Dorm Room Trading Inc.

2010

2009-12-25T15:04:00.000-08:00

Yeah its been awhile. Anyways Bespoke posted something interesting from various blogs on the 2010 outlook if you didn't know. Financial Armageddon comes in the most bearish while VIX and more comes in the most Bullish.

What Im Reading Today.

2009-11-17T12:19:00.000-08:00

The Debt Economy, How the Tax code encourages debt (The New Yorker 11/23) The MUST READ of today.

"The government doesn’t make people go into debt, of course. It just nudges them in that direction. Individuals are able to write off all their mortgage interest, up to a million dollars, and companies can write off all the interest on their debt, but not things like dividend payments. This gives the system what economists call a “debt bias.” It encourages people to make smaller down payments and to borrow more money than they otherwise would, and to tie up more of their wealth in housing than in other investments. Likewise, the system skews the decisions that companies make about how to fund themselves. Companies can raise money by reinvesting profits, raising equity (selling shares), or borrowing. But only when they borrow do they get the benefit of a “tax shield.”......

Economies work best, generally speaking, when people are making decisions based on economic fundamentals, not on tax considerations. So, as much as possible, the tax system should be neutral between debt and equity, and between housing and other investments. It’s not, and, worse still, as we’ve seen in the past couple of years, debt magnifies risk: if companies or individuals rely on large amounts of leverage, it’s much easier for bad decisions to lead to insolvency, with significant ripple effects in the wider economy. A debt-ridden economy is inherently more fragile and more volatile. This doesn’t mean that the tax system caused the financial crisis; after all, the tax breaks have been around for a long time, and the crisis is new. But, as a recent I.M.F. study found, tax distortions likely made the total amount of debt that people and companies took on much bigger. And that made the bursting of the housing bubble especially damaging. So encouraging people to take on debt qualifies as a genuinely bad idea.

Earnings seasons trends (Zach's)

AND If your mind is still curious.....

Gold Prices are a dead giveaway (The Independent)

Sovereign CDS

2009-11-16T13:32:00.000-08:00

Bond Holders getting worried about Britain.

Weekend Musings

2009-11-15T16:34:00.000-08:00

Earnings Season: More than 80% of S&P 500 companies beat their earnings estimates this earnings season, the average stock that beat estimates went up 1.32% on its report day, while the average stock that missed estimates went down 3.43%. (Source: Bespoke Investment Group) The Beat rate was 72% in Q2.

Uncle Sam is sitting on a Gold Mine (CNN Money)

"The United States is currently the largest holder of gold in the world. The US Treasury is currently sitting on 261.5 million ounces. Multiplied by roughly $1100 per ounce, we’re talking about a stash worth almost $300 billion at today’s prices."

A Superpower Stirs (WSJ)

"Now, at the dawn of the 21st century, the world is looking to China to assume an unfamiliar role of global leadership. At a time when American prestige is fading, China's status is rising....."

The Real Threat to Fed Independence (WSJ)

"So, why should we be concerned that the Fed will become highly politicized now? First, there is the Fed's legacy of its inability to limit past financial excesses. By failing to be an effective guardian of our financial system, it has lost credibility....

The Fed's unwinding of non-U.S.-government obligations will be monitored carefully by the market. But the disposition of these obligations is very sensitive politically. Many of these securities are mortgage-related. Their liquidation will put upward pressure on interest rates, which will not be welcomed by Washington, and even less by the housing industry"

Three things David Rosenburg thinks (Prag Cap)

Distribution of SPX returns over 2 and 5 years

2009-11-11T20:28:00.001-08:00

Some Musings

2009-11-10T12:38:00.000-08:00

"It seems to me that the economy has entered a sustained period of expansion." Janet Yellen Smokes Crack

"The mere fact that an instrument is "anti-social" is no reason to ban its use" (Information Arbitrage)

"The Brits Dont have a problem breaking up the banks" (WaPo)
One of the best articles I have read on the CDS Market (Friday In Vegas)
"Financial Regulation, How would you have it work?.... (Accrued Int)

"I'm a free market guy. I'd like to see any business be allowed to take whatever risks they can get funded. I don't want to tell what risks banks can take any more than I want to tell Macy's how many stores it should open or what flavor ice cream Coldstone should be selling."

"YTD Returns of the S&P 500 dont look too hot when measured in other currencies" (Bespoke)
"Why a Tobin Tax Wouldn't Work... Think it will? Ask Sweden" (Business Insider)

Some stuff im reading.

2009-11-02T15:43:00.000-08:00

Jittery Companies Stash Cash (WSJ) 10/2

"In the second quarter, the 500 largest nonfinancial U.S. firms, by total assets, held about $994 billion in cash and short-term investments, or 9.8% of their assets, according a Wall Street Journal analysis of corporate filings. That is up from $846 billion, or 7.9% of assets, a year earlier."
This is interesting in the case that since the market has rallied bonds rallied hard and it was much much easier to issue debt. Please say they are not gonna wait until stocks go higher (not saying I think they do) and then do massive buybacks (my pet peeve). I'd like to see some data on inventories because if they are just hoarding cash versus inventories it shows an even more dior outlook.

The Periodic Table of financial bloggers (The Reformed Broker). I didn't See Adam Warners Blog (Daily Options Report) on there which was a giant WTF from me. He is a regular in Abnormal Returns.

Will PIMCO's Size Crimp its Performance (WSJ) In two worlds. Probably Not. As much as I dont like Bill Gross because how close he is to the US Gov and how he constantly talks his book. He is by no means dumb.

Martin Armstrong

2009-10-07T20:38:00.000-07:00

Seeing Martin Armstrong in the limelight again.. The New Yorker did a great piece on him seen below:

"ABSTRACT: ANNALS OF FINANCE about Martin Armstrong, cycle theory, and the financial markets. One day, in a newspaper, the young Martin Armstrong came across a list of financial panics between 1683 and 1907. He found that, on average, there had been a panic every 8.6 years. As he read more, he began to suspect that 8.6 was a highly significant number. In the early seventies, Armstrong became a trader and dealer in gold, and began compiling forecasts about commodities and currencies, which he sent out to clients. Over time, forecasting became his business. He constructed what he called an Economic Confidence Model, which he relied on to predict an upturn in the price of commodities in the early days of 1977. It worked. Later, he realized that 8.6 years was exactly three thousand one hundred and forty-one days: 3,141, the number pi times a thousand. If pi was essential to the physical world, perhaps it somehow governed the markets. Pi suggested some future dates of significance, which Armstrong watched carefully as they approached: December, 1989, which marked the Nikkei’s peak before it crashed; July, 1998, the high point in the S & P, just before a Russian default broke the giant hedge fund Long Term Capital management. In 1999, Armstrong published a report explaining the part pi had played in his calculations. That year, he was charged with defrauding Japanese investors of billions of dollars. Armstrong has now spent more than nine years in jail. Discusses the differences between fundamental analysis and technical analysis of the financial markets. Cycle theory is a kind of Gnostic offshoot of technical analysis. Mentions other thinkers who have studied cycles and market timing, including Nikolai Kondratiev, Joseph Schumpeter, Bill Erman, and Arch Crawford. The writer was told repeatedly that some of the biggest investors out there view even the wackier cycle theories with respect. Tells about Edward R. Dewey, a cycle theorist who was the chief economic analyst for the Department of Commerce under Herbert Hoover. In the forties, he formed the Foundation for the Study of Cycles, which endeavored to collect and process as much cycle data as possible. Discusses Fibonacci and the idea that such phenomena as the spirals in the nautilus shells, hurricanes, and galaxies; branches of trees, leaf veins, skeletal and circulatory systems; and the distribution of flower petals and brain waves conform to something called the golden ratio. Also mentions the theories of Ralph Nelson Elliott and Robert Prechter. Tells about Armstrong’s arrest and gives details of the criminal case against him. Writer visits Armstrong at the low-security prison camp on the Fort Dix military base where he is being held."

Here is the full piece on his research with cycles. A read I highly recommend. For some reason I am interested in how the chair of the princeton economics department went to jail and decided to look a little deeper and see why.. (NYT article here) and this is according to Wikipedia:

"In 1999, Japanese fraud investigators determined that Armstrong had been collecting money from Japanese investors, improperly "commingling" these funds with funds from other investors, and using the fresh money to cover losses he had incurred while trading; this is a form of Ponzi scheme. Assisting Armstrong in his scheme was the Republic New York Bank which produced false account statements to reassure Armstrong's investors, and which in 2001 agreed to pay $606 million as restitution for its part in the scandal. Armstrong was indicted in 1999, and was ordered by Judge Richard Owen to turn over a number of gold bars, computers, and antiquities that had been bought with the fund's money; the list included bronze helmets and a bust of Julius Caesar. Armstrong produced some of the items, but claimed the others were not in his possession; this led to several contempt of court charges. Armstrong was jailed for seven years for contempt of court, and only went to trial when the NY Court of Appeals removed Judge Owen from his case; in 2007 he pleaded guilty and was sentenced to five more years in prison. Judge Sonia Sotomayor was reported to have been part of the panel of appeals judges that upheld a lower court ruling to keep Martin Armstrong in prison for contempt of court."

That last part is fascinating...

Consumer Credit

2009-10-07T13:33:00.001-07:00

Ok at the end of the day. Credit is inflation.. I'll bet you a buffalo nickel that inflation dosent "happen" price inflation that is until consumer credit picks up.. Think about it. In order for price inflation to pick up you need more nominal dollars chasing a finite amount of goods and services they bid the prices of those goods and services up with the more nominal dollars floating around. E.G. Prices of goods and services go up. Think about how many people buy stuff on credit. The majority of Americans will pay with a credit card and then pay it off at the end of the month. Less Credit = less money to bid up the prices of goods and services.....Thats it in a nutshell....

Misc.

2009-10-07T07:44:00.000-07:00

A Technical level Im watching on the $SPX

1121 - 50% Retracement level from the October High's to the march lows. This level will prove crucial if we are going to have "A new Bull market"

Note by the Slope of the EMA(200) we are not really going anywhere... I think we could see some more chop city.

BTW i had an interesting comment made to me this morning from a friend who does programming. We were discussing Thomas Friedman's book, "The world is flat". My friend thought that Friendman's idea's about globalization were interesting and right on until he started working with indian software and explaining and how awful the stuff is and comparatively the rest of the world lacks when it comes to actually innovation of software and producing a good product.. Just food for thought.

Links

2009-10-04T11:41:00.000-07:00

Busy Busy Busy so no real posts today.. Some of what Im reading

We are at a greater risk of a deflationary collapse today than in 2007 due to "Debt levels of consumers and business exceed the capacity to repay" (Mish)
Paulson's Mastermind Pellegrini has opened his own fund and is not doing too shabby up 80% YTD. (Bloomberg)
Interview with a mad hedge fund trader (Zero Hedge) and the case for TBT and Interest Rates:

"TBT is a 200% leveraged bet that long Treasury bonds will go down. While the Fed keeps short rates low, it doesn’t directly control long rates. As the supply of government bonds increases exponentially, their eventual collapse is inevitable. All Ponzi schemes must come to an end, and the US government is no exception. We currently have the greatest liquidity driven market of all time, and the ten year is eking out a mere 3.30% yield, pricing in near zero inflationary expectations. The average yield on this paper for the last ten years is 6.20%. If the yield goes back to 5%, that will take the TBT from $45 to $70. The TBT could perform even better if Treasuries lose their triple “A” rating, which I think is a real possibility.

Historically, bonds are not a good buy in a low interest rate, deflationary environment. If long rates move from 3% back to the 12% we saw in the early eighties, bond holders will get slaughtered, and the TBT could exceed $200. Even if inflation stays low, the sheer weight of supply and credit concerns will crater government bond prices."

I don't necessarily disagree, if you read the interview you will realize the guy is no idiot and quite intelligent. I would love to see how this work's out because we all the inverse ETF's dont always mimic like they "should" Since they track daily fluctuations. TBT is something you want to be long if you expect interest rates to make a series of slow daily moves upward.

Go Long Tech?

"With financials, I knew they would rebound, but didn’t imagine the extensive move we’ve seen. It was the greatest dead cat bounce and short covering rally of all time. But the financial sector will have troubles for years. If I had to buy U.S. stocks, I’d buy big tech stocks like Microsoft (MSFT), Oracle (ORCL), Intel, (INTC) and Cisco (CSCO), because for the most part they have tons of cash and little debt. Tech stocks didn’t have the problems that were plaguing the other sectors. For example, they have no troubled assets, and no regulatory clamp down on their business. The credit crisis didn’t affect them directly because they finance their operations through cash flow and tend not to borrow. Of course, they’re hurt indirectly when the customers have credit problems. "

On Oil and Natty:

"Stay away from natural gas. The volatility will kill you. If you are a masochist, then buy it only when it’s cheap, on big dips, in the $3/MBTU range. In the last three years, thanks to the new “fracting” technology used in oil shales, we have discovered a 100 year supply of natural gas sitting under the US, and the producers have not been able to cut back fast enough. So now we have a supply glut, and we are almost out of storage. This is what took us down from $13 to $2.40 in 18 months. The lack of hurricanes has not helped demand either. Producers have been cutting back like crazy, trying to balance supply and demand, with a breakeven point of $2. They need a cold winter to help bring things back into balance. If the industry gets organized, then gas can become the 20 year bridge we need, until energy alternatives kick in. That makes me a big supporter of the “Pickens Plan.”

Oil is much more interesting. It overshot to downside in January to $32. Crude is now at $70 climbing out of the recession. Imagine how high it will get when all economies are functioning again. The financial crisis hurt the ability of big oil companies to get financing for large development projects in oil. These projects can take five to ten years to bring online. That means we will get higher oil prices sooner. We may get a pull back to the $50s, but the $30’s would be a stretch. The $32 low was an artificial one caused by a complete absence of liquidity in all markets. I don’t think we’ll see those lows again. "

As a logical consequence of the prolonged economic downturn it appears that participation in the federal food stamp program is on the rise.

In fact, household participation has been climbing so steadily that it has far surpassed the last peak set as a result of the immediate fallout following hurricane Katrina.

The latest data released by the Department of Agriculture shows that, on a year-over-year basis, household participation has increased a whopping 24.55% while individual participation, as a ratio of the overall population, has increased 22.32%.

1 Year Anniversary of TARP and the numbers come in:

$573.3 Billion -- Total amount distributed
$72.8 Billion -- Amount returned to taxpayers.
So 12.6% has been returned....

Source for Numbers here.

Expect some more of these posts just to keep the blog up and running.

Why is Sheila Bair Outside the law?

2009-09-29T13:48:00.000-07:00

Its pretty much old news that the FDIC is broke. My little brother called that one.. Broke is what you get when congress thinks banks are well capitalized and does not allow the FDIC to collect insurance premiums on 95% of them for 10 years, then you have dozens of banks failures over an 18 month period. My question is as follows, why are people allowed to get away with breaking the law? Bloomberg news reported today "FDIC purposes bank's prepay deposits through 2012" There was an interesting couple of sentences in the middle of this article:

"The agency is required by law to rebuild the fund when the reserve ratio, or the balance divided by insured deposits, falls below 1.15 percent. It was 0.22 percent on June 30. The fund, drained by 95 bank failures this year, had $10.4 billion at the end of the second quarter."

I thought laws were passed to obey them? What is there to enforce this law. Why was Sheila Bair not working on this in June when the DIP was 81% below its minimum? Its easy to conclude that Obama supports unlawful behavior by backing Sheila Bair. Sheila bair ought to be prosecuted. This is a prime example of politicians not doing anything until a crisis hits.

Macro Ramblings and Predictions.

2009-09-24T11:53:00.000-07:00

Ok RIMM reported, they beat on net income but sales missed. This is a theme I am watching for the market as a whole.. I don't think we'll see an improvement in the economy until we see REVENUE Growth, because you can only cost cut so much over the long term.. Is RIMM gonna be a catalyst for the entire market? Speaking of catalyst I've spent a lot of nights thinking and reading and figuring out the million dollar question is, what the catalyst for a turn in this market will be.. If there is one @ all. As we have seen I think the $SPX's price will be a function of where the dollar, and oil go, with earnings as a smaller factor.. This is why I am focusing on oil and the dollar.

Oil and the Dollar:

Oil: We are currently looking at a crude market that is stuck between two competing factors: optimism over the perceived recovery of the global economy (and the oil demand that will generate) and persistently weak consumption of crude and its liquid derivatives. Any oil analyst will tell you that we are awash in. Production has and is running significantly higher than consumption. Shift those supply / demand curves baby! but Econ textbook's dont really get how markets work. They can stay irrational for awhile e.g. Those models don't take into account pricing for future demand / supply like markets do. I think oil will give us a clear indicator of where the global economy is going in the next 12 months and it will either move in lock step with the SnP or lead it.. Too the downside or the upside, the former is much more likely than the later IMHO. At the end of the day im speculating that crude oil will revert back to where it fundamentally belongs that is < $55. Btw Oil Cracked the 100 day moving average today. Be careful because this trade has some geopolitical risk, there is a pretty serious situation going on in Iran, and we are sitting down in October.... At the end of the day.. Im a Bear.

USD: this is another component of oil. The fed can print all day, but as long as credit is contracting that money sits in banks... Unless the velocity of money starts going up significantly (unlikely to happen with credit contraction where it is..... Credit = Inflation), that we are not gonna see a collapsing dollar anytime soon. We have another couple of weeks before a fed announcement so with that out of the way lets look at the supply and demand for USD, Credit markets are currently not very stressed, which equates to less demand for dollars...Also perma-Bear dollar people aside, there are too many dollar bears.... You have all these dollar carry trades going on.. Anyone remember what happened to all those people that had the yen carry trades on last year... I do..

My Predictions (unlike CNBC I might be wrong I might be right but I have money on most of these trades.

The $SPX will be lower next march than the current price (1043)... We could break the 1080 high.. but im still a Bear.
Crude will be lower than $55 at year end.
The GBP.USD will Get hit hard.. Im talking 1.45ish or lower.
The EUR.USD will be lower.. < 1.35
One last thing.. AIG... Seriously guys.. The thing is not worth anything... I'm saying it should go to Zero but you never what the gov. will do...

What Do I know I'm just a college kid? By reading this you accept that it is not investment advice.. Trade at your own Risk..

Walk Away

2009-09-20T19:17:00.001-07:00

The LA times had an interesting finding in an article this weekend. The thesis was that the majority of people who default have high credit scores and that more people are strategically defaulting.. Why are more people not doing this? If I was 40% underwater on a house I bought, Take your CD's and checking Savings account away from the bank you have loan with (they will take them if you default) and default on the loan. Banks dont wanna take the write down's and they are so busy that we know most wont kick you out. Basically Free rent for almost up to a year.

Is is prudent to Back America?

2009-09-02T14:11:00.001-07:00

There has been a PDF from Zerohedge that has been making the rounds from the blogosphere one quote that interests me is as follows:

It is astounding, and this is the
second interesting observation, how completely
naturally those who claim the moral high-ground
rush to join forces with the authorities and their
financial requirements. At the risk of once again
winding up certain specialists in business ethics,
let us briefly recall the sort of tax authorities we
are dealing with, and the sort of state they serve: a
country that, over the last 60 years, has unques-
tionably been one of the most aggressive nations
in the world. The USA has fought by far the larg-
est number of wars, sometimes with, but mostly
without a UN mandate. It has broken the interna-
tional laws of war, maintained secret prisons, and
fought an absurd war against drugs, with serious
consequences both abroad (Columbia, Afghani-
stan) and at home (according to reliable sources,
the tentacles of the narcotics mafia now reach
well into political circles). With breathtaking
moral duplicity, the USA maintains enormous
offshore havens in Florida, Delaware and others
of its states. The moralizers have joined sides with
a nation that still makes extensive use of the
death penalty, and that has a legal system under
which lawyers can get rich on the misfortunes of
their clients. Liability cases often end in verdicts
with exorbitant damages, which makes business
activity extremely risky, for medium-sized enter-
prises in particular. The moralizers provide intel-
lectual support for a country that allows its infra-
structure to collapse, and then stuffs convicts into
hopelessly overfilled jails, after what are not in-
frequently dubious proceedings. They fund a
nation that tolerates – or rather, causes – regular
crises in the global financial system that it man-
ages. A country whose underclass enjoys neither
the benefits of an adequate education, nor a half-
way functional healthcare system; a country
whose economic system is increasingly inclined to
overconsumption, and in which saving and invest-
ing have increasingly become alien concepts, a
situation that has undoubtedly been one of the
driving forces behind the current recession, with
all its catastrophic consequences for the whole
world.

Is eliminating flash trading a bad thing?

2009-08-31T10:45:00.000-07:00

Just thought I would post a convo I had this morning with a friend of mine who does Index arb and uses a lot of HFT strategies.

Me: So what do u think about all this flash trading / High Frequency trading stuff in the news
******: i think flash trading scandal is hokum. Flash trading is an OPTIONAL order type
******: if you think you're getting fucked with flash orders, then don't fucking use them and let the exchange ATS < ATS is the mechanism for which exchanges trade with each other.> your order instead and increase your commission bill. if you go to buy 10,000 shares on ARCA at .01, then ARCA will ATS the other exchange for the balance of the trade which they don't have but ARCA will charge you more for that what flash orders do is send an IOI to the other exchanges that they have an imbalnce on an order so that the other exchanges ATS them and it saves the client the commission charges however, all market participants see the IOI (IOI = indication of interest) order so the algo guys then IOC (IOC == immediate or cancel / fill or kill) the IOI to find the top.

Me: What about those congressional mandates to stop Flash Trading?
******: so what congress is thinking of forcing market participants to use limit orders with delay to cancel. So you need to put a limit order out, then keep the order out for at least a second IT'S FUCKING RETARDED. Good luck finding liquidity on electronic exchanges with you get rid of all the algo guys. The reason that the bulge brackets want to get rid of the electronic algos, so they can route the traffic to their dark pools, and their own trading desks
and make money that way.
Me: How do the big banks fit into this?
******: The kind of bullshit that GS, MS, and friends do is fucking criminal
because they give their "expert" opinion to the politicians whom we know are the retarded kids that jam jellybeans in their nose when nobody is looking.

Nice

Barrons top 100 advisors.... a sham...

2009-08-31T10:06:00.000-07:00

So Barron's this weekend ranked the top 100 independent financial advisors. I just said to myself what a sham. Their criteria for ranking them was "Managers that generally have a lot of assets under management for a sustained period of time generally do well" Not True. General Motors lost money for years on end but still sported a decent stock price for years on end! Just because a company attracts capital for a long period of time does not mean they make money. I have an idea how about we rank financial firms by return. Many of the wealth management firms have a chief investment officer who makes several model portfolio's and applies them to various accounts. Take the model portfolios and stack them up against each other. If you really want to take a look then the firms that want to participate can turn in audited account records and you can take the average account return and rank firms by that with other criteria such as risk adjusted return, Sharpe ratio's etc.

Doug Kass calls a market top.

2009-08-28T15:53:00.000-07:00

Doug Kass call's a market top:

Here are Doug’s 10 reasons why the rally has run out of steam and has “likely topped:”

1. Cost cuts are a corporate lifeline and so is fiscal stimulus, but both have a defined and limited life.

2. Cost cuts (exacerbated by wage deflation) pose an enduring threat to the consumer, which is still the most significant contributor to domestic growth.

3. The consumer entered the current downcycle exposed and levered to the hilt, and net worths have been damaged and will need to be repaired through higher savings and lower consumption.

4. The credit aftershock will continue to haunt the economy.

5. The effect of the Fed’s monetarist experiment and its impact on investing and spending still remain uncertain.

6. While the housing market has stabilized, its recovery will be muted, and there are few growth drivers to replace the important role taken by the real estate markets in the prior upturn.

7. Commercial real estate has only begun to enter a cyclical downturn.

8. While the public works component of public policy is a stimulant, the impact might be more muted than is generally recognized. There may be less than meets the eye as most of the current fiscal policy initiatives represent transfer payments that have a negative multiplier and create work disincentives.

9. Municipalities have historically provided economic stability — no more.

10. Federal, state and local taxes will be rising as the deficit must eventually be funded, and high-tax health and energy bills also loom.

Source:
Kass: Market Has Likely Topped
Doug Kass
TheStreet.com, 08/26/09
http://www.thestreet.com/story/10590765/1/kass-market-has-likely-topped.html

What is going on with AIG. This is madness

2009-08-27T14:37:00.000-07:00

$47 a share.. Really lets remember that if they made the same net income they made this quarter for the next 25 years and paid 100% of it back they would pay back the gov. in full.

Themis Trading on "HFT add's liquidiy argument"

2009-08-27T14:35:00.001-07:00

Written by Sal Arnuk of Themis Trading

There are two HFT-related articles this morning:

First, an article showcasing Getco LLC: http://online.wsj.com/article/SB125133123046162191.html

Second, an article by former POSIT founders defending Flash Trading: http://online.wsj.com/article/SB10001424052970203706604574374431720968204.html

I’ll start with the second article. It likens Flash Trading to offering to sell your house to your neighbor before you list it. That analogy is wrong. The correct real estate analogy would be that you are about to close on selling your house to Joey for $500,000, and you FLASH your neighbor (not Joey) about your impending deal with Joey, and then your neighbor can step in and buy your house instead of Joey for $500,001, or perhaps even drive to the closing before you get there, and offer Joey his house instead of yours for $499,999. Get it now guys?

The authors actually give an example of FLASH where a stock is $10.00 by $10.50, where an order was FLASHED in Directedge and received price improvement at $10.25. This FLASHED order detracted from volatility, and added liquidity to the market. It is a philosophically accurate and wonderful example, except for the fact that any buy side small cap trader does not relate to that experience as much as they relate to not getting the offer, as someone “beat them to it”. And the penalty for not getting that displayed offer is much harsher in a small cap than in GE, where the buyer just maybe pays up $.01. Unfortunately, we know that HFT has not added to liquidity in small caps, in which incidentally a $.50 spread is common, but rather they have added volatility.

Finally, the authors also say Flash Trading is no different than shopping an order upstairs in the “pre-computer era”. The authors say we had no problem with that shopping and process before, so why should we now. Only they are wrong. They should ask the buy side trading desks they used to service what they thought about the information leakage from shopping. Heck POSIT was a huge success because it DIDNT SHOP AND LEAK INFORMATION. Shocking.

Regarding the first article, which highlights Getco (a firm we commend on its success and ingenuity), allow me to comment . The article makes three points within 7 short paragraphs on the back page of C1 : 1) Mr Tierney say that HFT’s October 2008 losses would have been greater than the 14.1% decline the DJIA posted had it not been for HFT. 2) Getco made $400,000,000 in 2008 in profits. 3) Getco holds few securities by the end of each day (ie they go home flat). This does not jive. This is a zero sum game. They went home flat. How is that adding liquidity? How is that mitigating losses in the market? That sounds more like adding volatility to me. No?

Bank's Ranked by Commercial Real Estate Loans

2009-08-24T15:23:00.000-07:00

I ran some numbers on the first 10 and there are some that are very high (bolded). It's important to note that you cannot know the exact number for each bank because they hold certain inventory in trading asset's that are not accounted for. Also who know's what CDO's the bank hold's where the cash flow's come from CRE. Nobody knows what in Citicorp's Trillion dollar's worth of off balance sheet entities.

WFC 9.95%
BAC 5.7%
Met Life 48.7%
Jp Morgan 3.2%
PNC 12.5%
USB 10.5%
Regions Financial 20%
BB&T 17.1%
TD BankNorth 29.1%
Zions 33.5%

Choppiness Index

2009-08-20T18:40:00.000-07:00

The Sept. Version of Active Trader has an index that would be neat to code. It was created by the commodity trader named E.W. Bill Dreiss, according to active trader it is used to determine weather market movement is directional or consolidating. Supposedly low readings in the CI correspond closely with the end of the strong impulsive movements either up or down, while high readings occur after significant consolidations in price. a trader should trades when the CI is in an extended period of above average readings and instead favors situations in which the indicator fluctuates from one extreme to the other. Higher CI readings can also be a sing of the impending end of the consolidation while lower CI readings can indicate a possible reversal.

It is calculated as follows:

1. Calculate each periods (day, week, hour) true range. (the true high is the higher of this bars or the previous bar's close: the true low is the lower of this bars low or the previous bars close. The true range is the different between the two).

2. Sum the past n true ranges.

3. Calculate the true range range for the entire n bar period.

4. Divide the sum of the n true ranges by the n-day true range.

5. Calculate the logarithm (base 10) of the result from the step 4.

6. Divide the results from step 5 by the log of n.

7. Multiply the result by 100.

quick update.

2009-08-17T05:47:00.000-07:00

So looks nasty going into the open. SnP is down 20 pts or 2%. Oil is down $1.50 on no real news just the no Green Shoots. I'm just gonna wait until the open and see what happens. I am still pinching myself because I thought about getting short some /ES last night but didn't

Apple Insiders Getting Rid of their Stock / Options

2009-08-16T16:38:00.000-07:00

Deflation and Q3 GDP

2009-08-16T15:25:00.000-07:00

As fun as it is to be a gold bug and in the US Dollar is going to crash any day soon, the data just dosent point there. In order to see price inflation (CPI) we need to see the velocity of money to pick up (the new printed nominal dollars working their way through the economy to drive up the prices of an finite amount of goods and services.

Next week the PPI Data comes out and that should give me some indication as to weather or not we are pointed towards a deflationary spiral. The scare of a deflationary spiral will lock credit markets which usually leads to a massive sell off in equity markets (credit markets drive equity markets). All that "Demand" that is going to come out of Asia to help offset the slowdown in the US is obviously not working out so well.

Some things point to an unptick in Q3 GDP but others are suprising me. The “consensus” for consumer confidence was 68.5 with a range of 67.2 to 70.0. It came in at 63.2 for August. OUCH.. Remember that consumption is 73% of economic activity. Also interesting to note is that many are relying on auto sales to help narrow the output gap and add to this uptick in Q3 GDP, even with Cash for Clunkers auto sale came in extremely weak.