Sunday, November 29, 2009

It Could Drive a Man to Rhyme

I was reading the FT last week and one headline after another quoted Obama parroting something some Asian leader had told him to say. Fiscal responsibility. Harumph! Where was that in his playbook 6 months ago? How does that sync with the new healthcare plan he advocated (as opposed to the waterier one seeping thru Congress)? How does that sync with these not-so-fiscally-responsible splurges he authorized (to quote my anti-Stimulus blog post from last Feb):

"100 acres of new energy efficiency industrial zones" [in Puerto Rico] is gonna cost us $17 billion. That would be $4,000 a square foot ... or $11 million per job created. Why don't they just hand out shovelfuls of cash to these Caribbean shits? That would probably be cheaper than one of their other requests: $500 million to give solar water heater tanks to rural families. 14 very short-term jobs there (by their own count), so $35 million per job. Apparently the current $2,000 tax credit just isn't enough for these people, even though that's precisely the price of a one-family sized tank. Not that they're the only ones. Miami (city and county) have put in for nearly the same amount, mostly for transportation projects like the "Two hundred million dollar mile" project ($2.4 billion to extend the "Orange Line" east-west transit by 10 miles). By comparison, their pitch for $1.4 billion to expand the same "Orange Line" north-south is a bargain.
It drove me to verse:

Oh Jeez (after reading the first story)
Oh No (after reading the second story)
Oh Shit (after reading the third story)

Friday, November 27, 2009

And I Suppose People Were Not Expecting This ...

From the FT today:

Dubai shockwave hits global markets

Tremors from the shock request by Dubai’s flagship government-owned holding company for a debt standstill spread through global equity markets on Friday, triggering a sell-off in Asia and heavy losses on Wall Street.

While European markets staged a modest but nervous
rally after heavy sell-offs this week, investor sentiment remained jittery amid
a scramble to assess the broader fallout of the problems of Dubai World.
In depth: Dubai in turmoil - Jul-06
Editorial Comment: Dubai reveals the fragility of finance - Nov-27
Lex: Banks’ Dubai exposures - Nov-27
Opinion: Reality catches up with the Gulf’s model global city - Nov-27
Nakheel’s creditors dash to minimise damage - Nov-27
Abu Dhabi expected to prop up smaller brother - Nov-27

Hmm ... a scrap of the most inhospitable, useless land on the planet somehow convinces the world that it's rich simply by fiat. It goes on a spending spree to prove it. It falls flat on its face. I suppose that won't stop people from being shocked and awed.

Merriam-Webster defines a Mirage as:

... 2 : something illusory and unattainable like a mirage
synonyms: see delusion

Get it? A mirage? In the desert?

How's this for a rule, space cadets: nothing times any amount of leverage is still nothing. Remember that next time you are considering what to do with your kids' inheritance.

Saturday, November 14, 2009

Yeah, What HE Said: Warren Buffett

From the self-awareness file:

"We learned that a rising tide lifts all yachts."
-Warren Buffett on Charlie Rose last night

I was a bit surprised by his concerns on rising income inequality.

Tuesday, November 10, 2009

Sports Newspeak: Things Coaches, Athletes, and Announcers Shouldn't Say

Look - there are some people in sports who can do and say no wrong; Madden could read the Federalist Papers and it would be just as hilarious-slash-wtf as his MNF commentary. Cosell, Albert, Berman, Vitale, Carey - every guy has his list of classics who defined the trade. They can do no wrong. Nor can the old standards who are there to keep your focus on the sport, not the color commentary like Costas and Michaels. Nor can the big personalities like Deion, Tiki, and whoever shouts GOOOOOOOOOAL! On the other side of the mic are the golden-tongued coaches/managers (Holtz, Bowden, Torre, Riley to name just a few) who get away with saying the craziest things.

All those guys could make knitting interesting with the the force of their huge personalities.

This blog series is for everyone else. As the theory of multiple intelligences tells us, people can be really good at some things and not so good at others. There's no causal link between one type of intelligence and another. Athletes get recognized based on their physical "intelligence." Some are lucky enough to also have strong interpersonal and verbal "intelligences." Others ... not so much. Sadly, that doesn't stop many from trying to overcome stage fright with big words and fancy phases when presented with a mic. Often, they end up just parroting stuff they've heard other people say, even if it has little to do with the topic at hand ... and even if they don't really know what it means. At best, it's inane. So, why say it?

I suppose it's because we listen with baited breath to everything they say. We're all obsessed with these guys. Since the days of gladiators ... OK, probably genesis ... we have idolized and venerated physical prowess leading to victory. Unfortunately, we over-do it. Victory is not always directly ascribable to some dude's super-human aptitude.

Here's my own personal list of peeve phraseology that just makes us dumber, football edition:

Take Care of the Ball (v): The ability to not mess up. Just say "don't fumble."

Movement in Space (adv): Usually referring to an athlete's awareness or acuity in finding gaps in the opposing team's formations or plays. Just because the guy got a few yards doesn't necessarily mean he has some genetic mutation giving him radar-vision. So just say "good job running to a place where the opponent wasn't."

Good Feet (n): Another attempt to ascribe a specific success to an athlete's overall endowments. Just say "Good. He didn't fall down."

Hard-Fought (adj): Passive-agressive method of complimenting yourself via complimenting your opponent which can be used irrespective of whether your team won or lost. Just say "I think we're super."

I'm not Thinking About the Future... (ic): A thinly-veiled attempt to convince yourself that others believe you when you say that you're truly incentivized by the joy in the hearts of your fans, as opposed to the eight-figure contract your agent is negotiating or your mom says you deserve when you get to the pros.
Also: I'm just looking ahead to Sunday.
Also: All that matters is beating our next opponent.
Also: One game at a time.

Game-Time Decision (n): A way to avoid announcing a stupid decision you've made in the hope that, in retrospect, it will appear much smarter or will get forgotten.

Wednesday, November 04, 2009

What Will Tomorrow Bring: Program Trading for Everyone!

When the stock market (and every other market) is on a one-way trip to the clouds, brokers convince their prey (err, I mean customers) to "buy and hold" via "dollar-cost-averaging" with some nice "rebalancing" from time to time. As the great investor Issac Newton explained: What goes up must continue up. It's simple physics. It's the laws of Mother Nature. Don't you like nature? Of course. In that case, they might have a hot tip on a cool green stock you should sink your children's inheritance into.

Or you could just discipline yourself to sock away 10% of your monthly income in Spiders and forget about it.

Or you could get all control-freak and OCD and get all into options and day trading and lose your shirt.
These days, the markets follow a different law of physics called the Super Rubber Bouncy Ball law. What goes up hits the ceiling, accelerates, shoots downward, hits the bottom, accelerates further, shoots upward, bounces off the furniture and pings sideways into Mom's expensive vase. The vase shatters on the floor and scares the cat, which shreds the nearest curtain and then pisses on the carpet.

In such a world, the only way to grow your kids' inheritance is to be able to make money no matter what direction the market is moving. The only way to do that is to buy and cover low, sell and short high ... and play volatility in between ... all the while hedging against soaring interest rates and inflation.

In short - do what hedge funds and Wall Street have done for years ... Hopefully, with a little more prudence since it's your own dinero ... and maybe within the law.

I suspect you won't have armies of traders and analysts to do this for you like Wall Street does. Fear not. Hedge funds don't have armies either. You just have to learn to invest like they do: with computahs. Over 70% of all US stock trades are executed by computers following rules with no human intervention. Welcome to Program aka Algorithmic Trading. In short: rather than picking specific investments or trades, you define rules for investing and trading. Then the computers do the grunt work of hunting for opportunities that fit your rules and they execute the trades for you.

Yesterday: Have lunch with your broker. Listen and nod for an hour as he ruminates, boasts, rattles off arcane irrelevancies, pretends to see the future, and slips in stock pick recommendations. Then blindly agree, give him a check for another ten grand, and let him pay the lunch tab.
Tomorrow: Have a pre-defined amount of money automatically sent from each paycheck to your brokerage account. Have lunch with your broker. Listen and nod for an hour as he ruminates ... well, you know, they're creatures of habit ... but the difference is that his suggestions should be strategies (aka packages of rules that make sense together) as opposed to prognostication and specific picks.

Yesterday: Pore over stock info online. Read the WSJ. Check Morningstar and Jaywalk. Watch CNBC and Kramer (yuck!). Every day or two, jot down a stock symbol that someone seems to think are going to "pop." Then, log into eTrade or Merrill Online and key in your stock symbol, amount, and price. Then, sit back and watch as that stock inevitably does the unexpected. Finally, freak out and sell the stock. Take the money that's left and repeat.
Tomorrow: Pore, read, check and watch, but much less frequently. Every month or two, jot down a strategy that fits the new market and economic realities. Log on and key in the rules comprising the strategy. Have a pre-defined amount of money automatically sent from each paycheck to your brokerage account. Then, sit back and watch (or not) as the computer buys and sells things you didn't even know existed at prices you don't care about. Some trades go the right way and the computer exits with a nice profit for you. Other trades go the wrong way and the computer applies your stop-loss rules to ensure you don't end up living in a cardboard box. The computer repeats tens, hundreds of times a week without your input. Hopefully, profits pile up. If not ... well, bad strategy. Just like LTCM.

Don't look now, but the future is already here. Folks have been developing trading rules for decades. A growing number of folks are using a growing number of online brokerage sites which offer rule-based trading. It's a bit amateurish still, but getting better ... fast. This time last year, it was a treat to enter a rule requiring more than a stock symbol and a price. Now, the likes of TD-Strategy Desk and Credit Suisse-AES have rolled out platforms allowing folks to effectively build entire entry and exit strategies, taking into consideration multiple asset classes, company fundamentals, and market conditions.

Vague and arcane, right? Here's a simple concrete example:

Assumptions: Short-term, the dollar will continue to slide against Chinese and Emerging Market currencies. The US will buy less from abroad. Emerging market stocks will do better than domestic ones. The US stock markets will be volatile around earnings seasons. Medium-term, drug companies will be pressured by Obama to cut costs, and profits will shrink accordingly. Long-term, house prices will go back up while commercial real estate prices will go down.

A strategy might include a set of rules like:
  • Constantly assess cash available and asset allocation
  • Constantly assess current interest rates, dollar prices, relative yuan prices, etc
  • Constantly assess prices of bazillions of assets and fundamentals of bazillions of companies around the globe
  • Always maintain a certain cash balance, subject to a hard minimum plus some extra when market volatility increases ... and at Christmas times
  • Slowly build up interest bearing assets which mature in about June 2012, because that's when you'll be ready to buy your next fancy new car
  • Always maintain asset allocations within a few percentage points of the target pie-chart you've defined. If this appears to be limiting your profits because of missed opportunities (meaning another rule would have fired in the past and would have made you money, but it was prevented from doing so because of the allocation limits), alert you to reassess the allocation strategy
  • Auto-buy into dips in the market, especially around earnings seasons
  • Auto-sell when the asset reaches a relative target, either a % gain or crossing a certain statistical threshold like a moving average
  • Auto-exit if any trade goes south by more than a few percentage points
  • Auto-exit if a better opportunity presents itself
  • Keep an eye out for opportunities to buy residential real estate and related assets (like homebuilders, landlords, and residential REITs) when the asset's fundamentals look better than the average for the market and its price is below its 3-month moving average. Exit these positions once the price has jumped more than 10% in a day, risen by at least 20% overall, dips more than 3% below acquisition price, or 6 months have passed, whichever comes first.
  • Keep an eye out for opportunities to sell commercial real estate and related assets whose debt levels look particularly ugly and prices are above their 3-month moving averages. Exit these positions once the price has fallen more than 10% in a day, fallen by at least 20% overall, drifted up by 5% above acquisition price, or 3 months have passed, whichever comes first.
  • Ceterus paribus, slowly transition from US, dollar-denominated assets to those from China and other emerging markets. When the dollar temporarily spikes against these currencies, exit some laggard dollar-denominated assets and move the money into attractive Chinese and other emerging market assets. Avoid companies that export a lot to the US
  • Ceterus paribus, watch for opportunities to slowly move from investments in companies with non-dollar-denominated debt into those of similar companies with more dollar debt
  • If a headline turns up for one of the assets in your current portfolio, analyze the price vector (direction of change) after the headline and buy more or close out in order to beat everyone else to the punch.
  • Always maintain an appropriate level of rate hedge (for example, shorting treasuries, selling dollar futures/options, etc) in proportion to overall exposure, especially around significant announcements about the economy or the FOMC. If rates surge over a decent period of time, alert you to re-assess the strategy
  • And, of course, the security blankey: tell you if the model seems wrong compared with other peoples' behavior. Before accepting new rules from you, back-test them over some previous, similar time period to tell you you're being dumb. Oh, and slam on the brakes if the portfolio starts hemorrhaging money because of a flawed rule.
And Bob's your uncle! Ten years forward, investing like this will be commonplace. Believe me: I can see the future!

Illustrations Copyright