere, literally. But in the beginning of last year to me Japan started appearing really attractive, especially for dividend-paying value stocks which is the only kind I buy, so I bought two stocks: TAK, at the beginning of the year which so far has provided a 24% return not including the 4% dividend and KNBWY a year ago which provided an 11% return not including a 3% dividend (both are documented online at the time of purchase). Nothing to write home about but better than the market. If you consider that they are one of the largest pharma companies and beverage companies in the world selling for peanuts, you couldn't find anything of comparable value and safety profile in the US at the time.

Hernan Avella asks:

Mr Humbert, what % of your portfolio did you put in 2 stocks?

H. Humbert replies:

1% for the first one and 0.5% for the second one. Since I own over 200 stocks that's my typical purchase size for something I don't have any particular conviction about. I don't believe in concentrated portfolios since (a) I don't trust my own judgment THAT much (b) I never sell other than in rare cases for tax loss purposes, so this way regardless of what the stock does it never becomes a critical part of my portfolio so I have to trim it and pay taxes.

I also bought four British stocks, so pretty soon you run out of percentage points this way, but way over half of my purchases last year were in foreign stocks. I found much better values abroad, but the European stocks had different reasons to be more attractive than the Japanese ones.

Oct

13

Good Quote

October 13, 2020 | Leave a Comment

Victor Niederhoffer  writes: 

From wsj article on profits  "Night and day there are businessmen out there thinking of ways to feed us, to entertain us, to keep us healthy, to help us communicate — all out of a desire for profit.  The profit motive is the producer’s motive.  It is the desire to prosper by creating and offering for sale the values we need to live and enjoy life — and to spearhead the invention of new values that raise our standard of living.   The profit motive is the foundation of human happiness and human progress." — from the book "Equal is Unfair" by Yaron Brook and Don Watkins

Richard Owen  writes: 

Hi Vic - a noble story. It does feel though that if you tried to launch any benchmark business in recent years (presumably with a tech enabled angle) with the intention of collecting real profits, you were done for. QE took away the discount rate and corrupted the need for profits and perhaps underwrote much of the current chaos. With a 3% real fed, housing would be affordable and Jeff Bezos a lot poorer, allegedly two roots for mass discontent. And maybe the aim of competing improvements in products and services drove capitalism some time ago. Because there was a large productivity gap between what people were capable of and what they achieved. But now people seem to be operating closer to the asymptote. Where I am currently living there are three identical copies of Uber, and the only way to differentiate their product is who is willing to accept the biggest deficit of profits until the competition goes bankrupt. Capitalism's main end is no longer who is attracted by profits but who can most convincingly promise unrealistic distant future profits. Imagine there's no antitrust, it's easy if you try, no competition below us, above us, only sky.

Hernan Avella writes: 

Nevermind the rents extracted by businesses that nobody needs and are the product of cronyism and regulatory capture. Think 401k plan administrators and health care insurance middle men. H

Aug

24

Jordan Neuman writes: 

Ralph referenced the liquidity situation on 10/20/87. You can research and see that the S&P Futures settled at a 10% discount to the cash on 10/19. But it was wholly untradeable.   For one thing, you couldn't get a broker to answer your call. In a real stress situation liquidity is an illusion.  That's one thing the man from Lebanon has right.

Hernan Avella writes: 

He only things these analogues of ‘87 are predictive of, is the age cohort of the person that brings them up and his/her relative underperformance to the mkt.

Ralph Vince  writes: 

Nonsense. Try to overcome your animosities towards others and me and act like a man here. 

If you weren't around over a period of a critical couple of days in October, 1987 you don't know, firsthand, what a lack of liquidity in equities and credit instruments is like. If you think that cannot happen again, that the past is not germane to the current environment, or that you are wise enough to see it when it eventually comes, good luck — God' knows you;re going to need it.

Those of us who were around and deeply involved in it back then know full-well that it not only can happen again, but that things are far more precarious now, structurally, than then, for several reasons, each of which independently conspires to make things now far more dangerous.  

Michael Cook writes:

Notwithstanding the fisticuffs here, I wasn't around in '87 but I was in the middle of 97/98 when, for instance HKMA went openly and highly aggressively bid only into its currency and equity markets. The message telegraphed was 'we will buy every damn share you sell up to the size of the entire market'. Soros and a bunch of others were having a crack at Hong Kong after doing so well with all the other Asian/paper tigers, esp Thailand, Malaysia and Indonesia.

That was 98, way before GFC, QE and the other myriad of dysfunctional acronyms. If we do face a melt down in the US a la '87. I just dont see why the Fed wouldnt straightforward buy the equity market directly to support it.

What would be stopping the Fed, the feeling that that would be illogical, ultra vires, anti-capitalist? Look at what they have done already?! They are already buying corporate debt (bailed GM and AIG in GFC etc etc etc), it is quite a small jump now to just directly buying Apple common stock etc if needed.

I hate it, and I think it all ends in tears, but that looks the name of the game to me until the system literally breaks and we need do a new Bretton Woods / debt jubilee whatever, where the rules are all reset

Aug

18

Recessions

August 18, 2020 | Leave a Comment

 Ralph Vince writes: 

I went to look at past recessions beginning with the one that officially started in Aug '1929. I looked that the number of months, the recession officially lasted for what the highest teh unemployment rate got up to was, what the lowest GDP dropped during  it, and the drop in the DJIA. there were 14 official recessions in this period (Iam not counting the current recession we are in).Interestingly, the correlation between the depth of the unemployment  rate and the number of months the recessions lasted for was .8438. I  other words, the deeper the unemployment rate, the longer the recession lasted for to a very high correlation.

The depth ofGDP drop too was highly correlated to the months the recessoin lasted to a correlation of .75.Every recession saw  market drop-off of varrying degrees with the least being -5.727% from fb to october 1945, the worst -89.19% from  Aug 1929–Mar 1933 Of the 14 recessions, 10 saw market drops >20%, and 4 of those saw drops >45 %.

So I would expect this recession to last a long tim based on unemployment and GDP so-far. However, even though all recessions saw a market drop, th severity of the market drop and the length of months the recession lasted was only +.03. The other factors that correlated to market drop during recessions was depth of unemployment rate correlating positively by .12 to depth of market  correction, and depth of GDP drop correlating positively to market drop by .35. 

Peter Ringel writes: 

Damn Ralph!  Incredible call today.

Ralph Vince  writes: 

No but I thought it would be on much havier volume., 111/2 tims what we saw today.

Hernan Avella writes: 

maybe with more volume we get to 2150 by labor day, as you vehemently forecasted

Jul

24

Hernan Avella writes: 

An interesting article with relevance for markets and recurrent political/social events. H

Out-of-Sync ‘Loners’ May Secretly Protect Orderly Swarms

Studies of collective behavior usually focus on how crowds of organisms coordinate their actions. But what if the individuals that don’t participate have just as much to tell us?

Ralph Vince writes: 

It's interesting, although it falls more into the category of agent-based modelling. My fear with such an approach to market prognostications is that it ends up a dead-end much as the notion of neural nets being a panacea a few decads ago.

That my simply be my own failings with finding agent-based approaches to yield fruit, perhaps there are some out there who are?

Jul

19

Hernan Avella writes: 

A Fearful Asymmetry: Covid-19 and America’s Information Deficit with China

David Moser

July 11, 2020

Volume 18 | Issue 14 | Number 5

Article ID 5422

Abstract: There is a longstanding and fundamental asymmetry in level of mutual understanding between the US and China. Chinese citizens are avid consumers of American media and cultural products, whereas most Americans are woefully unfamiliar with even the basics of Chinese history and culture. This asymmetry has resulted in a situation where the US is in danger of misinterpreting or misunderstanding Chinese motivations in bilateral relations, particularly in times of crisis. This paper recounts how the Covid-19 epidemic of 2020 exacerbated existing tensions between the US and China, and how these escalations in state-to-state conflict were ilarge part due to America’s information deficit with the PRC.

Link: 

https://apjjf.org/2020/14/Moser.html?fbclid=IwAR2ZrN3-aHQojMrqtUSjHKlIonwdO8rsTlUSympmQrxMtLipatqC2WTm1OE

Jeffery Rollert writes: 

The article reminded me of old Cold War articles. Clear local perspective, and cold lanuguage discussing hot topics.  I found the premise to be thoughtful and well explained, but it seemed clouded by reaching to far from it.

K. K. Law writes: 

The author completely missed a very major point and that is likely the result of him also only having very superficial understanding of China and CCP. The author fails to account for the key role of CCP's propaganda machine which controls what the Chinese can read and see and also controls what kind of information and mid-information is allowed to be sent to the West.  The CCP has perfected its machine to control the minds and behaviors of Chinese inside the country since 1945.

Stefan Jovanovich replies: 

1948 would be a better date.  Until the KMT outlawed ownership of gold and imposed price controls - which ruined all remaining exchange value for the currency, the Maoist insurgency had no guarantee of winning.  As usual, the "conservatives" in American politics picked the wrong villain.  The communists in the State Department had little effect on the outcome; the sensible bipartisan financial experts are the people who "lost" China.

Jul

16

Zubin Al Genubi  writes: 

The martial artist who trains to kill and maim full time ought to beat special forces guy who has to diversify his training with guns, navigation, comm, explosives etc.   To generalize, the one who trains most to maim, disable and kill should win. A good reference is Musashi Miyamoto's Ringo No Sho, The Book of Five Rings.  Fighting is not always about head to head combat, but deception, surprise, unfair tactics, doing the unexpected.

Hernan Avella replies: 

A few notes on fighting:

1. Unconstrained fighting (using objects, eye gouging, groin shots, finger manipulation) is too chaotic, and for obvious reasons has never been studied systematically.  In an event of this nature, size, endurance and relevant experience with the setting are the most important variables. 

2.  In the hypothetical case where a person is limited to learn only one "martial art".  It's been more than proven that said martial art should be Brazilian Jiu-Jitsu. For a high level excellent discussion on BJJ as a system, check the JRE podcast with the brilliant coach John Danaher.

3. The sport of fighting (MMA) is relatively new, it's as close as it can be to a real fight, a few constraints added to avoid catastrophic injuries and deaths, (and some nonsensical rules thrown in there to cater to the bureaucrats of the fighting commissions).  In it's short history you have seen the  quick evolution of the ruleset and the techniques.  Just like in markets, every little rule or artificial limit, causes an inefficiency to be exploited.

4. To be proficient at fighting you need to be able to understand all the intricacies of a fight in different planes:  Standing, on the ground, clinching. Each of these 3 planes have different details depending on the range of proximity to your opponent.  Additionally, fighting is not carried out in discrete steps along the different plains, so you have to develop a sophisticated game for the "transitions".  The number of scenarios quickly explode and a fighter needs to train so much to make a lot of this second nature. It really makes all the other athletic endeavors look easy.

5. Like in markets, the ever changing cycles are very important.  The key variable here is the different superior skills that are disseminated non uniformly. The video tape as a research tool has been instrumental to accelerate adaptation.  Since the early 90's, the sport has seen several phases, each one builds on the previous one:

    a.) Jiu-Jitsu is king. 

    b.) Wrestling and ground and pound and weight-cutting

    c.) The rise of the well rounded fighter

    d.) Sophistication of the striking game

 6. A few things have stood the test of time despite the quick evolution of the sport: 

      a.) Leg kicks, super debilitating they impede mobility and damage accumulates quickly.

      b.) Defensive Jiu-Jitsu (avoid getting blood flow to the brain from being stopped or your limbs twisted), it's easier to defend than to attack.

      c.) Takedowns and clinch game: He who can control the plain in which the fight takes place has an advantage

      d.) Genetic differences and/or performance enhancing drugs are always key.

Finally, practical advice.  If you are about to enter a physical confrontation and your future opponent has cauliflower ears. Don't walk, run!, your life is in danger

larry replies: 

Prison fighting is a separate art unlike any other as it must end instantly before guards come—perhaps the deadliest of all

Jul

15

Hernan Avella writes: 

That cluttered this list for weeks with nonsense charts and mumbo, were they banned?, are they solvent?

Interestingly enough, long term bonds are 11 big points higher than they were last time Spu was up here in early June and Jeffersonian stocks 5% lower.  July VX arabesque-ing higher.

NQ has done it's job, perhaps value stocks can take the baton for the next 200 pts.

Ralph Vince writes: 

Yes,and we have not had so much as two consecutive down days (Spx) within this period.

Oddly, the 6 week coefficient of variance (6 week std dev/6 week ma) has not gone to below 

.01, which usually means a large (usually down) move is imminent, despite the tightness of the past 22 days. In other words, it feels as though we've been in a right range for the past 4 1/2 weeks but there's been a lot of movement within this range.

Jul

10

It's becoming a good tradition to buy spoos Sunday night after a bad Friday. i.e the heuristic that has saved many speculators from going bust is now hindering profits, as it should be. VX was ahead of this bounce, since Friday.

Jun

22

In essence, China now has a better fiscal position, a more conservative central bank, higher interest rates, and a relatively improved net international investment position."

This has some thought provoking charts and ideas.

May

1

From 1951 to 2019, there were 15 6-month periods ending on April 30 in which the S&P 500 index declined. The average net change over the next 6 months was -3.8%, a statistically significant underperformance compared to the 4.2% average 6-month gain during the entire 69-year period.

Date         Index close   net change last 6 months      net change next 6 months
    4/29/1960      54.37                  -5.5%                     -1.8%
    4/30/1962      65.24                  -4.9%                    -13.4%
    4/29/1966      91.06                  -1.5%                    -11.9%
    4/30/1970      81.52                 -16.1%                      2.1%
    4/30/1973     106.97                  -4.1%                      1.2%
    4/30/1974      90.31                 -16.6%                    -18.2%
    4/29/1977      98.44                  -4.3%                     -6.2%
    4/30/1982     116.44                  -4.5%                     14.8%
    4/30/1984     160.05                  -2.1%                      3.8%
    4/30/1990      330.8                  -2.8%                     -8.1%
    4/29/1994     450.91                  -3.6%                      4.8%
    4/30/2001    1249.46                 -12.6%                    -15.2%
    4/30/2008    1385.14                 -10.6%                    -30.1%
    4/30/2009     872.81                  -9.9%                     18.7%
    4/29/2016     2065.3                  -0.7%                      2.9%

                        Average                                     -3.8%
                        Standard deviation                          12.8%
                        N                                              15
                        t                                           -2.42
                        Average of all 6 month periods               4.2%

Hernan Avella writes: 

Thanks Steve. Some notes:

- If you include the monthly data from 1928 (free yahoo finance), you effect disappears the average next 6 month goes from -3.80% to -0.12%
- Since you have such a small sample perhaps better to look at the trimmed mean or the median……the median of your sample is -1.8%
- Another (arguably better) way to check for significance is calculate your own p value with the bootstrap and the empirical distribution of 6 month returns, using the trimmed mean and winsorized variance.
- Related to above, Victor recommended a fine book a while back.
- Whether one can make more money adding this layer of complexity is still to be determined.
 

Apr

30

"Mapping The World's Trade Domination: USA & China's Clout Since 1980":

"Our visualization compares the dollars traded between China and the chosen country to that same country’s trade with the U.S. For example, if country ABC did $100m in trade with China and did $200M with the U.S., the ratio would show 50% in favor of the U.S."
Top 5 U.S. Top Trade Partners in 2018 (Total Merchandise Trade, $M)
1. Canada: $617,382
2. Mexico: $611,528
3. Japan: $217,563
4. Germany: $183,558
5. Republic of Korea: $130,635

Top 5 China Top Trade Partners in 2018 (Total Merchandise Trade, $M)
1. Japan: $328,043
2. Republic of Korea: $312,520
3. Hong Kong: $312,258
4. Taiwan: $225,780
5. Germany: $184,368

Apr

22

A lovely grind for 100 NQ points starting at Europe's close, from round to round. It culminates with ecstasy just in time with the MOC's and proceeds to reverse 3/4's of the move in 15 min. What a script. The only persistent regularity of equity index futures is that they never go too far in a straight line, manage your inventory accordingly.

Apr

19

A few of us were around during 1960-82. These were bad years in the US. There were riots in the cities, the Viet Nam war, presidents were assassinated, impeached, there was a serious threat of nuclear annihilation. The stock market ranged up and down 40% for close to 20 years. The 70's were especially bad.

Hernan Avella writes: 

Everybody anchors to the familiar, to the period of time that fits their model of the world or their desires. Ray Dalio thinks we are in the 1930-1945, Stefan thinks we are in the 1920's, Ralph Vince thinks this is 1987… I don't feel very confident in any narrow set of outcomes outside minutes or hours.

Apr

6

It's been interesting to observe the performance of different "hedges" during the current drawdown. Up until Ronin demise Vol was your best friend. At that point long term bonds were 45 full points below max, and a rotation seemed sensible. A naive RPM type of approach would suggest that, with bonds 30 points above min and the potential effects of the stimulus start to sink in the minds of the collective…. perhaps gold will be a better partner for risk in the next sequence.

Apr

3

Some years ago during one of the golden years of the Speclist we had a discussion about data visualization. Edward Tufte's books about data visualization are among my favorites. Tufte described John Snow's map of the 1854 Broadstreet Cholera epidemic. Snow mapped each case and the location which ended up centering around the handle to the water pump everyone used. They removed the handle and the spread slowed.

I wish we had this data now which might lead to certain areas of disease spread that could help reduce infection transmission. More of a scalpel approach not a nuclear bomb.

Hernan Avella writes: 

Yes, this is the Taiwan and to some extent SGP approach. It's hard to predict if this is even an option in the west because allegedly #1 we can't get much more basic stuff done, and #2 it triggers the liberty/individuality ethos. At the same time, Mr. Snowden revelations show that #1 we can run a sophisticated surveillance system. #2 Most people don't care, not even the libertarians.

Mar

26

Apropos of SPU coming back to some normalcy, there's a provocative twitter thread by Mr. Bodek, a well known participant turned whistle blower. Most of these factoids are self-evident to practitioners:


"I can confirm futures are more f*cked than equities including a semi-secret CME dealing desk, undisclosed and unnecessary liquidity incentive programs, abuse of malformed messages to test latency, stop loss signatures in the matching engine event loop, some priority race/condition scheme exploited between implied and spread order book, ridiculous levels of easily detectable spoofing that clearly triggers large opposing reserve orders in years of tick data, 1 lot pinging tied to 1000 lot posting, self trade check creating a pile-on between coordinated trading desks, and an extremely large spoofer who splices orders together at same price to avoid surveillance"

I still think equities are more f*cked than futures, at least the games are not being played in 10 different exchanges.

Mar

19

If there's one fact about the current trading environment that is unassailable, it's that one can't read anything into the daily swings. One can assume that the rallies are underpinned by mechanical hedge flows, and not a renewed optimism about future prospects for economic growth.Theses moves are often violent, especially into the close; but are always sold into, and short-lived.

The problem with trying to resurrect the market is that it was extremely overpriced in the first place. The drift ain't no +30%. CEO's were more concerned about managing (bonus linked) share price than managing their company's business. Now, they are paying the price. Also, years of suppressed vol allowed money managers to lever up ever more, leaving a market built on a foundation of greed, debt, and leverage.

Economic shock is still expanding in both scope and scale; and nothing is getting fixed. Until they address credit, corporate cash flows, and lending disruptions( per Mr. Rollert), sustainable buying will not re-emerge. Additionally, heightened levels of vol reduces the pool of potential buyers, leaving only fundamental/discretionary and VaR insensitive investors left to re-allocate.

Hernan Avella writes: 

It's tough out there when even the true experts are feeling it:

"Williams declined to say which trading firms are involved in conversations pressing the banks to increase available capital. When market-makers stop buying and selling, markets can sometimes seize up and undercut investor confidence in financial markets"

anonymous adds: 

This is the same refrain as ever. The Citadels of the world push for pay for flow dark pool friendly regulation in normal markets, and then shut down their APIs once there's some vol so that flow adversely selects whatever is on the lit markets.

These articles are all lobbying. One simple way to increase the liquidity of the market would be to give time/price preference to lit Market Makers all the time! Let's see that get regulatory traction.

Jan

29

What does it say about the future of stocks returns when the big ones are advertising "riding the rally"?:

"Tepper, Druckenmiller Say They are riding the rally"

Ralph Vince writes: 

Once again, I must quote Camus, "If that's what they're really thinking, I suspect they will be in for a bad surprise."

The top will be in when sentiment says so, but I cannot rule out the early Jan 18 sentiment readings as having perhaps not already indicating this, we've overshot it in price but not by a whole lot as of yet.

The invested curve of late last Aug, my prop employment indicators now showing deterioration, and earnings flat for ten months indicate an imminent recession sometime this year.

With stocks trading at the same multiples as bonds, the former is generally preferred here because the risk is perceived as being in the bonds…the asset that will mature to par at some point.

Jun

22

Back in September 2015, GS introduced their first active beta ETF to much fanfare, including the fact that the management fee significantly undercut competing products.  Time enough for a reality check. Total Return Since Inception:

GSLC: 25.93%

SPY: 30.02%

Annualized equivalents:

GSLC: 14.82%

SPY 17.04%

[Note: results from 9/30/2015 to 05/31/2017]

Hernan Avella writes: 

It looks like the same can't be said abut Blair Hull ETF (HTUS). It seems to be accomplishing it's goal, beating SPY since inception and with less volatility. I haven't looked under the hood of fees, distributions, taxes. But superficially looks good.

Rishi Singh writes: 

The return/sharpe are meaningless for a sample size of a year, espeically as the fund (according to prospectus) is balanced quarterly. I would want to see tracking error of live results vs their backtest. Also - I don't think people would buy this ETF expecting a return > than SPY every year, but for the correlation benefit. Again, what's the backtested corr, vs live and tracking error?

Russ Sears writes: 

I would respectfully disagree that "return/Sharpe are meaningless for a sample size of a year" because if they have had 4 quarters, it should give someone watching an idea of how stable each part is compared to S&P, and idea of its volatility. The returns/Sharpe may not tell one much but the individual data points of 4 quarter returns and volatility/correlation the picture has become clearer. While I would agree that it may not be enough to make a statistically significant conclusion, I would not even use a fund for diversification/correlation if the volatility/correlations to standard benchmarks are not somewhat stable. And the poor start does not bode well for the fund's strategy's alpha's consistentcy.

Further, if you had invested say $100 million of some institutions funds in the fund with a benchmark of S&P arguing a $2.6 million under-performance would not be something I would want to defend too rigorously or try to initiate the fund.

Apr

14

One thing that is almost entirely gone from baseball is seeing coaches arguing with the umpire.

Where are the Billy Martins and Earl Weavers of these last few generations?

Basketball seems to still have coaches in college and pros that work the refs. Coach K comes to mind. You don't seem to see many coaches purposefully getting T'd up anymore to motivate the team and sway a ref?

Where are the McEnroe's in tennis?

All sports have seemed to have lightened up a bit. Quite possibly it is because of "video replays" and "challenges" that have take the great theatrical performances away from the game of sports.

Could it have gone away from the markets too over the years? Can't blame or swear at an electronic fill? In the past you had the "lady in the wire cage" to blame, market maker in the jacket, and countless others.

Baseball theatrical tiffs are what I miss the most.

Steve Ellison writes: 

One of the great memories of my childhood was attending a Red Sox vs. Yankees game at Fenway Park in 1977 as the two teams were in a close race. At some point, a Boston player lined a base hit to right field in the general direction of Reggie Jackson. Jackson didn't get to the ball for some time, even though it was in front of him. Meanwhile, the hustling batter got to second base. Immediately, Billy Martin pulled Jackson out of the game. When Jackson reached the dugout, he and Martin got in a fight, to the great delight of the crowd. Despite the ongoing feuding between Martin and Jackson, the Yankees went on to win the World Series that year, and Jackson earned the nickname "Mr. October".

Hernan Avella writes: 

That observation–that a fight is an event very few people can turn their attention away from– has been used by Mixed Martial Arts promoters for a long time. The UFC (ultimate fighting championship) has to be the fastest growing sports franchise since 2000. The Fertitta brothers bought it for 2 million in 2003 and recently there was talk of selling in the range of 4-6 billion. 2015 revenues around 600 mill.

anonymous writes: 

How soon before we have Gladiator games? What's preventing it? If we have the so-called right to choose how we die, and legalized suicide then why not allow voluntary death by public spectacle? Million dollar prize money for the winner, and an annuity for a victim's family should he not survive the bout should make it worth it for folks without economic hope, or a fear of eternal Justice. Combine it with in-the-ring porn star rewards for the victor, and you've got a bread and circuses diversion superior to that of the Roman Empire. A new sport for a new blood-lusty God-less New Age.

Sep

16

'Cyborg Chess' or 'Advanced Chess' is an area that might be of interest to specs in that humans are allowed to use computers during the decision making process. There is evidence that strong human players can add considerable value to pure computer play when the process is managed in the right way, for example Arno Nickel defeated Hydra in a correspondence chess match in which he used a regular PC against the the most powerful supercomputer in the World at that time. This event wasn't publicized as much as it might have been, but you can read more about Nickel and Cyborg Chess here:

Arno Nickel

Advanced Chess

I've experimented with 'Cyborg Chess' in correspondence tournaments in which computers are allowed. The results haven't been great, probably because I don't use deep calculation setting on the engine, but the experience has been educational. A major issue is in understanding where it is that I can add value as there's a temptation to either overrule what the engine recommends or be led by it indiscriminately. Probably a series of protocols would be a good idea but where does one start? Here's a provisional list:

1. Write down your list of candidate moves, in order, and then compare them with the top choices of the engine.

2.Consider whether this is the kind of position in which engines are likely to do better than you (ie highly calculative tactical ones).

3. Give greater weight to particular candidates based on point 2.

4. Check your top candidate(s) more carefully, perhaps using deeper engine settings, until a particular confidence level is arrived at.

It seems reasonable that different people might give a different weighting to their own choices versus those of the computer, but in either case it does seem that better decisions might be arrived at. In fact Nickel's achievement sort of proves that, and even if computers get so powerful that the more or less 'solve' chess the synthesis of man and machine should still have value in less finite fields.

Victor Niederhoffer writes: 

"Cyborg Chess" by Nigel brings up the effectiveness of human versus
robot trading in markets. Certainly costs must be considered as well as
effectiveness the way it is in all the studies of robotic versus human
surgery. Apparently robotic beats laporofic.
There should be areas where the robots have to be turned off for the
evening where the humans could develop an advantage. It seems the robots
are forcing early capitulations in many markets which is presumably an
effect of their programs.

anonymous writes: 

To list just two of scores of regular robot shutdowns that one knows of:

1. On Sunday nights in the professional electronic FX markets (using HotSpot as an example), one only has access to prices from 5PM NYC time unless you get on the phone and call a counterparty direct in New Zealand or early Sydney.

This 'dead zone' is almost completely without 'silicon based entity' interference and often sees a reasonable range that goes unrecorded. A stint in that dead zone is a prized achievement for FX traders learning how markets 'really' trade. Much like time on the floor of an exchange, it is an experience that is dying off.

2. Each night at 5 PM NYC time the professional electronic FX market goes dark for a few minutes as the value date changes.

After reopening, the market making algorithms kick in first with relatively wide spreads that narrow quickly when the Carbon based life forms start to interact. The HFT 'order facilitation' ( Ha!) kicks in next.

What is of increasing concern is that the lunatics are running the asylum. Meaning that the firm's running the robots are deciding when and why markets open and close rather than some supervisory body. I guess this is more a question of nature versus nurture.

Arguably, there is some marginal information that is helpful, in an accretive sense, to the buy or sell decision–from the opening procedures of robot dominated markets.

The first order possibilities for testing might involve: number of transactions per unit time, rate of change of spread contraction, the epps effect et.al. All for relatively short periods as the robo-market opens.

At a practical level, and without investing what I know to be substantial funds to study this issue, I believe it still comes down to basic conditionality, expectations based on that conditionality and finally path dependency.

Additionally, the predictive nature or otherwise of the situations introduced into the price generation process by exchanges, that I have previously posted on - must be tested and incorporated.

Jim Sogi writes: 

By their nature, cyborgs must look for fixed patterns. They have limited adaptability. Sudden bugs, unexpected changes, changes in cycles, and divergences will always surprise them. They can't anticipate. Their advantage is that they are as fast as their circuits, and comm allow. The unknown is how they perform in a complex system with other cyborgs and humans. As Nigel points out, a human can add value and beat a pure cyborg. Human foresight and understanding of human nature can add value.

Hernan Avella writes:

Machines keep improving, some moving away from brute force approaches…

"Deep Learning Machine Teaches Itself Chess in 72 Hours, Plays at International Master Level":

"Lai has created an artificial intelligence machine called Giraffe that has taught itself to play chess by evaluating positions much more like humans and in an entirely different way to conventional chess engines.

Straight out of the box, the new machine plays at the same level as the best conventional chess engines, many of which have been fine-tuned over many years. On a human level, it is equivalent to FIDE International Master status, placing it within the top 2.2 percent of tournament chess players"

Andrew Goodwin writes:

I still have my ticket stub from the match that Kasparov lost to Deep Blue in 1997 in NYC. Maurice Ashley was using the Fritz engine to evaluate the moves of the champion and the supercomputer in real time for the theater audience, as I recall.

Instead of making the next move optimization target the best calculable move, the supercomputer could make goal seeking calculations that lead the match to the most time consuming calculable end game for human competitors. It won that match with clock time to spare. That's the advantage.

The Chair's idea of a downtime for computer engines sounds sound for human comparisons.

Jim Sogi writes: 

I would challenge anyone to quantify what exactly is the difference between a cyborg traded market and a human traded market. Sure it feels different, but how exactly? How do the numbers trade. Are there less big blocks? Are there fewer round sizes? Are there fewer takers on breakouts, i.e stop buy orders? Where are the numbers on the table?

Hernan Avella writes: 

Difference? Generally speaking, most of the time, when bots are the market makers there is less friction, reduced bid-ask spread, more ability to get the trade done with less price disruption. Winners: longer term traders willing to pay the bid ask spread or less to get into or out of a position. Losers: human market makers who want to earn the bid-ask spread. They can no longer compete.

Jul

22

All traders have a tendency to be happier with down 5% after their max loss was 60% than up 25% after their max profit was 50%. Most Asian markets are up substantially with Chinese 25 to 40% up, and yet everyone is talking about the depths of despair there.

Hernan Avella writes: 

It's ubiquitous. I sit here in the airport, after my flight was delayed 3 times and then cancelled at 11:30pm. They tried to settle for a flight tomorrow night. I fought my way into a 5 am flight. I have to spend the next 4 hours in the airport (perhaps finding regularities). It's a disaster outcome that feels like a victory compared with the alternative. Rumors in the airport were that the Obama trip to New York messed up with air traffic. How appropriate.

Thomas Miller writes: 

Do flexions work the same in all markets? When they want to buy at lower prices do they push fear and negativity through media outlets (increasingly social media like TWTR) so the weakest hands sell out at the bottom where they come in buying positioned for the next move up? Or am I being overly paranoid and conspiratorial?
 

Jun

20

As I continue on my arduous journey for selecting and also constantly keeping traders at their A-game, I was wondering if Vic, Brett or others on the list have any experience with how Sports Psychology could be used with Traders.

A competing athlete goes through pretty much the same psychological challenges that a trader goes through…and I was wondering if any research had been done on this subject.

Mental training helps athletes perform more consistently, find the zone more often, keep a winning streak alive, and learn how to think well under pressure. Or, as one sports psychologist put it, mental toughness is "the ability to consistently perform toward the upper range of your talent and skill regardless of competitive circumstances." As psychologists debate the roles of genetics, environment, and learned skills in determining mental toughness, they do agree (along with athletes and coaches) that high levels of mental toughness are associated with athletic prowess and success. In fact, mental toughness (or "grit") may be the defining factor between finishing at the front of the pack and not finishing at all.

Any thoughts from Specs would be welcome.

Victor Niederhoffer writes:

One would turn to Galton as one should on most areas involving human faculty. The key to athletics success is the sports gene. A key to trading success is intelligence. I would also look to the circle of friends, colleagues and influencers that a prospective employee has. Is he benevolent or a hoodoo. Beware of the hoodoo, and stay with the ones that create benefits for those associated with them.

John Netto writes: 

Sushant. I would read Market Mind Games by Denise Shull. It's excellent and will be a nice resource on your journey. Good luck.

anonymous writes: 

Ability to learn from and then put losses behind them. The inevitable mistakes being made are then analyzed, learned from, improvement sought, and then move on without negative baggage and lament about what could have happened.

Longevity. Injury, early retirement, or large losses do not afford one the ability to succeed.

Independent thought. A Zen like ability to follow one's own methodology and ideas in a non-conformist fashion, yet to balance with the ability to absorb appropriate outside information

Simple hard work. The will to stay out on the field longer than anybody else. Think Jerry Rice, Marcus O'Sullivan, Patrick Kane, Michael Jordan. 

Brett Steenbarger writes: 

Frankly I think the best writing on the topic is your account of your racquetball career. I agree that mental toughness is important, but all the toughness and repetition in the world won't be helpful if a person is working on the wrong things. I continue to find that good trading makes for good psychology just as often as the reverse.

Larry Williams writes: 

The mark of all greats is the ability to come back from behind.

Hernan Avella writes: 

From Handbook of Sport Psychology. Gershon et al.

"Personality traits like dispositional self consciousness, reinvestment and trait anxiety have been associated with predictors of performance failure. Research has also demonstrated that giving athletes practice at dealing with the types of attention demands that performance pressure induces can reduce sill failure when the stakes are high. Also, that preventing athletes from acquiring the type of explicit knowledge that pressure may exploit to begin with may also help to quell the negative effects of stress at high levels of performance."

Paul Marino adds: 

I had a long discussion today with my father regarding choosing the humble person over the boisterous kind of person in any of of life's dealings, from the dry cleaner or barber to your doctor or broker. I tend to get less agitated around the humble and have an easier time speaking my mind. If my physician was loud I might not tell him as much about my life and habits as I should. It's what works best for you that counts, like in any system, trading or otherwise. "Know thyself" may be the best known and least used maxim of all time. 

Apr

27

1. I wonder if smell is perhaps related to the blind spots of perception of market movement.

"Smell is not subjective; rather, it is simply very hard to communicate objectively, that is, to talk about and achieve any sort of consensus. One possibility would be to unwind the "color wheel" model, and ask how many dimensions it would have to incorporate in order that all its observable contradictions disappear. Much like experimental versions of Mendeleev's original periodic table, there are interesting possibilities for new spatial models for representing scents. Perhaps future models of smell will have to address similar orders of complexity, and the solution just hasn't been drawn up yet. Alternatively, there may simply be no way to represent visually the variability presented by scents."

from Notes on Scents

2. I recently read "Seeing Circles, Sines, and Signals", which is a very nice introduction to signal processing. Its novelty is the dynamic graphics to get a better intuition of the concepts.

Mar

9

Perhaps it would not be remiss to express some thoughts I had over night.

1. Friday was perhaps the greatest loss in wealth ever.

2. Extraordinarily rare since the 90s for both stocks and bonds down 200. Actually only once since 1999. That in 2009.

3. Useful idiots attribute it to revision in expectations of fed increases.

4. But actually the rise had nothing to do with that but had to do with discounted value of returns on capital and lowering of inflation targets.

5. Amazing that good news can cause so much havoc.

6. But the market is the market. It will do what it wants.

7. But of course the stock market vigilantes, and now the bond market vigilantes will make it do the rite thing, especially before election.

8. Ephemeral things can cause great consternation.

9. The threat is worse than the execution.

10. They got me big yesterday. I actually make a nice little profit in SPU by getting out at 10 am.

11. However, I lost big in bonds, very big.

12. One will have to be more careful as the markets rise to new highs again. 

Jeff Rollert writes: 

It felt more like a systematic deleveraging. A balance sheet shrinkage, on both sides.

Anatoly Veltman writes: 

I think there is an important element missing from all these statistics. A drop such as Friday's is felt big by an SP futures long, because the SP futures long is very leveraged, while his currency exposure (hedge) is straight cash, unleveraged.

On the other hand, the real one day depreciation is miniscule for a holder of US stocks - as USD gained so much on the day. Compare a holder of US stocks Friday with an EU or UK person who held no stocks but their cash in the bank - and that person lost plenty, without being Long of US stocks.

Hernan Avella comments:

Anatoly, the reason why it was indeed very big is because you did not have the buffer of buying bonds, golds or oil. Furthermore, the 50-50 theoretical portfolio lost big on Friday on top of a bad streak of 5 down days out of the last 7, and now it's slightly down on the year.Now, when one accounts for stock market appreciation over the five year period as strictly "fundamental", "value of returns on capital", etc etc - one yet skips over a harder to quantify element of market truth: that Central Banks, with their long-standing zero interest policy, have left little alternatives for world wide investors but to pour cash into stocks the past five years. Some of that cash hasn't gone all in based on fundamental projections, it's just gone in. Like in "market will do what it wants". Enter one of the current day hot factors: EU is in dis-array. There is a lot of European capital that isn't investing based on long term returns on equity these days…They are paralyzed in fear of what next shoe will drop. So corrections such as Friday's are inevitable

Mar

2

The best health related book I've read recently is The Long and the Short of It: The Science of Life Span and Aging by Johnathan Silvertown. It's relatively short but packed with good information and a good rhythm outlining the history of the field. The book is organized in short sections: Life Span, Aging, Heredity, Plants, Natural Selection, Suicide, Pace and Mechanisms.

The key evolutionary concept to understand is that at some point in the life span, because of the diminishing contribution that individuals make to future generations as they grow older, natural selection loses it's power altogether. Before that point, natural selection fixes the weakest of the big 4 links (immune system, the resistance to cancer, the resistance to oxidative stress and efficient insulin signaling), ensuring that cellular function is not vulnerable to failed maintenance.

There's also a nice chapter on plants and two major takeaways. First, there seems to be a correlation between slow growth and longevity. The book shows a nice experiment where they stress fast and slow growing plants and see how they fare afterwards. The other takeaway, particularly relevant to systems, is about the advantages (for longevity) of plants modular design.

More related to our field, It could be interesting to look at the concept of 'senescense' or deterioration of biological function as it pertains to the longevity of market moves. The book introduces Gompertz Law, which states that after certain age, the mortality rate doubles at a constant rate. Perhaps a line of research can include some counting of market moves older than X and see whether there are some patterns in the mortality rate (>50% reversal). Alternatively, instead of 'age' of the move, one could look at size, given the strong relationship between them both in nature and markets.

Jan

30

We can soon expect to hear the mumbo about how if January is down the market is likely to be down for the year et al. How many times does this have to fail before it loses its impact.

Rocky Humbert writes:

Feel free to call this "mumbo" — but there are hundreds of millions, if not billions, of US stock market positions that will exit if the market closes today below the 1960-2000 level. I am not predicting today's close and the probability of falling 40+ spu points is always very low (hence betting on this outcome has lousy odds).

However, I will predict with confidence that should these "stops" get triggered, you will be rubbing your eyes next week at the much lower prices you will see. 

Hernan Avella writes: 

What happened with the idea you championed back in December about the wisdom of the common man, that poured $36.5 billion into stock funds on Xmas week, marking the biggest inflows on record as U.S. stocks surged to record highs. Are those the positions that are looking to sell today? Enlighten us please.

Rocky Humbert writes: 

The "common man" will do just fine. It's the professionals who will be selling based on things such as this.

Anton Johnson writes: 

Wondering about the self-promoting Mebane Faber and his recently launched ETF buisness, I found this value nugget:

Cambria global value ETF (GVAL) return since inception (3-12-2014 till 1-28-2015) is ~ -19%.

'The Cambria Global Value ETF seeks investment results that closely correspond to the price and yield performance, before fees and expenses, of the Cambria Global Value Index[…]The Index next separates the top 25% of these countries as measured by Cambria's proprietary long term valuation metrics. The Index then screens stocks with market capitalizations over $200 million. The Index is comprised of approximately 100 companies.'

anonymous writes:

Meb Faber likes to look at 12 month moving averages computed at the end of the month. For S&P we have:


Date              Close

1/30/2015       ??

12/31/2014     2058.9

11/28/2014     2067.56

10/31/2014     2018.05

9/30/2014       1972.29

8/29/2014       2003.37

7/31/2014       1930.67 

6/30/2014       1960.23

5/30/2014        1923.57

4/30/2014        1883.95

3/31/2014        1872.34

2/28/2014        1859.45

You can verify that he would be bearish if the end of January value is 1959.125 or below.

This I believe is the source of Rocky's numbers

Jan

9

Investors in U.S.-based funds poured $36.5 billion into stock funds in the latest weekly period, marking the biggest inflows on record as U.S. stocks surged to record highs, data from Thomson Reuters Lipper service showed on Friday"

They forgot to highlight the 18 billion outflows the week before. I don't have access to this Lipper data feed, but it would be interesting to search for a relationship between inflows/outflows (values, changes, streaks) and prospective returns. Copper the public at all times?

anonymous writes: 

Check out trim tabs… .

Jan

2

The CME and the CFTC are doing a great job at destroying the market ecology by exterminating the 'spoofers' out of the futures markets. This clever species helps maintain the equilibrium of order flow by gaming liquidity asymmetries and thus keeping the population of naive momentum front-running strategies in check. It reminds me of the extinction and later reintroduction of the wolves in Yellowstone.

Ed Stewart writes: 

I can't see how spoofers are bad for anyone but the momentum front runners, as you suggest. There must be a "god given" right to jump in front of slower moving participants that we are not aware of. I'd love to know how the spoofing practice developed. My guess is it started as a counter-strategy to neutralize front-running before it became a source of profit?

anonymous writes: 

And "they" destroyed limit orders when they busted the trades during the flash crash. I guess front-running is the only virtuous and god-favoured strategy?

Dec

30

"Investors in U.S.-based funds poured $36.5 billion into stock funds in the latest weekly period, marking the biggest inflows on record as U.S. stocks surged to record highs, data from Thomson Reuters Lipper service showed on Friday"

They forgot to highlight the 18 billion outflows the week before …. I don't have access to this Lipper data feed, but it would be interesting to search for a relationship between inflows/outflows (values, changes, streaks) and prospective returns. Copper the public at all times?

Dec

22

The CME and the CFTC are doing a great job at destroying the market ecology by exterminating the 'spoofers' out of the futures markets. This clever species helps maintain the equilibrium of order flow by gaming liquidity asymmetries and thus keeping the population of naive momentum front-running strategies in check. It reminds me of the extinction and later reintroduction of the wolves in Yellowstone.

Dec

2

Here is an interesting article about hacking passwords: "How Crackers Make Minced Meat Out of Your Passwords". It has an obvious relationship with counting.

"It's all about analysis, gut feelings, and maybe a little magic," he said. "Identify a pattern, run a mask, put recovered passes in a new dict, run again with rules, identify a new pattern, etc. If you know the source of the hashes, you scrape the company website to make a list of words that pertain to that specific field of business and then manipulate it until you are happy with your results."

Nov

30

Foxcatcher for me was highly thought provoking and educational on many levels.

1. It records the decadence of one man John Du Pont who was born to wealth, once his interests in ornithology, philately, and conchology receded.

2. It shows once again the violence that people without opposite sex partners are prone to. (apparently he killed Dave as a birthday present to a rival wrestler).

3. It shows the great composure, and consciousness, as Brett would call it, of Dave Schultze who never lost his cool during all his aggressive bouts winning the Olympic gold and world gold while maintaining a truly benevolent attitude towards his life and students.

4. It shows the athleticism and sports genes of a truly great athlete in Mark Schultze who was always in the brother's shadow even though amassing the same golds, and adding an ultimate world to his laurels.

5. Once again the seed of the problem was the the Wrestling association like all official bodies tends to impoverish it's customers while enriching themselves thereby leading to the poverty of Mark that made him bend to the will of a crazy man as the only way to make a living while training to compete with the state sponsored athletes.

6. It reminds me of what the USSRA was like when I was in a similar situation to Mark, the best with no money and the USSRA watching me like a hawk to see that no prize with the rise in the price of gold amounted to more than $150.

7. It shows what good actors can do under the stewardship of a good director, the actors being Steve Carell, Channing Tatum, and Mark Ruffalo. They had to work out strenuously for 7 months to perform all the wrestling scenes in verisimilitude and live action.

8. It shows the subtlety of Bennett Miller who directed Moneyball and is obviously a fellow traveler in leaving the output of the movie to the viewer without knocking him on the head with hateful depictions of the rich, albeit to insure good reviews he had to make Du Pont look like an idiot for his patriotism.

9. It has real wrestlers and real footage to carry the story along.

10. the one thing left out to me was the strange case of why the security head who accompanied John on his fatal shooting didn't try to stop the shooting. Also, why Dave stayed with John for 7 years after the brother was ostracized. The humiliating spectacle of Mark staying on living rent free after being fired but being paid shows how money is so important in shaping a destiny. It's a highly recommended sports film.

Victor Niederhoffer adds: 

Here is some good skinny on the deranged man with money who was able to buy the wrestler's loyalty. There are many Jewish proverbs about this: a rich mans jokes are always funny; if you have money, men think you are wise, and handsome and sing like a bird.

Ed Stewart writes: 

The idea that the "amateur" restrictions on money making opens a window for freaks and weirdos to get leverage that they don't deserve is a good one. I have though that to some extent the same process occurs in political funding. The amount of leverage that, say, $25m can get is astonishingly out of proportion to what seems logical.

Another thought: can accommodating nutty behaviors or antics actually accelerate or provoke the insanity? I think so, I think I have seen it. And there is a clear line between expressions of individuality and self-destructive antics of a pending madman.

Some behaviors cry out so loudly to be corrected, it is almost as if the person in the downward spiral is dying for someone to set a limit for their antics. If there is no pain or reaction, (the real world) the aberrant behavior grows unchecked. In that sense humoring such a person might ultimately be a very cruel act. 

Hernan Avella writes: 

One aspect of the movie that is touched only tangentially is the decline of the sport of wrestling. These great athletes compete at the highest levels in their twenties and then it's all over and the best thing they can aspire is to be a coach in a reputable college wrestling program. The final scene shows Mark in a cage fight. He participated in the Ultimate Fighting Championship #6 and won his fight and $50K. Capitalism has open a window for wrestlers to transition into a profitable business or continue their careers through Mixed Martial Arts. It's a truly barbaric sport, but the consumer likes it. I have the utmost respect for cage fighters, who not only have to be highly proficient in wrestling, but also Brazilian jiu jitsu, boxing, Muay Thai, and many more arts. Thanks for the recommendation. Great movie.

Aug

28

I took part in the Chicago Triathlon. One of the highlights was witnessing american enterprise at its best. It's a very efficient system working for a piece of the aspirational consumer disposable income. The evangelizers (using their own but also academic research in psychology) increase the popularity of the sport through the media outlets and the elite athletes. At the top level the message is about health and self-improvement. Quality of life is so high these days, that we crave for activities that simulate physical struggle. They also disseminate technical views and advice, which by definition are in favor of newer and more gear. Every part of the sport gets highly specialized, horizontally and vertically, following the professional circuit. It's a matrix of time (training, pre-competition, competition, post-competition) and technical component (nutrition, recovery, gear, literature, tourism). Every component gets subdivided more and more to create diversity of demand and add new lines of businesses. At the end of the day everybody is happy.

Jun

24

We all know by now that one of the main purposes of the market is to create more flow so that the public can do the wrong thing. The market accomplishes this in a infinite variety of beautiful ways. One of the unobtrusive ways is through colors as in the Peacocks tail. The various quote machines flash red when down on the day and green when up on the day. Many markets, much too many for chance, flash from red to green incessantly until they attract your notice and lure you into an unprofitable for you trade. Right now Crude has flashed red to green to red about 1000 times in front of one's poor wherewithal.

Art Cooper writes: 

This is straight out of Las Vegas's playbook, where the slot machines ("One-armed bandits") are set up to maximize flashing lights, noise, etc. especially highlighting the (very rare) payouts.

Hernan Avella writes: 

Yet, it is remarkable that participants keep depending on the same limiting media tools which shape their understanding of the system. I watched this video from a leading computer programmer and it got me thinking about the possibilities if one steps out of the conventional offerings. I'm convinced that one has to design their own tools to watch the market, given our propensity to fall for deception and traps, specially of a visual kind.

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