Aug

8

A Currency Note is akin to a Time Insensitive Zero Coupon Bond with zero regard to the idea of Inflation. Whether you present it now or a year later the Promissory Note that a Currency Note is will provide you with goods or whatever you have agreed to obtain against it at the face value that day.

Over simplification being a standard problem of modelling, the diversification with cash idea propounded by Markowitz is a numerical illusion. Since the face value of cash does not change it dampens volatility. We understand high school level Mathematica. Thank you very much Mr. Markowitz for showing us how by doing nothing one can reduce risk. I as a student of markets am interested in figuring out how can I reduce my risk while I am still doing something.

Yet, things could have been still tolerable had the negative rate of return on cash implicit due to unavoidable inflation would have been plugged in somewhere in the diversification model.

Holding cash for dampening volatility for a very short period of time is fine. But then Portfolio Management is such an aggrandized term that traders cannot even come remotely close to it and has to be a long term religion. How does anyone ever reduce risk by holding onto a guaranteed to lose investment in their portfolios?

Using even my high School standards only Maths I cannot accept to believe ever that cash that keeps getting trashed over time in value will ever add anything but negative returns in my portfolio and even if a theoretically flawed calculation of a dampened volatility is accepted as still correct then too bring me to a higher utility curve.

The higher investment utility curves built using cash to me appear similar to claims of reaching higher states of consciousness by starving. All I have known people reaching is altered states of consciousness by starving.

Hold cash and starve. Simple. Why do I need a celebrated model and an entire marketplace revolving around such a flawed reasoning. Well I need this since without such mass hysteria, where is the money to be made?

Mr. Krisrock writes: 

Cash is a proxy for the currency… that's why the Japanese bond market can be among the best performers despite near zero rates. Smart bond men are willing to accept zero if the total return is simply the currency appreciation. Ask John Taylor he called all this…

Sushil Kedia replies: 

I cannot agree more with your point here. Accepting zero interest is fine if the interest rates on other currencies are higher and thus the currency in which the zero interest rate bond is denominated will appreciate.

Yet that is a different point.

I am only crying over the years consumed in living with Portfolio Theory that was drilled down my brains in the MBA days.

Aug

8

There are some benefits to higher rates that are never mentioned, which I think will and should happen, things like yield curve flattens. For the $100 billion it will cost the gov, there are those who benefit by equal or greater amount.

It's good for savers like retirees and depositors. Good for currency, maybe. Our dollar depreciation could slow or reverse. Could be a catalyst for corporate and housing activity, i.e, "if rates are going up soon, better invest, buy xyz now, not later". Banks may be more interested in actual corporate lending if treasuries spread narrows.

Higher rates and higher GDP are not mutually exclusive. End to the zero interest rate experiment, which just seems wrong to me, and easier to run discounted cash flow models without having a zero in the denominator.

Aug

8

If there has been one consistency in the past two weeks, it is that market reactions have been the opposite of what might be logically expected. I look around three times when I say that for fear that reactions will now switch to the obvious.

Alex Castaldo adds:

Another example today 2011/08/08: The newly downgraded 10 Year US Bond went down in yield by 24 bips.

Aug

8

Stocks should have rallied (and stayed rallied) but didn't on Friday because insiders (as some say, flexions) knew the S&P downgrade was coming. On Monday stocks will rally (perhaps after an opening down move) because the S&P downgrade is meaningless.

As a matter of fact it is bullish, because the only meaning it will have is in the Presidential election where Obama will now lose because the Republicans will constantly beat him over the head that he lost the US's AAA credit rating. Something clear that the public can understand and focus on.

Aug

8

All that money flooding into that NY bank so they charge you for parking it there — boy, did we all miss that one, what a tip-off in retrospect to the S&P downgrade, connected money dumping bonds and parking cash to avoid Monday morning.

Aug

8

As the Chair so properly puts it, the S&P downgrade is a shot across the bow. In their own words (see S&P: "US Credit Rating Lowered" ).

Aug

8

Let me try a different format for the "surprise vol" days:

With so few "starts" of volatile periods fairly balance outcomes and over so much time nothing too hang a hat on. Unless that is the lesson.

Surprise Vol.

   Concurrent Day   
Inter Day Vol  Count   Positives Average    
>2.75%           6      1       -2.55%        
>3.00%          11      1       -2.54%       
>3.25%          10      1       -2.67%       
>3.50%          10      2       -1.71%        

Next Day
Inter Day Vol    Positives Average    
>2.75%           2         -0.47%    
>3.00%           5         -0.13%     
>3.25%           3         -0.40%     
>3.50%           5          0.19%     

Next 63 Days
Inter Day Vol       Positives Average
>2.75%                4         0.97%
>3.00%                5        -4.06%
>3.25%                4        -3.64%
>3.50%                6        -1.01%

Aug

5

What giants these men of the 1920s were. Harold Thayer Davis, who wrote The Analysis of Economic Time Series , Herbert E. Jones who quantified the distribution of runs in [stock markets and] weather, and [Louis] Besson in The Monthly Weather Review and Cowles himself, who would probably shudder that Shiller holds a chair at his namesake foundation .

Alex Castaldo adds:

The famous 1937 Cowles and Jones paper "Some A Posteriori Probabilities in Stock Market Action" is available online.

The Besson paper "On the Comparison of Meteorological Data with Results of Chance" apparently is not.

Aug

5

It is interesting to contemplate that we have gone through two round numbers of 100 like from above 1300 to below 1300 to below 1200 without a rise above 1300 only 3 times in the last 15 years. On one of those occasions on 11/11/2008 the market dropped from 1196 to 893 to set its negative sequence; i.e, it was at 893 when it set the sequence. Subsequently it jerked around a bit before its inevitable rise. I call these things negative sequences in honor of Alfred Cowles who first studied them in the 1920s. I had the pleasure of corresponding with Cowles in the 1960s and he was very forthright in saying that after corresponding with me, he understood why his fills were always so bad.

Aug

5

It's strange that traders work so hard for days during calm seas to make 5 or 10 pointers, yet they always fear at any moment that a twister can kick up a dust storm and destroy the month. Yet, in a panic a trader gets lucky and is up 10 points in 10 minutes, or up 20 on a random number generated news story, and you almost have to reach through the data feeds yourself to get the guys to sell.

It must be why some fighter jets have 2 men in the cockpit and race car drivers are totally dependent on their spotters and radio.

Aug

5

A section of this brief Reason TV video on Matt Damon went viral.

Memo to Matt:

Matt, as for that "lousy cameraman" (Jim Epstein), would you fire him if he were shooting your movie?

No, I'm sure you'd keep him on because his salary is "shitty" compared to yours. And besides, firing people is what CEO's do!

Matt, I'm sure you send your kids to public schools. Exercising school choice–which charter schools and vouchers might allow poor people to engage in almost as much as rich people like you–is also striclty for the CEO's of this world.

*Please *don't tell me you send your kids to private schools! Isn't that what CEO's do?

Gene Epstein
Economics & Books Editor
Barron's

Aug

4

Dear Dr Niederhoffer,

I refer to your article "A Shocking Concatenation" :

Yesterday's action was unusual in that it was a big up opening, but down consistently from the opening. I find that such a condition has never occurred before, although it all seems quite reasonable and de rigeur. What other seemingly normal things hardly ever happen, thereby violating the random walk?

This is an unusual and rare condition indeed, and seems to be occurring today again. Last time it marked a pronounced cycle change with a low being made the following day. I remember writing a little on the possible change of cycle, to which you agreed however also pointed out that one sparrow does not make a spring. Perhaps today is another example of such a cycle change — in any case I thought I'd highlight this for you as it is such a rare occurrence (perhaps only the third time in ten years) and we are in need of more statistics on such a condition.

Also, perhaps the fall in Euro today is the beginning of a LoBagola move back through the highs at 1.45 and 1.5…

Kind regards,

Tom Blackwood

Aug

4

Some were saying to expect a big decline in case a debt deal would not occur. A failure to compromise was the "bad news". Eventually a compromise was found. An impressive bear trap was set up. Markets opened sharply higher and accelerated to the downside. So it seems that actually the "bad news", as the markets perceived it, was the done deal. The news is that Mr Market is finally reacting negatively to bad news. It was right about time. Today it went down because there are concerns about a "weak economy"… when over the past months nothing could shake the dip buyers' confidence. The game may be changed. I think a new cycle has emerged and we'll have to study and find new patterns and behaviors. But how many points does the S&P have to go down before they offer another stimulus?

Gary Rogan writes: 

It is true and I even mentioned it earlier today that "a failure to compromise would be terrifying" was one of the big lies our sadistic fascist government has promulgated. I refuse to believe that that in itself was a bear trap. Why? Because it was clear to anyone with an ounce of common sense that while the Republicans had ALL THE CARDS to completely stop the insanity HAD THEY HAD THE WILL (how? by simply refusing to extend the debt limit NO MATTER WHAT) they DID NOT HAVE THE WILL, at least not to go through a few days like today while being blamed for them and not capitulate. So in some sense they HAD NO REAL CARDS, and thus the bear trap would have to be for very innocent bulls, more innocent than one can credibly believe in.

The deal in itself had no effect in my opinion. The market is a very imperfect predictive device in that it acts on emotion at least as much as on the information. A few days of turmoil and orderly declines did indeed shake the confidence enough so that the market finally had an excuse to react to the bad news it has known for a long time, weeks or months. The reversal yesterday gave an excuse to call the end of the improbable down run sequence. The Roadrunner suspended in mid-air for a few moments after running past the edge of a cliff comes to mind.
 

Aug

4

george riceI don't think football is good for life expectancy. I believe it killed my father. It shook up all the muscles as well as the broken nose 17 times (no helmet visas) in those days, and that sent a signal to the body to do him in at 64.

Russ Sears writes:

While there is some merit to what the chair is implying about being hit so many times. The bigger issue for most people is the weight lifting and with it the weight gain. Most high schoolers do not have a clue the bargain they have made by bulking up at that young age. It is very much like a high school kid taking a 30 year mortgage on a McMansion. Yes, some of them will enjoy both the lifting and cardio enough to be able to afford the time commitment it takes to maintain a healthy buff body all their life… but most after bulking up have trained their adult body to be a certain weight. This weight is only healthy if it is muscle weight, but most will not be able to maintain the muscle and revert to fat or left with a life long battle of combating weight gain. Cardio health will kill and debilitate many more before there time.

While I don't have the number handy, I believe the actuarial stats will show this for all levels of football.

 

Aug

4

Hi Victor,

I attached a recent find which you might be interested in reading, Story of a Speculator written by Arthur Cutten. The book form was a private publication but originally was a three part serial in the Saturday Evening Post published in late 1932. There are many similarities between Cutten's views and your editorial, The Speculator as a Hero.

Perhaps you are already aware but if not, Cutten swung such a large line at the CBOT in wheat that it prompted the gov't to begin position limits in futures.

I'd also like to apologize for taking "french leave" from the Spec list almost two years ago now. Originally it was meant to be a short break to aid my focus throughout the day by having less distractions from the trading screen and it's worked so well that I haven't joined back up but still follow DailySpec. The education and friendships I formed from the SpecList were amazing and I'll always be grateful to have been a part.

Thanks again and I hope you're doing well,

Ryan

Aug

4

Dr.  Gary Jason will be talking at the NYC Junto tonite August 4, 2011 at 7 15 pm at the Mechanics Institute 20 West 44 th street, NY NY on " what's wrong and right about education".                                       

Aug

4

Traders are so convinced it's all rigged so we get this comment from a chartist.

"Can you believe this is the low of the day.. that can't be a coincidence."

SPX Low 1,234.56

Aug

4

The last push down on the S&P 500 futures contract [at approximately 10:30 am EDT on 2011 August 3] ]was turned back almost exactly 10% below the adjusted May 2 high.

Aug

4

Louie Gohmert, Connie Mack and Mike Lee are no more heroic for voting what their constituencies want than the City Council of San Francisco is heroic for deciding that orthodox Judaism is the one religion not entitled to the protections of the 1st Amendment (of all the health issues confronting our formerly free city the question of circumcision has somehow become the burning issue). Clearly, the voters of the United States have chosen to have the country follow a course that will allow most of the recipients of government money to keep getting their checks. What else could have been expected? The only question was whether or not even lip service would be paid to the notion of a balanced budget. Until now, under both Republicans and Democrats, Congress has worshiped at the altar of the Keynesian religion; as Nixon said, everyone agreed that somehow money printed and circulated in the proper digital form would increase actual wealth.

The present legislation at least questions the God of free money; it does not do much to end the abomination, but it is a beginning - just as the Northwest Ordinance was towards the abolition of slavery. The vice of all government - the taking of property in the name of the law - was not going to magically end in the United States because Rick Santelli had an inspired rant on CNBC and the Democrats once again tried to nationalize health care. Those of us who voted to have lip service paid to the ideas of economic liberty will take what we have gotten and then, as Samuel Gompers advised, ask for much more.

P.S. It always delighted me that Gompers and Andrew Carnegie were buried nearly side by side in Sleepy Hollow cemetery.

Aug

2

Several recent internet articles mention that many banks are making the decision to tear down low value foreclosed properties. It looks like an accelerating trend.

Demolition companies, track hoe rental stores , waste haulers, and waste disposal companies would appear most likely to benefit immediately from this business. Using the bulldozer to improve the bottom line:

"Bank of America had 40,000 foreclosures in the first quarter, saddling the Charlotte, N.C., lender with taxes and maintenance costs. The bank announced the Cleveland program last month, has committed as many as 100 properties in Detroit and 150 in Chicago, and may add as many as nine cities by the end of the year, said Rick Simon, a company spokesman.

The lender will pay as much as $7,500 for demolition or $3,500 in areas eligible to receive funds through the federal Neighborhood Stabilization Program. Uses for the land include development, open space and urban farming, according to the statement. Simon declined to say how many foreclosed properties Bank of America holds."

Read more here.

Aug

2

One disability many of us face is clinging to unusual or untested beliefs to explain what is seen. It is hard not to be influenced by superstitions and attachments to ideas.

Perhaps a deeper cause may be found in another statistic: 70% of Americans still do not understand the scientific process, defined in the NSF study as grasping probability, the experimental method, and hypothesis testing.

- excerpt from Michael Shermer's The Believing Brain

Aug

2

For a 1 year period the S&P is up about 15%, while the KBE (market cap bank ETF) is down about 7% and GS is down more than 10%

"Men enslave themselves, forging the chains link by link, usually by demanding protection as a group. When business men ask for government credit, they surrender control of their business." Isabel Paterson, “The God of the Machine”

Perhaps the markets have recognized the too big to fail investment bank have become little more than union shops…running and existing not for the stockholder/owners but for the employees and the politicians. Government can print more and more money, but if the sole idea of the bank is to continue to exist not to take risk unless it help politicians; then the money printed will continue to only flow to the flexions The government control what business risks can be taken and the answer so far has been “None, we only want guarantees, banks cannot fail”. The circularity of the “what risks should the too big to fail be allowed to take?” question escapes them.

Aug

2

In the two and a half months from the end of the intense reporting period for first quarter earnings (April 30) to the beginning of the reporting period for second quarter earnings (July 15), the S&P 500 futures declined 2.9%. During the intense reporting period for second quarter earnings (July 18-29), the S&P 500 declined 2.0%.

Declines in both the earnings reporting period and the preceding 2 1/2 months have occurred only 9 times in the last 22 years. The following 2 1/2 months were up in 4 of the 9 instances, with an average loss of1.7%.

Earnings End    Change to next
Date            earnings begin date
  1/31/1990          4.1%
  7/31/2001        -10.4%
 10/31/2001          8.2%
  4/30/2002        -14.6%
  7/31/2002         -3.2%
  4/30/2004         -0.2%
  7/30/2004          0.6%
  1/31/2008         -3.3%
  1/30/2009          3.6%

Aug

2

I found the article "The Optimism Bias" by Tali Sharot very interesting.

Our brain is hardwired for hope. The brain evolved over the ages to look positively into the future. Even in bad outcomes our brain tends to find some positive conclusions. There is a neural mechanism that generates optimism:

…these precise regions - the amygdala and the rACC - show abnormal activity in depressed individuals. While healthy people expect the future to be slightly better than it ends up being, people with severe depression tend to be pessimistically biased: they expect things to be worse than they end up being. People with mild depression are relatively accurate when predicting future events. They see the world as it is. In other words, in the absence of a neural mechanism that generates unrealistic optimism, it is possible all humans would be mildly depressed.

I try to draw some parallels with trading. Most traders tend to look positively to news and expect positive outcomes to challenges. This could explain why buying a dip is more successful than selling an expansion of price to the upside. It explains also why crashes catch by surprise the optimistic herd, that continues to look positively into the future although all the elements are there to understand that things are very bad. Only a few "mildly depressed" investors manage to sail macro and micro events maintaining a good understanding of what is going on. (I am not sure whether this is good or bad news because it is not very exciting to be "mildly depressed" in order to make money…).

"How do expectations change reality? ….. To induce expectations of success, she primed college students with words such as smart, intelligent and clever just before asking them to perform a test. To induce expectations of failure, she primed them with words like stupid and ignorant. The students performed better after being primed with an affirmative message". “Expectations become self-fulfilling by altering our performance and actions, which ultimately affects what happens in the future. Often, however, expectations simply transform the way we perceive the world without altering reality itself.”

The majority of the people display optimism (which is generally considered as a winning attitude), but they are surprised by negative events that happen more often than not. They take risks because they see a bright future and are self-confident. They make more mistakes (and win less frequently) than pessimists although being positive can improve their results and their performance. When few of them win, they win big.

At the same time it is hard for pessimists (which are are seen as "losers") to be surprised. They analyze all the various scenarios, especially the negative, and are ready to cope with them. They see the world as it is. They make less mistakes. They tend not to take risks because things could easily turn bad. They have more winners, but have a lower average winning trade. Their results are less volatile. When they are caught by surprise, it is very, very painful.

Aug

2

Did you read (and comment) the article Ten Reasons Why China is Different by Stephen S. Roach?

It appears the Yale faculty member of MS-Asia is attempting to sell a stale bushel of IB produce…

May be worth publishing here that which the commentator (vn 05:28 31 May 11) wrote in response to Roach a la "ten reasons why Stephen Roach is wrong…" [Ed.: we don't know the identity of the commentator].

"1. China's financial sector is in a mess. Read "Red Capitalism" by Carl Walter and Fraser Howie. Banks have been going through multiple recapitalizations but there continue to be piles of debt accumulating in a range of Ponzi schemes that would make the traders of Goldener Sacks and Lehman Brothers blush. And just as the global financial crisis came from nowhere, so will China's.

2. The seemingly wise, strategic, and committed leadership of the communist party that Roach so extols is as prone to crony capitalism, corruption, nepotism, and political patronage as the most capitalist societies. The state-owned corporations and banks of China are being carved up between communist party leaders, their families, relations, and friends.

3. The aggrandizement of China's export success as an example of superior strategy and impressive competitiveness actually rests on ever-increasing subsidies through low prices for energy, land, capital, water, and the environment, a labor force kept suppliant by the communist party, and an undervalued currency.

4. Continued high investment rates are being achieved by taxing households through a plethora of channels — including low interest rates, wages well below marginal productivity, and the delivery of health and education services at exorbitant prices.

5. China's gleaming cities have been built by migrant workers with no access to health, education, or housing services. Urban areas conduct a discreet form of apartheid where access to basic services depends on where people are born. (The so-called  户籍   system).

6. Inequality in consumption and income are rising — and inequality of asset ownership is probably at stratospheric levels. Yet popular discontent is repressed.

7. As a senior communist party official once remarked, China has privatized its government. It can no longer tell the difference between a public or a private good (or service). Most government departments and agencies have become profit centers, even the PLA. The China Banking Regulatory Commission — responsible for regulating China's powerful banking system — relies for its budget on the banks it is supposed to oversee. As it is, information asymmetries are powerful in banking — the incentives implicit in the Chinese supervisory system make them virtually insurmountable. The conflict of interest in the west’s credit rating agencies pale in comparison to the practices in China.

8. Mercantilist policies have created an accumulated environmental deficit that will take years to remedy – although the chances of reforms in this area are low given the close family and patronage ties between heads of large (polluting) firms and senior leaders in the party. Vested interests in the current arrangement have become very powerful.

9. The practice of “pragmatic, incremental” policy changes that China so prides itself in has created a complex web of interconnected policies, laws, guidelines, practices, and informal arrangements that make it very difficult to untangle. Even if the Chinese know what they want to change, they are not sure how to do it. Recent shortages in energy availability are a case in point. Power generation plants have had to close because of losses caused by high raw material costs and low administered energy prices – but raising energy prices would hurt energy-intensive industry; and raising public subsidies through the budget or banking system run counter to the government’s efforts to withdraw economic stimulus at a time when inflation is high and rising.

10. Encouraged by the success of the stimulus package, the government’s further encroachment into economic decision making by firms and individuals is moving in the opposite direction to where it should be going – if it is to become an innovative, flexible, and dynamic society. China’s leaders are drawing the wrong lessons from their past success. They believe it was because of the government’s superior decision making ability, when in reality it was because of the strength of markets."

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