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.)