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

29

Tony Hawk's body, according to Hampton Sides, looks like barnacles cover his hand. he has broken every bone in his body. He looks with disdain upon anyone worried about a broken arm of some such.

Often the last second of a market session changes the whole complexion. for example at 4:15 et on May 25, the S&P was 4150, near a 20-day low, but then Nvidia was announced. and in two days the S&P changed course rising to a 20-day hi at 4230. query: did the move have anything to do with zero-day expiration options?

books read and highly recommended this weekend: Darwin's Dog: How Darwin's Pets Helped Form a World-Changing Theory of Evolution by Emma Townshend, Trees: A Complete Guide to Their Biology and Structure by Roland Ennos, and Political Geography by Martin Glassner and Chuck Fahrer.

Darwin to Galton in a letter of 1840: "I am studying minute unimportant things while you are dealing with Big things like Rhinoceroses and Hippopotamuses." Darwin relied on a Galton cousin for breading info on cattle and dogs.

Only a small part of a tree's biomass is capable of photosynthesis, but trees are excellent competitors for light. They hold their leaves above all plants and shade them out. How is that relevant to the best performing nasdaq stocks in last 6 months having superior performance by end of year?

did Miami let it's guard down with 1 second to go into going after rebound? instead of high fiving, as is the custom when a crucial shot is made or missed, should Miami have been on its guard and fighting for the rebound until the end?

The ending of the Celtics game reminds one of the many astonishing wins that Tom Wiswell pulled out on the last move frequently a 2-against-3 win for Wiswell.

with by partisan wins like this, McCarthy must have regulatory capture forecasted for 2024 at a max. that's what the big boys want.

Biden says budget deal reached, takes ‘catastrophic default’ off the table

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May

23

i thought i had played every racket game but Susan showed me a new one she saw when in Croatia with many grandkids: handball in the water with a water ball. apparently you have to wear very tight speedos when you play. Reminds me of Palindrome.

apparently beach ball is more popular than pickle ball. a ridiculous mutant game to me. but it does teach you correct pronation for serves. all players really get the racket way back with terrific torque on serve. problem is no one can return serve.

most gentlemen don't like bonds even after 7 in a row. happened 7 times since 2011. only a speculation - no evidence to support it - but to what extent are the sequence of 20-day lows in bonds designed to help the perfect father get a face saving deal?

an agrarian plies her trade somewhat shamelessly:

Yellen Warns Again That the U.S. Could Default as Soon as June 1

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May

22

excellent book read over weekend, highly recommended: Friedrich Hayek: A Biography by Alan Ebenstein, and Freedom's Furies by Timothy Sandefur. the Hayek book introduces my to Edwin Cannan, and Friedrich von Wieser. I learned many things, eg Oskar Morgenstern was part of Mises circle.

Hayek's theory of business cycles very relevant to today, depends upon fed keeping interest rates too low and early stages of production being replaced by consumers.

Finale: Late Conversations with Stephen Sondheim a book that makes you feel ugly after reading it. Sondheim such a bad persona but good on harmony.

Sondheim in a typical gesture cuts off New Yorker interview after 3 months and 48 hrs of interviews because interviewer asks him about Webber.

an agrarian shamelessly boosts the perfect father: JANNET YELLEN SAYS ODDS OF PAYING ALL BILLS BY JUNE 15 `QUITE LOW'

bonds with 7th day down in row refusing to bail those who are stuck with problems so far.

one of Hayek's major points was that gov planning leads inevitably to total restriction of consumer choice. what do we have now saving us - gas stoves, electric cars, air conditioning, tipping - what else?

Vic's twitter feed

May

20

the more he's complicit, the better he does, and the better for market. when I won a number of National tournaments in a row, not one fan in gallery was rooting for me. Reminds one of reason that S&P is bullish despite. some excellent ideas about unanimity in favor of the idea that has world in its grip (very favorable for S&P) in Holman Jenkins article in wsj today:

John Durham’s Report and a Presidency in Crisis

anything to help Mr. Perfect (the good one forbid they should violate their institutional preferences):

Fed Officials Face ‘Loathsome’ Playbook for Debt-Ceiling Standoff

one posits that 5 or 8 of the NASDAQ 100 always account for majority of move. that's the way of all distributions especially normal and what they used to call Pareto. and why would it be bad if it's greater than usual?

thing missing is all fellow travelers asking when S&P will hit an all-time high. others who refuse to adjust to change wonder how S&P can go up while the perfect father improves his odds every day. ask the 3-letter agencies, the professional sports leagues, and the consumer bigs.

a personage who has never had an economics course and is a master at sucking up to the current boss talks about the separation principle and the lags in policy. sounds good. now the Brooklyn acolyte must say how important raising the debt ceiling is. a 1-2 punch.

it would be good if someone on the favored side of the aisle were to reduce centralized influence on individuals ability to choose.

a shocking anomaly: the perfect father actually for once loses prob of winning on grounds that laundering thru 19 companies is worse than improprieties with the opposite sex. that's the only explanation for why we are not visited with another 20-day high in S&P.

Bidens Used Web of Shell Companies to Conceal Foreign Cash, Bank Records Obtained by House GOP Reveal

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May

18

Many meals for a lifetime in this long interview with Sam Zell, which starts at about the 7:35 mark.

Historical insight: His father and mother escaped from Poland to Lithuania as the Germans were invading in 1939.

His father had been getting ready to leave because he saw what was coming and he tried to convince his extended family to leave, too, but their view was that life had been better under the Germans in WWI than it had been under the Poles, so it would be better to stay.

Zell's father had been paying attention to what had been happening in Germany, but he couldn't get them to join him.

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.

May

18

‘Like a chairlift up Everest’: Once running’s supreme challenge, has the value of a four-minute mile diminished?

"[Peter] Thompson has previously worked with running brand Hoka to develop carbon-fiber-plated shoes and delivered a workshop on the performance-enhancing effect of “super shoes” and “super spikes” – as they are now ubiquitously known – at the World Athletics Championships in Eugene, Oregon, last year.

The carbon plates, Thompson says, function as “spring-like devices” and give runners more energy return compared to traditional shoe models.

According to data he collated, between 30 and 38 athletes competing in NCAA Division I indoor track races ran sub-four-minute miles each year between 2015 and 2021; that figure has increased about three-fold over the past two years to 90 in 2022 and 97 in 2023, he says."

Larry Williams responds:

I've been running is these [carbon-fiber-plated shoes] for 2 year. not sure about bounce but much easier on your legs = better endurance.

May

13

The playoff images and all other games illustrate one of the fundamental principles of a successful life: Never put all your eggs in one basket - the mouse with one hole is quickly taken. essential for market success also.

the Knicks relied on Brunson exclusively - the Warriors relied on Curry exclusively with wristy shots with no hope of subsequent action. when the wristy shots failed, they were gone. What other illustrations of this principle do you have?

How is this related to market sense? a million ways. the foremost is never go for a regularity that leaves you with one exit based on a singular event. don't go for short term profits. what else?

Vic's twitter feed

May

10

Character(s)

May 10, 2023 | Leave a Comment

most gentlemen don't like stocks.

Most Gentlemen Don't Like Love

How to Succeed in Business Without Really Trying (1967)

the worse the polls, the better the odds - like the market - the worse it looks the better it is.

gas stoves, eternal flame, air conditioning, what else? how has consumer's ability to choose been restricted, and how does this cause inflation? lady follower at the treasury can always be counted on for support of expansion of direction from above.

two biographies of great men: one leaves you sick, A Most Remarkable Fella: Frank Loesser and the Guys and Dolls in His Life: A Portrait by His Daughter; the other Theophilus North by Thornton Wilder.

Loesser was a great composer, of Show tunes, lyrics, and popular songs, but the book doesn't say anything about how he composed the music, the harmony, rhythm, melody, et al. but we learn about his drinking, smoking, womanizing, and chiseling all his players. Mien was similar to Rogers.

Loesser was a great business man - similar in all his personal characteristics to Rogers. Wilder on the other hand was always helping people, didn't drink, and teaches you about Goethe, Shakespeare, Goldsmith, Homer, Bach, and other greats.

one of the problems of a malfeaser is that when your associates know about the bad deeds, you can't say no to them. It is for this reason that the shrewd palindrome who I worked for intimately for 10 years was very careful not to involve or disclose to me any such deeds. Those currently in high office have a similar monkey on their backs.

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May

10

Lately I have seen a lot of "sell in May" analysis with this being a good example:

Chart of the Day: Sell in May S&P 500

So I looked at all SPY years and calculated the returns for two periods: (1) "summer", end of May to end of October, and (2) "winter", end of October to end of May:

For owning "summer", $100 became $186.
For owning "winter", $100 became $790.

Seems like a clear victory for "sell in May", except for what they always leave out: buy and hold over the whole period turns $100 into $1474.

H. Humbert adds:

It's obviously a much more ridiculous idea if you consider capital gains taxes, which would be short-term if you truly buy and sell for the winter.

Jeffrey Hirsch replies:

Issued my Best Six Months MACD Sell Signal on April 25 for Dow and S&P. Everyone gets so hyper focused on "sell in May", they forget to "buy in October and get themselves sober," as I like to say.

I tweeted on this last week.

Larry Williams provides perspective:

Never forget: Prior to 1950's best was to buy in may to make some hay….Long gone but once in the data.

Jeffrey Hirsch responds:

Thanks for the Reminder Larry! So true. Here's the chart I use to make that point:

Steve Ellison writes:

For any seasonal pattern, I ask, "Who is the sucker at the table who will buy too high at one time and sell too low at a different time?" And do said suckers have a reason to continue their behavior into the future? The late Mr. E said that a lot of money flows into the stock market at the beginning of a new calendar year as, for example, high-income people who maxed out their 401(k) contributions the previous year can resume.

There was an annual cycle of profitability at the multinational technology company where I worked for 20 years; conveniently, their fiscal year end of October 31 aligned exactly with the Best/Worst 6 months thesis. First quarter, ending in January, was usually strong as it included both the Christmas season and the end-of-year "budget flush" in which corporate managers had to spend any surplus lest their budgets be cut the next year. Second quarter, ending in April, was also usually strong.

Third quarter, ending in July, tended to be a bit weaker as summer started. Fourth quarter, ending in October, was a mixed bag as back-to-school selling season was offset by European businesses mostly shutting down in August. But with commissions and bonuses on the line, the sales force would work 24/7 in the second half of October to close deals and bring in a strong quarter.

Additionally, with third quarter results being reported in mid-August while Wall Street was in the summer doldrums, the company was disproportionately likely to report any major writeoffs or other bad news in the third quarter.

May

7

there is a shibboleth among scientists that if an effect is true, the greater the magnitude the more likely it is to hold. nothing can be more detrimental to the market player. the intricacies of deception that the market plays are even more ingenious than those played by spiders and other animals and insects.

some pickleball thoughts: In Brooklyn, especially Brighton Beach from 1930 - 1977, a game almost identical to pickleball was played by thousands including my whole family - it was called paddle tennis and played the same in New Zealand.

the game was very popular in the 1920-1930s and was a mania played in private facilities on the rooftops of big buildings in Manhattan. It was played with a tennis ball sometimes punctured and that bail is still most appropriate and better athletically than the contrived plastic and ugly ball now in use. The game was and is completely athletic with all good players rushing to the net on the serve and return of serve. the one area that the old good players were much better than the current is that they all had topspin backhands or lefts.

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