This will be a quick fight...

As a counterpoint to the prevailing gloom and doom :

The Big 3 Giving Us The Big Finger

About Late-Bloomers

My buddy asked what I gleaned from previously blogged article (http://www.newyorker.com/reporting/2008/10/20/081020fa_fact_gladwell) and I wrote this summary:

The main concept was that there are two types of genius in history, 'expressionists' and 'experimentalists'.  The expressionists are born with an innate genius level of skill where their work just flows from them, typically at an early age.  The example used is Picasso.  The other type are people with skill who continue to get better through trial and error, which typically takes a long time.  The example given is Cezzane.

Interesting to me was seeing how the experimentalists can seem to be floundering or even failures for much of their career lives, and also how luck, passion and a 'patron' (someone who is willing to fund the r&d) are typical ingredients to their eventual success.

Anyway, it was nice to be reminded that contrary to the typical portrayal of success and genius, it doesn't always happen at an early age :-)

The Chinese Illusion

It's long been my opinion that much of the numbers and specifics about the Chinese economic miracle of the 2000's is suspect, and now we have the most visible example of it, in microcosm.
Much of the Olympics Opening Ceremony is now having the curtain pulled back on it.  Everyone couldn't stop talking about how impressive the ceremony was, the day after.  Now everyone is talking about how much of the spectacular-ness of it was a choreographed illusion.  I'm sure the same will apply to the economic miracle there too. 

Gold's done

The most recent move, a good example of what happens when a one-way-trade gets unwound (see my blog post of earlier this yr, re: gold and oil), is now stretched and seems to have reached one-way-trade status on its own.  So, net net, I'm looking for gold to reverse and eventually hit 950.  Could go as low as 780, but I don't think it goes below 800.

Still working on quantifying this type of action in equities.

Happy Birthday, in advance

No idea when your birthday is, but let me give you your birthday gift right now.  It is possibly the greatest source of mental adventures I've found on the internet, so far, by far.  And not one session has left me with anything less than the awe one feels when standing next to the ocean pondering how immense and varied life is.

Please subscribe to the podcast on itunes, and/or watch the videos on the site.

Enjoy!    http://www.ted.com/


Some of my favorites from the site:

http://www.ted.com/index.php/talks/jill_bolte_taylor_s_powerful_stroke_of_insight.html
http://www.ted.com/index.php/talks/tony_robbins_asks_why_we_do_what_we_do.html
http://www.ted.com/index.php/talks/dan_gilbert_asks_why_are_we_happy.html
http://www.ted.com/index.php/talks/richard_dawkins_on_our_queer_universe.html
http://www.ted.com/index.php/talks/freeman_dyson_says_let_s_look_for_life_in_the_outer_solar_system.html
http://www.ted.com/index.php/talks/brian_greene_on_string_theory.html
http://www.ted.com/index.php/talks/vilayanur_ramachandran_on_your_mind.html

And I have many, many more that I haven't watched yet, but will soon. 
Please share some of your favorites.  Thanks.

Why Indians (and other frugal types) love the environmental -anti global warming - energy conservation movement

Because it's finally made being a cheap-o a good thing!

We can now drive small cheap cars, keep our A/C's and heaters turned low, buy less stuff and leave our lawns on the edge of anarchy, all in the name of the environment when all along we've been doing it to save money!

Just kidding. Kind of.

Tail, meet Dog

Funny headline on Bloomberg this morning:

Paulson & Co. Plans Fund to Provide Capital to Banks
(Article:  http://bloomberg.com/apps/news?pid=20601110&sid=aANbt26C4Kuk)

So, hedge funds, traditionally borrowers from banks, in the form of leverage as well as loans, are now turning the tables and providing capital!
Amazing world we live in.

Should You Judge Performance on Alpha or Sharpe?

People often say they are focused on obtaining the highest risk adjusted return.  I would suggest the highest goal is return, with an eye towards containing risk.  There's a vast difference in the two approaches.

Primarily, we're trying to maximize the mean periodic return of our investments and minimize the variance of those returns.  If we had an unlimited bankroll, minimizing those variances wouldn't matter because the risk of catastrophic loss, defined in this case as the risk of not being able to continue, wouldn't exist (unlimited bankroll, remember).  We would simply shoot for the biggest returns, acting rationally.  But since we have a limit to the losses that can be sustained, we have to constrain our pursuit of return in this way.

Where people often trip up is in thinking that a given investment with an expected return and beta is better than another investment of the same expected return and higher beta.  Not necessarily, because beta is a backward looking and inherently fuzzy measure.  Even when evaluating a stream of observed returns, the observed volatility is not the same as risk.  Its is the portion of risk that is realized, with possibly much more risk that wasn't observed but still existent.  Just because risk didn't rear its ugly head doesn't mean it wasn't there.

So when someone says they have a sharpe ratio of this or that, consider their alpha as the more important measure.  Higher sharpe may or may not be better, whereas higher alpha is always better.  It's the one that is accurate to the penny, whereas all other measures are fuzzy.  You can't feed your family on sharpe!

'Free', 'clean' energy - yeah, right!

Increasingly, there are articles all over the popular press about generating power from the sun, wind, and waves.  Like this one : http://hardware.slashdot.org/article.pl?sid=08/07/07/0024204&from=rss.

I'm sure to the average American (and world citizen, for that matter) these seem like great ideas to tap inexhaustible sources of power with no effect on the environment.  It makes me cringe - people's naivete! 

The same people that believe that putting gases into the clouds and thereby changing the rate of absorption of solar energy by our atmosphere, feel that there will be no effect of intercepting solar energy before it hits bio-mass and the ground. 

The same people that believe that global temperatures warming causes massive polar ice melting, which is bad because it disrupts ocean currents feel that there will be no effect of taking energy out of those very same currents via turbines and other wave-energy capturing devices. 

The same people that believe that global temperature rises are causing wind patterns to change and thereby ravaging some areas with floods and others with drought, feel that changing wind patterns by putting up wind turbine farms and thereby taking energy from wind currents isn't going to have any effect on weather patterns.

Is the glaring hypocrisy visible only to me??  I suppose it's too much to expect many people to understand the complex interrelationships that occur in nature and science and the intricate linkages between cause and effect in such a massively emergent system - but then why are many of these same people so vocal about what they think is happening and the 'solutions' to them??


Now, I'll admit I don't understand these issues completely (who in their right mind thinks they really do?) and I too am talking out of my rear about much of this, but the point I'm making is that nothing is free and completely 'clean' in these sense that it has no effect on the environment.  Taking energy from any large system, be it from burning fossil fuels or taking it from the sun, wind or water, is going to have some consequence.  The main difference is that these other systems are more directly connected to our weather and much, much less understood.  Going from the kettle to the fire, in my humble opinion.

The only source of energy that I can think of that possibly has no side effect on our massively complex system, and is inexhaustible, is gravity - and the power that is generated from capturing it's energy in the form of waterfalls and streams - though I'm sure if you look hard enough you'll see some effect there too.

Momentum has been STRONG, and about to FAIL??

First, a little background. Amongst the many US Equity models I run, two are simplistic Momentum and Mean-Reversion. They serve as a rough idea of what the market has been favoring.

For a couple of years prior to Aug '07, Mean-Reversion had been a clear winner after which Momentum and Reversion have swung wildly back and forth, jostling for leadership.

Well, today (Monday) we went into uncharted territory in terms of the spread : Mo-Rev! There hasn't been a one day lead of MO over REV of that magnitude in at least 4 yrs.

And each of the last few uncharted territory peaks in the same direction (esp when Mo has been leading for a little while, as is the case now) marked a reversal of that strategy (pun intended) into Mean-Reversion leadership.

Luckily, there's a fairly clear cut signal that confirms the change in tide, and I'll be looking for that during this week. Email me if you'd like to be kept in the loop.

If you're a MO player, and you'll know you are if today has been a terrific day for you, or like me have recently been MO b/c it's what has been working, I hope you had a good time, it's most likely about to change soon.

Pop quiz, hotshot.

There's a bomb on a bus. Once the bus goes 50 miles an hour, the bomb is armed. If it drops below 50........ oh wait, wrong one.

Ok, here is the rght question, hotshot:

What's the average day's point move on the Dow, over the last year?  Take a guess.....


===================================
It's 114 points!  Hard to believe huh?

Ok, here's where it gets interesting.  What's the average day's point move on the Dow, over the year prior?  Take a guess.....

It's only 53 points!

Now, that's what I call a regime shift.

Best Vacation Spots for Summer 2008

Anywhere that requires lots of fuel for most people to get to. They won't be crowded and the experience will more than make up for the extra energy costs.

Alaska and parts of Africa come to mind.

The Album As An Individual Piece Of Art

I mean the whole album as a unit of art, verses each track. 

 

The concept is soon to be lost to the world thanks to mp3's and i-tunes.  Which may not be that bad a thing.

 

Examples of Divine Pieces of Art in the Form of An Album :

Animals by Pink Floyd

The Unforgettable Fire by U2

 

Gnome underpants

Step 1:  Find out what's making money.
Step 2:  Identify when it cracks.
Step 3:  ????
Step 4:  Profit!

Another Investment Fallacy

There's an oft repeated saw about 80% of any stocks movement is the market and sector.
Think about that for a moment. Then remember that the 'market' and 'sector' are simply aggregates of these individual stocks. Yes, the economy and the industry are reflected in those.....

It's like saying that 80% of a stocks price is the 50 day moving average. It's much easier to see why that's not quite true even if the correlations would suggest that.
The average is derived from price, not the other way around, and the same applies to the market and sector.

Noodle that one over for a bit and see if it resonates.

funny stuff

http://www.boredstop.com/index.php?option=com_content&task=view&id=109&Itemid=32

And if you value your time at all, DO NOT HIT 'NEXT'

Innovation in Quant Strategies

In case you don't get Alpha Magazine, here's a good article about quant strategies.

http://www.alphamagazine.com/Article.aspx?ArticleID=1897101


It has been a rough time to start a Quant portfolio, and I certainly wish I'd have had a year or two before the 'perfect storm' hit, but it is what it is.  In lieu of tremendous profits, I take solace in the remarkable similarities of my home-grown approach and innovations to those of the best teams of PhD's out there.  I'm looking forward to seeing what can be done once I've had some time in the alpha sun and built a team to work with.

One Way Trades

I was having lunch with a good friend of mine, a quant employed as the Risk Mgr of a large Fund of Funds, and we spoke about some investment themes.  I mentioned that the concept that has really grabbed a hold of me recently is to look for crowding.  A lack of diversity in investment opinion for an asset class, country or specific investment.  Something that everyone agrees is going only one way.

Now, I'm not interested in being a contrarian in the traditional sense.  Those guys get carried out on stretchers all the time, since we all know that markets can remain irrational longer than you can remain solvent!  (BSC, Amaranth, LTCM, etc)  I'm interested in looking for a lack of diversity, then watch for a huge run and then the first major crack.  The recovery from that first crack, the one that fails to make a new high and then breaks lower, that's when I want to go the other way.  For a trade - not for a long term hold, since many of these one way trades have long term supply demand imbalances to fuel them for a long long time.

What are the current one way trades I'm watching?  Oil, gold, agriculture and Asia come to mind on the long side.  Housing, financials and internet/tech come to mind on the short side.  Some, like China and India, have already cracked and I'm waiting for a rally that fails to hit new highs.  Oil and agriculture are eminent.   Housing and financials,  GOOG and AAPL seem to be on the crack to the upside right now. 

One of my current models looks for this type of thing to occur, on an individual investment basis, and on a micro scale - ie intermediate, almost one way trades.  I have hopes that this is a theme that hasn't been fully circulated yet, at least by quants.

Ayn Rand's Objectivism

I have to admit that for the longest time I dismissed Ayn Rand's philosophy as described by people I've known. It simply seemed too self serving and stark for my tastes.
Recently, I read a blog post of one of my favorite writers on Trading and Psychology, Brett Steenbarger. That changed everything! One paragraph helped me understand the power and pervasiveness of that philosophy (or that philosophy as Brett describes it.):

" The novelist/philosopher Ayn Rand considered the willingness to face and deal with reality to be among the cardinal human virtues. While other animals can survive through their ability to forage or hunt prey, the human animal can survive only through reason and the use of the mind. To blank out reality--or fake it--is to betray what makes us unique; it is a moral failing and not just a psychological one. "


Facing reality, not faking it, is very hard to maintain and rare amongst people.

Here's the article:
http://traderfeed.blogspot.com/2008/01/cardinal-virtue-of-trading.html

Why I've always chosen to be entrepreneurial.

Very well summed up logically by Paul Graham:  Pizza is like a job at a big company, natural foods are like working for a small group or yourself; it's the natural thing to do.  And it's the reason I love my current gig.

"If people have to choose between something that's cheap, heavily marketed, and appealing in the short term, and something that's expensive, obscure, and appealing in the long term, which do you think most will choose?"

http://www.paulgraham.com/boss.html

Best. Movie. Ever.

As a movie overall, "There Will Be Blood" was a really good movie.   Was it as good as the ratings on Rotten Tomatoes or IMDB suggest?  I don't think so.
The last 20 minutes, though, that last scene... is simply devine.  A work of God.  A masterpiece. 

That scene makes the rest of the movie more than worthwhile.  It builds to that scene's glory.


"No Country For Old Men" missed that.  The build up, and rest of that movie was magnificent.  The intrigue, the novelty, the winding route...  But that ending just left me unsatisfied. 

Now, if THAT build up were paired with Blood's ending, THAT would be one of the best movies of all time!

The next bubble

I'm always wondering where the next bubble may be, since I see that most wealth is accumulated by catching the mega-trends when they happen....

Interesting take on a possible next - bubble:
http://www.harpers.org/archive/2008/02/0081908

And a take on the other side of that coin, making sure you avoid being on the wrong side of mega-trends, from Pimco's Bill Gross:
http://www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2008/IO+March+2008.htm

YOU MUST READ THIS PAPER!!!

Anyone interested in risk, uncertainty, randomness, Black Swans, quant or investing needs to read this paper by UBS's Ineichen.

I must warn you though, this is a page turner - you will not be able to put it down. It is a thought provoking, head scratching, illuminating 46 page piece of research that will make you go 'hmmm'.

This paper has earned a spot in the top 5 pieces of research I've read in recent memory.

Enjoy :-)

The Paper:
http://allaboutalpha.com/doc_bin/AIS%20conference%20proceedings%201207.pdf

Where I found it:
http://allaboutalpha.com/blog/2007/12/26/ineichen-looks-back-way-back-to-see-forward/

(Great blog, btw)

Looks like Obama, but then again, it looked like the Patriots too!

Lots of things can change, but right now it looks like Obama is leading the dems strongly and with either of the republicans, it may be Obama at the end.

The election has alot to do with policy, especially with all of the candidates stumping quite a bit about stimulus and bailing out the homeowner.  The perception of policy will move markets in different directions.  Equity and real estate are the ones I'm trying to understand.  Along with the dollar, I suppose. 

What if an Obama win reverses the housing slump, or significantly delays it?  What if the perception of a growth / bailout presidency takes hold?

Will funds being readied for upcoming Real Estate bargain hunting be prepared to change tack or will many take liberties with investment goals and standards??

The First Few Moments

Spinning around as a child.
The stopping is so fresh
and such a shock.
That's when the world changes and
you begin to find
what you've suddenly lost
- you.

Those first few moments are so blissful
that you barely get to know it,
before it disappears and 'you'
are back again.

Thats why we spin around as kids,
for that brief glimpse of 'unknowing'.

That brief glimpse without which,
you'd never have known,
that there is a 'unknowing'.

Thoughts on a price vector anomaly.

Hey, good to chat yest.  Quick thought on the high price / low price anomaly you mentioned you've seen (the positive alpha of (highest priced 20 - lowest priced 20(over $5)).....  Is there a survivorship bias in the low end?  If not, ie, persists over the most recent period and you've included stocks that were in that low price area during the test, then the other thought I had is that maybe its one or the other, ie are both ends of the price vector moving abnormally vs the universe or is it just the low end (my guess for what it ends up being is that the low end is providing most of the alpha [low%chg - univ%chg > high%chg - univ%chg] ).


It's possibly a real anomaly.  And it makes sense to some extent, b/c of some institutions' avoidance of low priced stocks, and other people's preference for lower priced stocks for 'big moves', causes there to be an artificial 'slippery spot' or boundary on the price vector where that price is - and many people use $5.  Which could explain the outperformance of stocks at just over $5.


I'll run a few studies on my end and have some screenshots for you.

In case you missed the news....

Or didn't read my post the morning of the French invasion of the Fed :

Fed May Cut Rate to Below Inflation, Risk Unleashing of New Asset Bubbles
http://www.bloomberg.com/apps/news?pid=20601109&sid=amPLl6VFY8FM&refer=home


Exactly what I thought would be the eventual outcome - unforeseen monkey wrenches and asset bubbles!!

Want to save the planet, reduce dependency on Middle East Oil and make less of an impact??

Turn veggie!

This article spells out what I've been saying when people ask me if I do my part,  I say "Yes, I do more than most, since I don't eat dead animals."

http://www.nytimes.com/2008/01/27/weekinreview/27bittman.html?em&ex=1201582800&en=f3cfee6abce3bfe4&ei=5087%0A

The Fed Cut For A Rogue Trader!!

The U.S. Federal Reserve -


made its most dramatic rate cut EVER - (bigger than for 9/11)


In response to a worldwide collapse of equity markets -


DUE TO A ROGUE TRADER MAKING LESS THAN $100k Euros!!!!!!


So...... you think maybe the Fed overreacted and is going to regret causing massive, unintentional, complex and unpredictable bubbles in the world's economies???

Fundamentalists should be thanking the Fed and Quants should be short term

Clearly this is another opportunity for fundamental traders to exit/go short, courtesy of the fed :-)

As for quants, I take some solace to what AQR went through during the end of the 90's when they were down almost 50%!  They were doing what quants do - expecting the markets to behave somewhat like they had for the recent and long term past - somewhat rationally.  The late 90's bubble caused that strategy to fail and being the pioneers they were, they were still discovering the field as they went along.  Well, anyone using a similar strategy (including yours truly) has been having a less than pleasant time since the summer of '07 and all of this turmoil is upending much of what we 'know'.

Only quants trading very short term / high frequency have any hope of maintaining returns.  Until, that is, that trade gets crowded too. (Like the low vol RIEF-like trade got crowded coming into summer '07).

Now, its time to figure out how to profit from future bouts of 'lack of diversity' and 'tight coupling' :-)

The Fed's Big 75 Bps Mistake

Just a quick note about the Fed managing yesteryear's economy. 
There are many parallels to this weekend's article on increased risk of worldwide pandemic outbreaks due to increased international travel and the worldwide healthcare systems' utter lack of preparedness to handle it - and the worlds economic risk of pandemic outbreaks.  The difference is that the coupling of the world's markets is even tighter and the spread even quicker. 
The Fed is managing under the illusion of yesteryear's lightly coupled economies.  To be fair though, not sure that they have any choice.

The reason today's 75 bps cut is a mistake is that they are taking a big move without understanding the effects of feedback loops in a tightly coupled financial world.  Better to do nothing or small things than to throw a monkey wrench in a random direction.

Markets serve to find a clearing price and I don't see how this will do much to rectify the world's over-housing and overspending.  Borrow from Peter to pay Paul enough and Peter ends up owning you....

Very nerdy, but awesome video

One of my favorite bloggers, Tim Knight, creator of prophet.net and their clean charting, has linked a youtube video at the bottom of this post:

http://www.slopeofhope.com/2008/01/tim-knight-isin.html

that is a parody of The Police's "Every Breadth You Take".   Well worth checking out :-)

Amazing show on PBS - Curious

About the brain and its complexities.  The common fruit fly has a brain the size of a sesame seed, and does some amazingly complex things.  A brain with 300,000 neurons.  And only a handful control the incredibly complex act of flying!   Something that the best scientists in todays world can't even come close to replicating no matter how many computers we throw at it.
See the show for a pretty good description. (link below)

What I've always mentioned to Dharma (my wife) is that I'm amazed that there are things THEMSELVES THE SIZE of a sesame seed, you know, gnats, that can fly in very complex ways - can avoid my hand and tissue very effectively, for example.

The show leads up to the question of mind vs brain.  The analogy made by a neuroscientist was that if you replaced one neuron in a brain with a suitably designed semiconductor switch, it should work the same way.  If you replace two or ten, it should continue to work the same way.  Eventually if you replaced all of the neurons with chips, would it continue to work the same way?  In the sense that it would be conscious and have an identity??  That is questionable and I believe it wouldn't work - the brain, I believe, does things at a subatomic and quantum level that creates consciousness.  If not that, then perhaps something about the complexity that arises from such an enormous number of neurons gives rise to consciousness.  Like cells vs animals and humans vs societies.  Traders vs markets....

What are your thoughts on this??

(Hahahahaha - get it?, no seriously what are your thoughts?)



Here's the link to the show:
http://www.thirteen.org/curious/

Unintended consequences

Here's an article that talks of an ostensibly positive change we as a society have made, which had an unwelcome and somewhat opposite effect, many generations later: (Clean environments lead to allergies.)

http://www.technologyreview.com/Biotech/19997/


What other examples can you think of ?

Want more money, better health and sharper focus??

Meditate!

http://www.time.com/time/magazine/article/0,9171,1147167-2,00.html

Joe Rogan talking about DMT??!? This guy is crazy!

Total waste of time, I'm sure, but very interesting:

http://www.youtube.com/watch?v=grcqs9cDuN8

NFLX - knew it!

Just yesterday, was speaking with a colleague about the writer's strike and the first new shows in a long time. He mentioned that's supposedly going to drive more business to NFLX and other 'alternatives', but felt that it may be a mixed blessing, in that it may also increase current subscriber's use of their services = higher costs, so it'll be a tug of war btwn the new subs and the higher costs per sub. My colleague gave the example of his brother, who NFLX must lose money on, because he's a heavy user. I then mentioned that I don't understand why NFLX doesn't just provide heavy users with a small $50 box that downloads those movies in DiVX, quicker than they mail it to him, and bring the cost to almost $0.

Couldn't make this stuff up, but it's what they announced this morning. Too bad I'm not long the stock!

I guess even Quant-abee's like to pick stocks sometimes...