Monday, December 29, 2008

(Potential) Californian victims

When California runs out of cash by Feb. 09, the state will start issuing IOUs. It's a downward spiral and regardless if Cali eventually makes good on the debt or defaults, the IOU holders will be hurt.

Some high profile creditors mentioned (probably not limited to),

Office Depot,
JP Morgan,
and Ford and GM dealers, but of course these guys're screwed already from other circumstances.

Keep in mind that "unprecedented" does not equate to "impossible". When state employees start getting IOUs instead of cash, state revenue will lower further as people will have even less money to pay off bills, mortgages, and TAXES!

Friday, December 26, 2008

Time of Dionysus

I find this painting mesmerizing. A Maenad having a drink, before the ritualistic, flesh tearing frenzy for the sake of Dionysus (Greek God, born on Dec. 25th).

It is told that acolytes, initiates dance while wine gushes forth from the Earth. The women wrap themselves with snakes, impervious to harm the serpents lick the sweat off their cheeks. Among them fawns, bulls let loose, and the animals are ravaged and devoured raw, their blood sucked. Rose petals everywhere, thorns kept to prick the exhausted into life. And together they pray that Dionysus would come, and press his body upon them as they take their first breaths of winter...

Maybe this explains why everyone feels like partying this time of the year. As much as Christianity has made it mainstream today, the Greeks seemed to have more "fun" this time of the year. I guess my point is that nothing is as simple as it seems at surface.

Sunday, December 21, 2008

Porn downloading at the SEC

OK I am not surprised, anyone else? Apparently some SEC employees multitask quite well, downloading porn and managing personal businseses, all the while "protecting investors and maintaining fair, orderly, and efficient markets."

SEC Report: Employees Browsed Porn, Ran Private Businesses

What the hell, right? Where are the outraged American voters, the pillaged tax payers? Oh well.

Saturday, December 20, 2008

Californian uncertainties

This clip is from Bloomberg, so I would not take it verbatim. Reading between the lines, either somebody there wants to hurt the current Cali bond holders real bad, or more likely a gigantic amount of US taxpayer money will be confiscated (again) to keep the state services running. Regardless, it is a good idea to try and read between the lines.

Tuesday, December 9, 2008

Nassim Taleb on Charlie Rose

Taleb is the author of "The Black Swan", a required reading on Wall Street (and a personal favorite). Always interesting to see what he has to say. I especially like the "turkey" thing.

Monday, December 8, 2008

Secrets of Professional Turf Betting

I haven't read this book, just found its summary very interesting. It agrees with the idea of exploiting sentiment for gains in speculative industries.

Source: Mark Mills at Amazon

Chapter 1. Always bet against the public. Betting at a racetrack is a zero sum game from which the track takes a significant chunk of the wagers before anyone gets paid. Further, the people who know the horses best and can easily fix the race, the owners and trainers, are betting against you. At best, only a minority can ever win. The track requires the majority to lose, therefore avoid the majority play. Only bet when two situations occur simultaneously: 1) you have well considered odds in your favor. 2) The public is betting your choice is a loser. Put the two together, and be sure to have 3-1 or better odds in your favor. In other words, always think in terms of probabilities.

Chapter 2. Things are easier now since the 'action' is more liquid and public opinion based on weak authorities.

Chapter 3. Keep up to date on new angles: read what the professional reads.

Chapter 4. The public doesn't lose their fair share. Statistically, they should only have 10% losses. Instead, many lose everything they bring to the track. They do this by allowing emotion to switch their betting style from one race to the next, and always switch at the wrong time. If they just picked 'position 6' every time, they would only lose 10%, but they bet little when they should bet much, and much when they shouldn't bet at all. It is the 'switches' that pull money from the public. Having 'guts' means sticking with your strategy in the face of losses. You can count on the public being unable to demonstrate guts.

Chapter 5. Ever changing cycles: The game will only last as long as people see enough winners to convince them they have a chance. If the 'true' odds become obvious, no one would play. Therefore, there must always be long shot winners and ceaseless change in the strategies of the winners. Early in the season, the public badly assesses the odds, the pros bet them and win. Late in the season, the public loads up on the good horses, but this reduces the odds, so the long shots get undervalued and provide the winning odds.

Chapter 6-7. Be aware the owners and trainers need not always focus on winning. Know what motivates the owner of the horse to enter the race. Are they building a reputation? Trying to win purses? Trying to turn the public against the horse, then win as a long shot? Understand the rules constraining owners and trainers. Know the claiming rules. Know how to read the weight reports.

Chapter 8: Sum the odds. The odds are reported as 3-1, 4-1, etc, so it isn't obvious that the sum should be 100. Convert the odds to percentages and sum the list. If the sum of each horse's chance of winning is less than 100, bet on every horse and you are sure to win. If you are sure a favorite won't win, you can create a sure win by betting on everything else (less than 100 sum). The track is sure to make money if the sum is over 100.

Chapter 9: Make your own price lines (100% books) and test them every day (paper workouts)

Chapter 10: Pittsburgh Phil's system: buy the stuff that no one wants. It takes guts to stick with the system. It killed Pittsburgh Phil at 52. It takes guts, that is why it doesn't matter if everyone knows the system. Guts isn't the ability to ignore fear, it is the ability to stick to your original goal, process and strategy. (!!!!)

Chapter 11: Money management: the obvious, don't spend your living expenses, but also, the important thing is your emotional balance. Without balance, you switch and that is how to lose.

Chapter 12: you cannot grind, you must speculate. You can't chisel, you must gamble. Accept and expect more losers than winners.

Chapter 13-15: Reading the racing publications

The rest of the book is a detailed plan for seasonal betting, January through December, one chapter per month.

While reading, I speculated on how to apply this to the securities markets. What is a 'race', a day of trading? In terms of stocks, what are 'claiming races'? What are weights?

The notion of 'ever changing cycles' is really interesting. The 'racing game' is clearly a product of some evolutionary process that weeded out less robust 'betting markets'. By looking at the 'game' as a whole, one can see it as an activity perfectly designed, but having no designer. Most will lose, but still find it enjoyable enough to continue the playing. Further, it is impossible to investigate unemotionally, since the attraction perpetuating the games existence is entirely emotional. The opacity is central to the game's survival.

Friday, December 5, 2008

Mixed messages in NZ

This is all from yesterday, I have the radio on frequently and catch little bits and pieces while working on the computer.

Earlier in the day, some economist (allegedly qualified) made the claim that unemployment here in NZ is expected to go from 4% to 7% in 09; HOWEVER, she stated the economy will "improve" as homes become cheaper which means people must have more money to spend.

Yeah, what the hell right? She tried hard to stay on the optimism script, the anxiety was heard through her tone.

Productivity is expected to drop, real estate investors (bulk of uninformed New Zealanders) will take increased losses, coupled with losing currency... I don't think anything will likely improve. Of course I could be, and hope to be wrong, just not likely.

Oh and it gets better. Later in the afternoon, the central bank here lowered interest rate by a point (of course the NZD currency upside bets are going "OMFG we're going down!") and declared that "the recession is over!" hahaha

Happy times are back again, according to most newbies. Time to brace ourselves.

Wednesday, December 3, 2008

Market neutral funds

Funds highly correlated to major indexes are collapsing, applying the “we can’t be liable for the markets” to distract investors from blatant incompetency. Unbelievable. Like relationships, business models can only display true survivability in hard times; and it has become apparent that only market neutral (low correlation to key indexes) strategies offer a practical fighting chance at consistent profitability.

Conventional buy & hold investments

It takes no skill to buy, hold, and hope; translation, No Added Value, whatsoever. To charge exorbitant amounts of fees to boot is borderline criminal. The mutual funds AKA unit trusts, the infamous “finance companies” in New Zealand all belong to this group. They take investors’ capital, then make upside bets under the assumption that global economies grow at exponential rates without limits… What the hell, right?

Then when crap hits the fan, they freeze withdrawals just so the public investors become forced to take heavy losses while these businesses move to initiate the game once more with newly created entities. Anyone with a fair understanding of financial economics should see by now these funds are nothing but rackets run by groups of dishonest, unskilled snake oil pushers.

Market neutral investments

It takes skills to trade the financial markets and win consistently, hence added value for the investors. Actively managed, market neutral, investments have a fighting chance. It is where an investor could watch the market drop like a ship from heaven, and smile, wondering what companies the fund had shorted…

Distinct differences

Some (definitely not all) common financial snake-oil salesmen traits:

1. Historical performance highly correlated (positive or negative) to the indexes

2. “The market’s always going up…”

3. “We can’t be responsible for the market…”

4. “Diversification lowers risks…”

5. “The market’s cheap/over sold right now!” with no logical data to support, historical prices are meaningless

6. They avoid topics regarding fundamental, credit risk

7. They avoid commission/fee details

8. They avoid topics regarding business/liquidity cycles

Some characteristics of potentially competent investment managers

1. Positive historical performance with low correlation to major indexes

2. Realistic focus on credit, liquidity risks

3. Takes responsibility for performance, regardless of market behavior

4. Incentive based fees (positively correlated to investors’ returns)

5. Realistically assesses weaknesses of academic financial theories (portfolio theory, CAPM, assumption of no fundamental risk, normal distributions, and etc.)

Saturday, November 29, 2008

S&P yield > 10year Treasury

Source: Bloomberg Apparently this hasn't happened since the 50's. While many analysts would recommend this a signal to buy, investors should keep in mind that the economics still suggest things will not likely get better in the near term future.

Some coming problems yet to unfold include but are not limited to:

1) Commercial real estate bubble
2) Credit Default Swap liabilities
3) Lehman Brothers' victims on the verge of collapse
4) Consumer debt bubble
5) Unprecedented national debt levels for the USA and England

Friday, November 21, 2008

A century of returns

One of the books I'm working through this moment, Quantitative Financial Economics, has a chapter (4) on stock returns. It starts off with a distribution of S&P500 monthly returns for the period from Feb. 1915 to Apr. 2004.

I can't post the graph here since I only have the physical book, but I will state the obvious points suggested by the century long return distribution.

Returns have a negative skew- Heteroscedasticity (volatility) usually increases as prices decline. The left side reashs -0.15 while the right hand side dies off at roughly 0.13.

Volatility is conditionally autoregressive- When volatility is high, it tends to stay high for some time, and simlary for low volatility periods.

Now we can see how the market functions to extract wealth from the uninformed investors. The slow and minimal upside returns lure them in, then the sharp corrections blow their accounts and transfer their wealth to those on the other side of the trades. It's a good system, as long as you're not the patsy.

Wednesday, November 19, 2008

About Warren Buffet

Warren Buffet does not run charity organizations, therefore he would not reveal his core investments intentionally. The buying action with Berkshire Hathaway, all talked about throughout financial media, were meant to bring in some optimism amongst public investors.

It is possible that the US government had influenced his purchases. No seasoned trader/investor would make upside bets with this economy except for very good reasons. The repercussions have begun to surface, CDS (Credit Default Swap) values insuring the $40B BRK credit risk has increased to the point of implying just above junk status rating.

Source: Bloomberg media

Thursday, November 13, 2008

About critical thinking

Intelligence defined today has become irrelevant with the ability to think critically. This is tragically unfortunate. I spent the afternoon discussing this with Darryl, a friend from University of Auckland. He’s probably what some would call a modern day philosopher, and at times makes some very good points, and questions.


Why do people knowingly make self-sabotaging decisions? Spending beyond ones’ means, making upside bets having learned business/economic cycles, or stuffing themselves brownies understanding potential health/appearance challenges come to mind. Even the supposed “intelligent” and educated men fall for these scenarios, so what is going on?

The lazy mind

Sure, thinking takes energy, especially when digging for rare and practical information. The negative consequence of an idle mind i.e. allowing external influences, delusions operate effectively, could easily destroy everything built over a life time.

A few acquaintances had lost life savings from little-understood investments. I remembering having suggested they do some research and not risk any money until the potential risks/rewards are figured out, and they simply brushed it off. Expectedly, to this day they blame it on luck to avoid personal responsibility.

The simple cure

A bit of research alongside logical, objective thinking could make one practically immune to many of today’s living denials and misconceptions, and have odds swing in favor of desirable solutions. I suppose sometimes thinking simply leads to more questions, but at least it gives you a shot at finding some real answers.

Why do stock brokers avoid the subject of credit risk? Why do people study majors knowing they eventually must compete with third world nationals who do the same work for literally cents on the dollar? Why do so many people choose to live as mindless drones?

Wednesday, November 12, 2008

IOUSA concise version

This presents a pretty clear picture of America today, sadly not many Americans wish to understand it.

Saturday, November 8, 2008

US banks deeper in red

This is getting quite serious. For the first time, US banks' Nonborrowed reserves dipped below 0 since January 08.

US Bank Nonborrowed reserves (Sept. 08)

-$187.305 Billion

Then the $700B bailout (actually $850Billion, but who's counting?)

Today (Nov.) it's at
-$259.385 Billion

while the Fed based requirement sits at $52.272 Billion

Source: The US Federal Reserve

The tax payer Wall Street handout didn't seem to "rescue" much, or am I missing something?

Friday, November 7, 2008

US retirement accounts risk confiscation

Dems Target Private Retirement Accounts

This is simply horrifying. The US government looks to take (by force) private 401k and IRA funds and turn them over to the management of the good old social security people.

The artificial incentive would come out as "saving" the Americans from losing retirement accounts from further losses. Of course it has to sound noble, for the US government would never want to exhibit an image of tyranny.

The US national debt has become so incredible, yet nobody wants to honker down and pay the bills. Well sooner or later, something's gotta give. The intelligent Americans are fighting this, imploring the government to cut spending and start paying off debt, yet the uninformed ignorants still make up the majority. Was any of this unexpected, I think not.

Tuesday, November 4, 2008

Stock survival rate

I've been going through NNT's The Black Swan again, found something worth mentioning here.

Out of all companies making up the S&P500 since the 60's, only 75~ remain in the index in 2007. The rest (425, or 80%ish) had either withered incredibly or gone belly up. Why did the index keep rising? Inflation, and constant replacement by better performing businesses.

What does that suggest about taking upside bets in the stock market? Didn't we all learn about the business or economic cycles? I define gamblers as those who participate in a losing game. The edge sits against the uninformed, upside investors. Therefore, if you buy & hold (& hope), you're simply gambling.

Tuesday, October 28, 2008

Foreclosure reality

The chart speaks for itself. Keep in mind this will not slow for the next 4 freaking years!

Monday, October 27, 2008

About Joe Pesci

Things (relevant to the financial markets) I've learned from Joe Pesci,

1) Learn who the Patsy (fall guy) is

2) If you can’t figure out who the Patsy is, YOU are the Patsy

3) Figure out how the game screws the Patsy

4) Find ways to always take opposite sides of the Patsy

5) Once you’re “in”, keep your mouth SHUT

6) Be wise, stay low, profit off the game

Saturday, October 25, 2008

Oklahoma University royally screwed

Apparently, the supposed $160Million in donations from T. Boone Pickens to Oklahoma State University once hit $300M before crumbling to $ZERO$, today. What makes it worse is that the university has borrowed a whole lot of money against it as collateral... OUCH! hence the "royally screwed" status.

Lesson here

Hand outs hurt, whatever that could go wrong, WILL go wrong. Leveraging against uncalculated risks invariably ends badly. When it comes down to it, you can't rely on anyone but your own abilities and convictions.

Friday, October 24, 2008

Nations face difficulty

Robert Peston at BBC News has mentioned some interesting points that today we are looking at credit risk imposed by countries, namely Iceland, Hungary, Pakistan, Ukraine and Belarus, Argentina, and lastly but most importantly, South Korea.

This could affect YOU and me. If you have a pension fund, you should find out if the investments involve any debt issued from the above mentioned countries; and if so, time to make some changes to your hard earned retirement fund. Government debt is NOT risk free, and the existing fund managers are not adequately prepared for proper risk management. The level of incompetence behind institutional doors is shocking, I tell ya, SHOCKING. But that's for another article.

Monday, October 20, 2008

Option expiration week

The following statistics offer mean S&P Index returns and associated skew values for each trading day within the 3rd week of the month (AKA Option Expiration Week), for the decade starting from 1998. 1 While you should not anchor on these figures entirely, they do provide a pretty good picture of how the stock markets move for the week.

Data source: Advanced Option Pricing Models

Mean Return

This gives the return of highest frequency for the studied period. Most would conclude that this points to expiration week Tuesdays as favorable buying days, and vice versa on Friday. I would highly advice against that sort of presumption. Historical price movements have little if any affect toward that of the future.

Expiration week Friday however, is another story. This is what often happens…

At the last hour of trading of Thursday, many option traders sell Out-of-the-Money Index Put Options, expecting them to expire worthless within a day, thereby keeping the premiums, and of course dismissing the risk of a dramatic volatility jump. The big players buy these OTM Puts, being on the other side of the trades. Then Friday comes and the big guys pump the markets full of selling orders, forcing these options into money as the index drops, and they invariably end the day with up to 5,000% profit from the options (while the sellers lose their shirts, remember Niederhoffer?)

Neat trick huh!


These numbers, in my personal opinion, offers more value than the former. It comes in the form of standard deviations. OK, we all know normal distributions do not apply to financial markets, still this figure provides one of the most vivid imagery of the fat tails. The highly negative values suggest that even while the markets had moved upwards more often, when it drops, it drops like there’s no tomorrow.

I suppose that added to another reason why I usually prefer short selling than taking upside bets. Anyway, while these numbers do not provide a “holy grail” sort of thing, they do offer a bit more reality of how markets actually perform.

Saturday, October 18, 2008

Lehman Joke

I still frequent Elite Trader, and this got me cracking up all morning.

Quoted from Nutmeg

"If life hands you a Lehman, make Lehman-ade."

Thursday, October 16, 2008

Lured by pennies

Most corporations today shell out tens of millions consulting specialist think-tanks for continuous innovation; Microsoft does it for practically no cost with Imagine Cup. I attended the seminar today, and witnessed (expectedly) many computer science majors falling for the lure.


The competitors form 2-4 person teams, and present solutions in software and/or hardware concerning some (supposedly) critical issues today. So according to the speakers, winners within NZ gets roughly $10K worth of downloads off MS. The global winner gets $25K USD. Of course the experience helps with their resumes/CVs, and yadda yadda yadda… That is pretty much it.

Pennies instead of dollars

Microsoft is one clever SoB, offering pennies while expecting millions in return. According to one of the speakers, 60,000 teams of 2+ staff engaged in the event last year. So a 120,000+ strong R&D dept. handing over their intellectual properties along with blood and sweat, all in hopes of $25k USD (unadjusted for inflation) and some downloads in return. That is the basic run down.

Nassim Nicholas Taleb was right about many things. What really struck me was how he pointed out that people naturally focus on the pennies instead of the dollars. Those who buy stocks for the dividend yield, good example; Imagine-Cup, perfect example.

Critical analysis

It doesn’t make any sense. If you have an awesome solution to an existing problem, a product that people want but are not getting, then you could easily attract 7-8 figure private funding and possibly retire within a couple of years, never having to work again. Why the hell would you give that to Microsoft for next-to-nothing?

Sadly I have met more close-minded persons at the Dept. of Math & Science than their business school counterparts. It appears that conventional education depresses critical thinking, regardless of the area of study. Oh well, if anyone opts to remain naïve, that is their choice. Hell, it’s less competition for the rest of us.

TED spread

The TED Spread explains the difference between 3-month US treasury bills and LIBOR (London Interbank Offered Rate). It is useful in identifying current credit conditions, and below entails a graph if it in the past year off bloomberg compared to the VIX index.

The chart shows a positive correlation between the TED Spread and the VIX, where we can conclude that it holds a significant negative correlation to US stock indexes. Furthermore, the above suggests that banks have become increasingly unwilling to lend to each other.

So from this standpoint, as long as financing remains difficult and (very) expensive, the big players will keep selling. Trying to pick local bottoms and going long would be very dangerous.

Tuesday, October 14, 2008

About inflation

A number of independent writers have expressed concerns of deflation, while others such as Peter Schiff have repeatedly maintained that developed nations, particularly the US, face unprecedented inflation. So who is “correct”? Who cares. The more important question lies in mechanics of staying profitable alongside this uncertainty.

Exploring both scenarios

In an exaggerated inflationary period, we expect the following:

  • Bullish stock markets
  • Very bullish commodity prices
  • Very bearish debt instruments (treasuries, corporate bonds, etc.)
  • Real estate bubble build up
  • Lowered general market volatility
  • Bankrupt companies fall, but the execs go away and have another go easily

Conversely, in deflationary periods (or inflation slow downs) we have seen the below:

  • Sharp declines in stock markets as volatility increases
  • Commodity/real estate prices come back and adjust to the actual rate of inflation
  • Fixed income debt instruments tend to rally
  • Financially unstable firms go down, alongside the long-side investors

Traditional hedges

Many investors hedge against exchange rate risk by holding a basket of different currencies. This still leaves the risk of currencies losing value collectively like what we have seen the last few weeks, though they have more to gain if inflation slows.

Some solutions

Commodities and real estate are probably the “safest” in this period. As they have intrinsic value, and true “deflation” would never occur with the current credit based financial system. Inflation slows or picks up pace, either way over the long run (years), commodity and land prices will always adjust and rise with respect to paper money.

Shorting companies on the verge of insolvency “works” regardless of inflationary concerns. Badly managed, heavily geared, non-performing businesses inevitably lose investors’ confidence. These stocks head toward $0 as statistical eventualities, the rate of inflation simply determine the speed of it. So even in the case of high inflation, a “slow death” via a thousand cuts (I think that’s a line from some Kung Fu movie) would still reward the short seller with a nice return.

Short term arbitrage of course works regardless of any market or monetary conditions. This just takes much more critical thinking and probably physical work to both search out and exploit discovered inefficiencies. Now that the Chinese stock markets have started experimenting with short selling, many new opportunities have opened.

That’s all for now.

Friday, October 10, 2008

Strategy tweaking

Regardless of all the hype of discipline, having a solid trading strategy (or business model) remains the critical key to trading profitably. The next logical step then lies in continuous improvements, where vulnerabilities, unexpected risks are not only addressed by also resolved.

The confirmation fallacy

Mentioned in “The Black Swan” by Taleb (great book by the way), historical “confirmations” of where the strategy had succeeded means nothing. A large string of winning trades as result of a particular strategy suggests little if backed by purely quantitative means alone; likewise, just because you have survived another day does not suggest you are an ageless immortal.

Remedying weaknesses

You should instead search for incidences in the past where the interested strategy has failed (spectacularly), however improbable they may seem for the future. Once analyzed, you must create ways to adapt to these implausible but unavoidable events so that when they occur the next time, the strategy would result in break even or a net profit anyway. Like all business models, creativity is crucial.


Someone who believes in long-term investment in the stock market might find the improbable yet inevitable fundamental risk of bankruptcies highly damaging. The investor then decides to only invest in index futures and ETFs. As a result, he experiences no more devastating portfolio losses from single company failures.

A typical trend following strategy carries very low winning rate as it depends on low-probability fat-tails off return distributions. As a solution, the trader could keep track of historical and implied volatilities, and exploit it to improve winning rate significantly. See here for more details concerning Trend Following improvements.

Tuesday, October 7, 2008


As mentioned via a comment, the content of this blog has drifted away from the mathematical side of things for a good while now; I wanted to express some personal thoughts toward the financial industry at this point. Nothing is as it seems.

Pure Quantitative Studies are Over-Rated

The search for an elegant mathematical system to both explain the past and exploit future moves of the financial markets continues, yet so far I have not found anything of significant value to study historical prices. Too many assumptions regarding distributions, probabilities, rational trading behavior, and etc. have done more harm than good (e.g. consider the credit crisis and the half quadrillion derivative shenanigans).

So for anyone starting out and trying to figure out patterns, wedges, flags, trend-lines, let me save you some time and suggest that it is all a waste of time. Studying prices and price derived “dependent” variables will not result in consistently profitable trading.

Some Things that have “worked”

The news. Trading against mainstream financial media has worked exceptionally well. All you have to do is put yourself in their shoes, and think critically of motivations behind each public announcement, and more often than not obvious answers lie behind the veils of deception. Remember my article on Goldman Sachs and oil?

Quantified sentiment. Only by observing what most traders are actually doing, can one truly assess realistic likelihood of liquidity in the markets and therefore directional bias. One example of such would be the ISE sentiment index.

Credit risk assessment. An easy way to find good candidates for shorts is to look for a company that issues bonds of very high Yield to Maturity. The higher the YTM, the more willing investors “imply” high credit risk of the issuing business. At the same time, if the company is willing to pay such high interest for borrowing, it MUST be desperate for cash. This can not be faked by playful accounting.

Market depth of ECNs. Observing bid/ask volumes off BatsTrading or ARCA do provide a significant edge in day trading, unfortunately my current schedule does not allow for late nights every week day.

Existing research

My research this moment lies applying Support Vector Machines in neural networks for financial forecasting. Sounds impressive, though the mathematics gets so convoluted I get easily lost within the numbers, let alone trying to predict the markets for the next day or two. Nevertheless, I still search for something that “works” on the very short horizon.

I believe that method(s) MUST exist to determine high probability direction of stock indexes at any point in time, and finding answers from pure mathematics is improbable. From this point my interest has turned toward that of economics, politics, and behavior of the financial institutions, and this explains the change in the title.

Saturday, October 4, 2008

Californian challenge

Not surprised, Arnold had "hinted" it when he tried to cut state employee wages to the federal minimum. People there remain oblivious of the need to honker down, buckle up, and start saving instead of consuming needless things.

LOS ANGELES — With the credit crisis cutting off access to short-term financing, California officials said the state may be forced to ask the United States government to lend it $7 billion, warning that the state could run out of money in a few weeks without it.

Asked what would happen if the markets or the government did not come through, Mr. Schwarzenegger replied, “This is no such thing in my vocabulary as ‘what if not.’ We will."

Another columnist provided a main street perspective of the Californian situation (via an alternative media outlet).

California going broke - California is broke, but most Californians don’t know it. College students know it because their tuitions have gone up. Teachers received layoff notices in May, but many of those notices were rescinded when teachers agreed to benefit cuts to save fellow teachers jobs.

However, the majority of Californians are clueless that their state is broke.

Reality arrived recently for everyone who owns an operable car or pickup. The governor’s finance director just tripled registration fees for every registered vehicle in this state. If you paid $150 to register your car last year, the next notice will be for $450. This was no arbitrary decision, but a statutory trigger in a law passed during the last, Republican administration that says basically when the state cannot pay its bills, license fees triple.

California is looking at a budget deficit of somewhere between $35 billion and $38 billion, roughly one third of its annual budget. Anyway it’s sliced, the fifth or sixth largest economy in the world, depending on who is doing the boasting, is broke.

What does that mean? For many state administrators, it means no paycheck until a budget is approved. For many union state workers, it means minimum wage paychecks until the budget is passed.

For University of California Cooperative Extension farm advisors and specialists, it likely means you are out of a job or you may be working out of your pickup or a rented trailer in a county equipment yard.

Layoff notices are about to go out to 400 California Highway Patrolmen.

A new era is beginning in county and city governments because their pipeline of state money is dry. It is called outsourcing. This is not simply contracting with someone to clean buildings or service city cars. It means city and county-owned facilities like convention centers and exhibit halls will be run by contractors and not employees paid by tax dollars. Cities cannot afford to operate their own properties and are turning them over to outsiders in hopes of cutting expenses and hopefully generate revenue to meet budget shortfalls.

California is facing a fiscal crisis only a very few really understand. Can California be broke?

Oh yes it can and because of it there is an even chance the governor of one of the largest economies in the world is facing recall. Gray Davis is no corrupt, local politician. He a savvy, cat-like politician who seems to land on his feet more times than a cat thrown out a first floor window. He is the governor of the largest state in the nation and he may be kicked out of office mid-term. It is not all because of the current budget deficit. The energy crisis of two years ago still has people seething.

Recall proponents already have enough signatures (about 900,000) to recall Gov. Gray Davis. They want many more signatures to guarantee that the recall goes on to the ballot.

The recall seems more certain than the prospect of getting a state budget any time soon. Hang on because you are about to see a state government for more than 32 million citizens go broke. Recalling the governor will not put $35 billion in the bank. It will only add to the financial chaos that seems to have no easy solutions.


Thursday, October 2, 2008

Stephen Colbert

Tuesday, September 30, 2008

The Petro Dollar

This is a well made documentary on the relationship of US economic power with respect to Mid East oil.

Several points of interest

  • US ran out of its own oil sources in the 1970's
  • Saddam began to sell oil for Euro instead of USD roughly a year before the invasion
  • Iran established its own exchange and currently trades oil for non-US currencies
  • Saudi Arabia is considering changing currencies as well
Perhaps it's time to look at taking some long positions in oil.

Part 1/4

Part 2/4

Part 3/4

Part 4/4

Sunday, September 28, 2008

Cramer Again

Last Friday, Sept. 26th 08, Jim Cramer suggested that the Dow could lower to 8,000; thereby implying that the market will likely rally in the near term future, probably the next few weeks. As average mainstream investors make up the typical CNBC audience demographic, the winning edge lies against all proposed by seasoned network personnel.

Nature of Cramer

There is absolutely no incentive for Cramer to help the average CNBC audience. Instead, he gets paid by sponsors pushing their agendas. In this case, it is likely that Cramer’s handlers look to do some bargain hunting, and they want improved liquidity from the uninformed crowds.

Current sentiment too negative

In the past couple of weeks, much of the frantic selling from uninformed, scared investors have already liquidated. Historically speaking, the more fear investors feel, the more likely markets will rally in the immediate future. Panic quantified points to volatility; today, the VIX (implied volatility for S&P 500) or VXO (Implied Volatility for S&P100) are at significant highs.

How to play this

For the next several weeks, keeping in mind that big money intends to buy; taking only long positions in the equity markets would provide a slight winning edge. Just keep in mind that regardless of how cliché “Buy Low/Sell High” may sound, it is the only way to survive this game.

Saturday, September 27, 2008

OK, I don't want to make this an advertisement, just this hedge fund backed site seems pretty cool. They let you paper trade US stock markets, and if you're profitable some real money is paid out in the form of paypal. It's a good place to get your foot in the door, check out how most players perform, and practice without any real money risk.

Here's the link

I'm there to test some strategies of my own. To find me there, search through investors for "rockochen"

Thursday, September 25, 2008

Max Keiser

I like Max Keiser, he isn't so scared of holding back truth in light of political correctness.

Tuesday, September 23, 2008

Stock Wars!

Now we know why those stocks tanked, woowie!

"Distressed assets"

The US tax payers are getting royalled fudged, but then again, it's partly due to the apathy of the majority. Can't simply blame politicians, after all, US politicans grew up just like the average citizen...

Sarcasm at its best, Buy My Shitpile!


With our economy in crisis, the US Government is scrambling to rescue our banks by purchasing their "distressed assets", i.e., assets that no one else wants to buy from them. We figured that instead of protesting this plan, we'd give regular Americans the same opportunity to sell their bad assets to the government. We need your help and you need the Government's help!

Use the form below to submit bad assets you'd like the government to take off your hands. And remember, when estimating the value of your 1997 limited edition Hanson single CD "MMMbop", it's not what you can sell these items for that matters, it's what you think they are worth. The fact that you think they are worth more than anyone will buy them for is what makes them bad assets.


Monday, September 22, 2008

ASX Bans Shorts

Australia Bans Short Selling

The Australian Securities and Investments Commission Sunday banned covered short selling of all listed shares following moves by other countries to ban short selling of financial stocks.

In a rapid escalation of the clampdown on short selling, ASIC said in a statement that it had decided to ban covered short selling from the start of trading Monday because a number of countries had banned covered short selling of financial stocks and there was a risk that if Australia didn’t follow with its own ban that there would be a risk of “unwarranted activity” in the Australian market.

“These measures are necessary to maintain fair and orderly markets (ed: yeah right!) in these exceptional times of global crises of confidence in financial markets,” ASIC Chairman Tony D’Aloisio said in a statement.

“Because of the relatively small size and the structure of the Australian market, it is necessary to extend the prohibition to all stocks,” he said. “To limit the prohibition to financial stocks, as has been done in the U.K., could subject our other stocks to unwarranted attack given the unknown amount of global money that may be looking for short-sell plays.”

Things will get worse. Without bids from short covering traders, when selling pressure commences, the market will drop like a hot knife through butter. This is therefore caused by either utter incompetence, or intentional destruction. The latter is more likely.

Sunday, September 21, 2008


Basic Lessons:
1) The closer to a heavy drop, the harder Wall Street pushes the "everything is just dandy!" propaganda.

2) The so-called industry experts either intentionally deceive or are clueless numb-nuts.

3) When dumb-money, e.g. the bank teller, shoe shine boy, decide to buy... it's time to sell.

4) Volatility increases on downside moves, due to fear of further losses, which ironically causes increased price drops.

5) The market does not move in a straight line fashion. A few days of rallying does not necessarily mean the panic's over.

Most importantly- Learn how the market works before diving in with real money. Once mastered, fortunes can be made off these moves.

Enjoy the video!

Part I

Part II

Part III

Part IV

Friday, September 19, 2008

Ways to Short Indirectly

Now that financial stocks are "unshortable" directly until October, below are some ways you can do so through derivatives:

1) Buying Deep In-The-Money Puts: the deeper ITM, the less time value it'll carry and behave like the underlying stock.

2) A synthetic short with options: long Put and short Call at the same strike price

3) Short single stock futures: though I hear the liquidity isn't all that great

4) Inverse ETFs (Exchange Traded Funds)

5) Shorting Index Futures: almost as good, as the financial companies are positively correlated to the stock indexes.

I'll add to this list as I think of more!

Wednesday, September 17, 2008

Lehman Victims

Reserve Primary Money Fund Falls Below $1 a Share

"The fund, whose assets plunged more than 60 percent to $23 billion in the past two days, said the Lehman losses forced the net value of its assets below $1 a share, known as breaking the buck. Reserve Primary, the oldest money fund in the nation, fell to 97 cents a share and redemptions were suspended for as long as seven days."

Potentially Profitable Scheme

Search out for companies/funds who invested heavily in debt issued by troubled banks, and short them off short term rallies. Many are not in the spotlight, yet, of course by the time they are, it's too late to get in the party. These opportunities will not present themselves on silver platters, it takes some work to search them out, and that is where your job comes in.

As mentioned in "Statistical Moments of Real Stock Returns" , the edge is on your side when you bet on the downside. Taleb also wrote in The Black Swan that destruction usually comes swiftly, while the build up takes time and patience (paraphrased). Don't blindly agree with everything I write, but do your research, learn the game, and make it work for you.

Tuesday, September 16, 2008

ANZ Bank Risk

Now let's think about the financial condition at ANZ, who currently holds no more than $4billion in reserves. They own 50% of ING, therefore liable for roughly half the losses. Of the two credit funds (Regular Income Fund, Diversified Yield Fund, withdrawals frozen since Mar 08), realistic losses should stand at roughly 90%.

That would not be so bad, if unleveraged, as the original investment prospectus suggested a goal of roughly 10% return per annum, it suggests their gains/losses probably stood somewhere around 300% to500% of market performance. In this case, it means they've lost about 270% to 450% of investors' capital. Each fund held roughly $500m, and being liable for half the damages, ANZ lost at least $1.5 billion off those two funds alone (other losses are mounting).

Excessive Credit Risk

ANZ has sold about $23 billion worth of CDS, guaranteeing against practically junk status credit instruments. Simply put, more defaults will come from the now begun credit contraction, and ANZ will not be able to handle all the write downs. If you're a customer of the bank, it would be high risk to leave the bulk of your wealth there.

Nouriel Roubini

Roubini has been right from the beginning, that most of these commercial/investment banks have become insolvent, in the wake of Lehman Bros collapse.

Key talking points:

1) Real market value for the distressed credit instruments are likely to hold only 5 cents on the dollar.

2) Excessive leverage applied, hence the now crisis.

Monday, September 15, 2008

Treasury CDS

This is from Bloomberg.


Sept. 9 (Bloomberg) -- The cost of hedging against losses on Treasuries rose to a record on concern the U.S. government faces higher liabilities because of its rescue of mortgage companies Fannie Mae and Freddie Mac, credit-default swaps show.

Contracts on U.S. government debt increased 3.5 basis points to a record 18, up from 6 basis points in April, according to CMA Datavision prices for five-year credit-default swaps at 5 p.m. in London. Credit-default swaps on German government bonds cost 8 basis points and Japanese bonds 16.5 basis points.


The US government is considered to hold higher default risk as of now than Japan and Germany. This is unprecedented, volatility's likely to jump in the near future.

Tuesday, September 9, 2008

Fannie Freddie

Jim Rogers is easily the most truthful and least scripted person on financial media today. Here're his opinions of the Fannie & Freddie rescue package.

Rough summary- Not Good.

Sunday, September 7, 2008

Problem Loans

Gerard Cassidy of RBC Capital Market made that claim on Bloomberg, the interview is available at youtube. Of course some of us are fully aware of the coming bank failures, this gives even more reason to avoid upside bets on the economy.

It's interesting that Bloomberg TV has disabled embedded availability of the video, where one could speculate that they do not want public investored informed. (I uploaded it here manually)

Saturday, September 6, 2008

Institutional Investments

OK this was originally a video by Xenix2012 at youtube, and it appears that he's removed himself (or been removed) from the website. I will try and paraphrase his points below.

Large financial institutions tend to work alongside lenders, namely banks and the Fed, therefore they hold enough capital to sometimes impose their will upon the markets (except for "Black Swan", low probability events). So exchange price fluctuations mostly result from their orders.

They do not apply the so-called mainstream analysis of historical prices. Only semi "useful" thing I've found deriving from price has been historical volatility, and even this calculation remains limited in forecasting directional bias.

They buy low, and sell high, based on hints from the banks or the Fed. This is probably why monitoring credit conditions (e.g. LIBOR spreads, CDS yield, bond rates... and etc.) remain important in assessing equity markets, for the retail traders.

Here's something that we all know already (deep down). The institutions usually take opposite positions as those pushed through media outlets they own. E.g. when Goldman Sachs announced oil prices likely to hit $200 several months ago when it was $145, GS sold its positions instead to dumb money who take "infotainment" as truth (See article for details) . Today, I think oil is at $95/barrel.

*Whoever commented on the video disappearing, thank you!

Wednesday, September 3, 2008

Eugene Matthews

This is kind of hilarious since these guys are half serious and half... well, less reserved. Watch it and enjoy the 10 minutes!

Tuesday, September 2, 2008

ASX bearish

According to Jacob Greber, Australia May Cut Rate for First Time Since 2001, Signal More, and it signals a high probability of the market ending lower in the coming fiscal period. I'll try and explain this as simply as possible.

Common media pushes the idea that lowering interest rates induces equity market rallies over in the long run as investors may find debt instrument less desirable as result. The sentiment is true, among the newbie, uninformed investors; and the markets do tend to go up on the very days where interest rates lower, the momentum often loses air soon after.

However, reality (often far from conventional beliefs) lies through the perspective of the few consistent winners. The right question would be, what is the true motivation for the central banks to lower interest rates?

They do it because they believe things will get worse in the coming fiscal period, and lowering interest rates might produce a soft landing. As the Gods of central banks understand current economic conditions better than most of us, and unlike popular TV economists, they are CORRECT more often than not.

Pretty simple logic right? The financial institutions are not charity organizations. Every news release, publicized analyst opinion hold a specific purpose. Once understood, one could start finding real value off mainstream financial media.

Monday, September 1, 2008

Lehman Is screwed

I ran across this today, Lehman is a buy — and here's why ; from what I've read, the article only displayed reasons why you should short the stock.

Analyst says Lehman will address problems or face hostile takeover bid

By John Spence, MarketWatch
Last update: 11:29 a.m. EDT Aug. 29, 2008

BOSTON (MarketWatch) -- One of the more candid analysts tracking Wall Street is sticking with his buy rating on Lehman Brothers... the embattled investment bank planning to lay off as many as 1,500 employees...

Chart of LEH
Chief Executive Richard Fuld is also said to be facing an internal rebellion...

'This saga is not likely to continue much longer. Since I believe the result will be a positive one,' Bove said, even though markets are expecting "dismal" results for the fiscal third quarter, which ends Aug. 31. End of Story

The attempt at deception is unbelievable, Bove thinks we're stupid. He tried to entice investors into buying Lehman stocks with only a "I believe the results will be a positive one...", he could've done better than that. Not even the dumb money would swallow that up.

Lehman Brothers is f&*$ed, and Bove's handlers want to dump the stock, it would be great if some uninformed investors decide to make the investment off the above propaganda for a nice rally to sell off from. There's some truth.

Sunday, August 31, 2008

President Bush Says Happy Days Are Back Again

Pretty funny right?

Aug. 30 (Bloomberg) -- President George W. Bush (reminds me of the guy in picture) said the U.S. economy is 'beginning to improve,' and he credited the $168 billion stimulus this year with helping to ward off a recession.

Bush, in his weekly radio address today, cited several economic indicators that he said show signs of improvement: the decline in home sales has leveled off and sales are rising in some parts of the country. Orders for some durable goods are increasing, and the economy grew at an annual rate of 3.3 percent in the second quarter, he added.

'There are signs that the stimulus package will continue to have a beneficial impact on the economy in the second half of the year,' Bush said.

Likely Truth

Basically, the president wants the average, uninformed public investor to start buying and provide some liquidity for the institutional traders. The above pretty much hints a high probability of markets declining in the near future.