Chinese credit bubble yet to pop

Fitch Ratings warns that Chinese banks have a whole lot of bad loans due in the coming future. This seems odd since Fitch did absolutely nothing to forewarn the US credit crisis. There is probably more to this story than meets the eye.

But this article points out some excellent issues to ponder within the Chinese economy,

some key points,
"
China's banks are veering out of control. The half-reformed economy of the People's Republic cannot absorb the $1,000bn (£600bn) blitz of new lending issued since December.
" (he means $1 Trillian)

another interesting thought,
"
This is a surprise to me but Michael Pettis from Beijing University says China's public debt may be as high as 50pc-70pc of GDP when 'correctly counted'.
"

WOooOOOo. The Chinese government has much to fear from an economic instability, as many still recall the days of Mao, communism, revolutions, etc. This will end badly, one way or another.

Crude Sentiment Measure

Check out Google Fight! It offers some interesting stats. The below shows that more folks today believe in the markets rallying in the near future, which usually presents a good sign to start selling.


Coincidentally, more people believe Amanda Knox is guilty rather than innocent. Looks like the American propoganda machine doesn't always get the job done!

Behravesh, Rogoff, Roubini on US, Global Economies

Despite that this talk happened in Mar., it remains very much relevant and applicable for the immediate and midterm future. This type of information has given me a tremendous edge while making financial bets.


1 of 9 (Generally where we are and what to look forward to)


2 of 9 (Oil price forecasts)


3 of 9 (Roubini explains some immediate credit market concerns, GOOD STUFF!)


4 of 9 (Lehman Bros. vs Systemic Meltdown)


5 of 9 (Japan or Sweden, Predictability and Black Swans)


6 of 9 (Inept regulators, Europe vs. US outlooks)


7 of 9 (Stimulus money, nationalization issues)


8 of 9 ("Too Big to Fail", monetary policies, some coming challenges)


9 of 9 (Emerging markets, pent-up demand)

German Financial Advisor Tortured

Senior citizens in Germany got so fed up with the responsibility escaping line of "It was not my fault, but due to market conditions..." from their "financial advisor", that torture seemed like a good consequence.

This is what happens if you screw around with OPM (Other People's Money). Perhaps this event could remind these so-called experts to think twice before screaming out moronic sales pitches for "buy & hold".

Some interesting excerpts,

"
A gang of wealthy Senior citizens living on pensions kidnapped and tortured a financial adviser in Germany after he lost £2 million of their savings during the financial crisis.

Dubbed ‘The Geritol Gang’ by police – after the arthritis drug – the kidnappers seized James Arnburn and subjected him to a four-day ordeal. He was burned with cigarettes, beaten with a chair leg and chained up 'like an animal'

Mr Arnburn, 56, described how two of his kidnappers, identified only as Roland K, 74, and Willy D, 60, hit him with a Zimmer frame (their geriatric walkers as shown below) outside his home in Speyer, west Germany before binding him with duct tape.
"

Yield matters

When it comes to stocks, yield hints immediate future price moves via implied professional sentiment. Keep in mind that large, price affecting orders come from institutions and high value traders who make decisions largely by economic means, not historical price charts.

Yield vs. fixed interest

The relationship is simple. When dividend yield of a stock exceeds fixed interest instruments (bonds, savings accounts, and etc.), some large investors find the said stock more desirable due to a relatively higher return over time. So naturally when yield makes a historically significant high, large buying orders come and push the price up in the immediate future, and vice versa.

Of course if we take into account of credit risk (listed company going bankrupt) or direct market directional risk, it becomes a bit more complicated. Despite that, from personal experience and empirical evidence, not all institutional investors comprehend these issues. Remember how I mentioned that 80% of hedge fund employees did not understanding the technicalities of “hedging”?

How to apply this for an edge

Yield as a time series tends to remain stationary and has a negative correlation to the underlying stock price. Consider selling short when yield gets to a historical low, look at covering when it reverts to mean value; and vice versa for buying and selling.

The chart holds last two years of McDonald’s (MCD) along with its yield. Pretty easy right?

Buying the New Low (and die)

Bella from SMB-Trading talked about the "Buying the New Low" automated trading strategy. She is right it absolutely does not "work". But I also find it disturbing that people assume mathematicians work tirelessly on something this trivial.

A basic recap of the laughable "algorithm":

"
When a stock makes a new intraday low algorithmic programs buy this new low because they know that short term traders will get short. These programs are betting that only light volume will enter the market when a stock makes a new low. They buy the new low, tick higher and force the weaker short term shorts to cover.
"

So some so-called quantitative analysts (with PhD's in math) allegedly came up with it. I highly doubt it. Any newbie hoping to "buy low sell high" could have come up with that. It just seems shocking how any institutional management could take it seriously as mentioned in the article.

Predictable "Random" Distributions

Opposed to academic principles, I notice predictable elements within “random distributions” via theory and empirical evidence. Exploiting these alleged aspects or “inefficiencies” then could open doors to profitable betting.


Normal Distribution basics

“In probability theory and statistics, the Normal or Gaussian distribution is a continuous probability distribution that describes data that clusters around a mean or average.” (Wikipedia) This theory applies to most assumed independently random statistics today (e.g. coin tosses, roulette spins, blackjack hands, individual lifespan, and etc.), where the law of large numbers states larger sample groups produces more stable (relatively narrow) distributions.





Empirical observations (Blackjack)

Purely independent events like a string of blackjack games while the player applies the “basic strategy” would results in a win/loss distribution with the mean somewhere a bit left of 50%. Understanding and knowing this, several assertions become possible.


Theory

Due to independent randomness, any arbitrary sample group W/L distribution exhibits Stationarity. This means with any string of games, you KNOW a rough range of resulting winners. You simply do not know when they will occur, only that they come sometimes earlier than later.


Instances where winning hands come later, preceded by strings of losers, a window of profitable opportunity then arrives. Mean reversion works! Yeah this completely disengages from academic philosophy, which is reassuring considering how flawed existing academic financial economic theories still flourish today.


An example stock return distribution



This is a daily return distribution of US stocks from Dec. 31, 1999 to April 09, overlapped with a Normal Bell Curve. (Similar to the century long return) The distribution, though not exactly normal, clearly suggests stock prices tend to fall harder (given large enough trading days). It also hints that each period of rallying presents a higher probability of a coming decline. After all, we care more about the immediate future than the immediate past.

Commerical Bankruptcies Reach 376/day

I noticed this from USA Today, alongside 6,000 total bankruptcies each filing day in May 09. Credit risk may finally get some respect.

Laziness Does Not Pay

I ran into a few articles on “The Lazy Way to Investment Success” focusing on holding various mutual funds, this “way” will invariably end badly for largely the excessively high fees and credit risk. OK, let us backtrack a moment and remember the actual risks of “buying, holding, and hoping”.

Inflation adjusted

At page 40 of the my SVR Research, we notice that the correlation between GOX (CBOE Gold Index) and the ASX200 stock index stabilizes around 95%. This means that actual stock performance simply adjusts with the real rate of inflation. Buying and holding stock indexes on its own, over time, will end with 0 return. Therefore, when transaction fees become involved, real-losses become inevitable for the long term sucker/investor.

Volatility and Credit risk

I have discussed actual stock return distributions from Katz and McCormick’s Advance Option Pricing Models. The numbers do not lie. The negative skew in actual historical returns not only disagree with conventional assumptions of Monte Carlo price movement, but also points to undesirability of buying & holding. Margin calls and/or bankruptcy related losses remain common with every volatility jump.

Diversification does not work

Imaging going to the casino and instead of blowing all your money on a single game of roulette, you split it up between slot machines, poker, blackjack, etc. Will you expect to win just for playing more games? I think not.

Laziness never ends well

This benefits the diligent trader however. The financial markets were designed deceptively simple to entice the lazy, hell all you have to do is push “buy” or “sell”. Ignore inflation, and you can convince yourself that it is “better” to just sit back and let the good times roll.

The good news

Losses taken by the lazy, uninformed, usually result in profit for the diligent traders. So, if they choose to remain “lazy investors”, so be it.

Mini Dow Jones -900% tick!

Somebody must've shat bricks from this, haha.