Capitalogix

Some Good Sunday Reading Links

Here are some of the posts that caught my eye. Hope you find something interesting.

Business:

• Wall Street’s Need for Trading Speed: The Nanosecond Age.  (WSJ)
• Fed Cuts Growth Forecast; No Hint of More Support.  (Reuters)
• Ignored Greek Default Risk Makes Bank Stress Tests ‘Irrelevant’.  (Bloomberg)
• Firms Sitting on Record $800 Billion Of Cash - But Still Won't Hire.  (CNBC)
• Will Google Ventures Disrupt Venture Capital?  (On StartUps)

Lighter Ideas and Fun Links:

• Visionaries Need Not Be Mad … But It May Help.  (FT)
• CIA Website Taken-Down By Hackers. How Safe is Yours?   (Reuters)
• iPads Consume 400% More Wi-Fi Data Than Other Mobile Devices. (Mashable)
• Researchers Nose into the Smell of Sickness.  The Clues Are On Your Breath. (Wired)
• The Big Business of Synthetic Highs.  Real Profits from Fake Drugs. (BW)

Some Good Reading Links That Caught My Eye

Here are some of the posts that i found interesting recently.

Business:

• Bill Gross Says QE3 Unlikely; Still Shuns Treasuries.  (GlobalEcon)
• Playing Chicken with the Debt Ceiling is a Dangerous Game. (Fortune)
• Collapse In Philly Fed: Weakest Since 2009, Biggest 3 Month Drop Ever. (ZeroHedge)
• Millionaires Control 39% of the World’s Wealth.  (WSJ)
• The U.S. Postal Service Nears Collapse: Can It Re-Invent Itself?  (BusinessWeek)

Lighter Ideas and Fun Links:

• Gut a Feeling? Bacteria In The Body May Affect Mood.  (MSNBC)
• All You Need to Do When Dealing with Difficult People.  (PsychToday)
• What Happens When the Cloud Crashes? (Brivo)
• E-Mail Hack Attack Targeted White House. (WSJ)
• Company Offers Free Sports Car (with Jet Purchase). (WSJ)

Interestesting Graphic Showing Foreclosure Backlog

Millions of homeowners in distress are getting some unexpected breathing room — lots of it in some places.

In New York State, it would take lenders 62 years at their current pace, the longest time frame in the nation, to repossess the 213,000 houses now in severe default or foreclosure.

 

Clearing the pipeline in New Jersey, which like New York handles foreclosures through the courts, would take 49 years. In Florida, Massachusetts and Illinois, it would take a decade.

In the 27 states where the courts play no role in foreclosures, the pace is much more brisk.  For more on this, see the full article.

Related articles

• RealtyTrac: Foreclosure Activity Increases in March, Down in Q1 (calculatedriskblog.com)
• More Worries About the Foreclosure Overhang (nakedcapitalism.com)

Venture Deals Are Picking Up

An increase in Venture Capital funding is typically a good indicator that more growth is coming.

CB Insights Quarterly Venture Capital Report for Q1 2011 highlights the recent positive momentum.  It reports about $7.5B invested across 738 deals.  The following chart shows the top states based on deals and dollars.

The full chart details Q1 deals in 39 different states.

So, who is doing the deals?

Top Venture Capital Firms of 2011 Based on Deal Activity

Kleiner Perkins was the most active venture capital firm in Q1 2011 participating in 23 new and follow-on financings in US-based companies followed closely by New Enterprise Associates.  It was a busy quarter for many VC firms with 27 firms participating in at least 7 financing deals in the quarter.  Note: You can get the entire Q1 2011 63 page report here.

Below is the list of the top dozen most active VC firms in the US.

Investor	# of deals	Rank
Kleiner Perkins Caufield  & Byers	23	1
New Enterprise Associates	20	2
500 Startups	14	3
First Round Capital	14	3
Sequoia Capital	14	3
SV Angel	14	3
Charles River Ventures	12	7
Bessemer Venture Partners	11	8
Spark Capital	11	8
DAG Ventures	9	10
Founder Collective	9	10
General Catalyst Partners	9	10

See the entire list here.

Related articles

• Venture Capital Slowly Trending Up, But Gains Mostly Limited to Silicon Valley (coydavidson.wordpress.com)
• Some Thoughts On InvestorRank (avc.com)
• Web IPO Boom Marks VC Haves from Have-Nots (businessweek.com)

A Look at the Recent Increase in IPOs: What it Means and Who it Benefits

There have been a number of high profile Initial Public Offerings lately, including LinkedIn, Pandora, and soon Groupon and Facebook.

Here is a clip where Silicon Valley pundit, Andy Kessler, talks about the recent increase in tech IPOs and what the that means ... and who they benefit.

 

Here is a link to the transcript.

Related articles

• This Isn't 1995 (slopeofhope.com)
• Pandora Fizzles After Hot IPO Debut (minyanville.com)
• CONGRATULATIONS WALL STREET AND PANDORA! A Hot Tech IPO Is Finally Priced Correctly (businessinsider.com)

Money Is Flowing Into Asia

I have spent the past few days in Jakarta, for meetings; and I'm impressed

 

 
The World Economic Forum is having some sessions here ... and the city is bustling.

There is much new muscle and confidence here about Asian economies and money-flow into the region.

Even the local tech fair surprised me.  It felt like I was in Vegas.  It was huge, packed, and everyone seemed to be buying something.

 

His shirt labels him as a Technophile.  Well, everywhere I looked, there were iPads, Androids, Blackberries, and mobile hotspots. 

Just like cellular helped this region leap-frog the lack of landline infrastructure, wireless Internet seems to be re-shaping it yet again. 

It certainly made the traffic jams more tolerable and productive.

Some Good Reading Links That Caught My Eye Recently

Business Posts Moving the Markets that I Found Interesting Recently:

• The Ranks of the World's Millionaires Expanded by 12 percent in 2010.   (Bloomberg)
• Indicators Point to a Small-Business Rebound.   (Entrepreneur)
• Measuring the Net's Growth: The Internet Is Now a Big Part of Global GDP.  (McKinsey)
• Airline Industry’s Profit Forecast Slashed to Less than a Quarter of Last Year’s #.  (FT)
• A Game Changer:  The Average Duration Of Unemployment.   (BizInsider)

Lighter Ideas and Fun Links that I Found Interesting Recently:

• The Optimism Bias: Why Most Believe the Future Will Be Better than the Past.  (Time)
• The Risks of Quantification: Can Numbers Really Describe Reality?  (HBR)
• Technological Prophecies - Predictions Ahead Of Their Time. (Money)
• First Quantum Computer Sold: Defense Contractor Pays $10MM For It. (TechReview)
• Think Twice Before Reaching For A Caffeine Boost. (NPR)

Want to Know What to Invest In? Watch the U.S. Dollar

Image via Wikipedia

Typically there are a few major inflection points in the year where assets either switch gears and reverse their prior trends or undergo an acceleration of their current trend.

One of the key predictors of these inflection points, over the last few years, has been a reversal of the general trend of the U.S. Dollar.

Consequently, determining whether the Dollar is at a major inflection point may have considerable implications for asset allocation (bonds, stocks, commodities, currencies) and sector allocation (cyclicals, non-cyclicals) strategies.

Here Is Why the Dollar Can Tell You What to Invest In.

Many traders believe that when the Dollar is weak, the following general relationships are seen:

“RISK ON” Trade

• Stocks outperform bonds
• Investment grade and high yield bonds outperform US Treasuries
• Foreign stocks outperform US equities
• Commodities are strong
• Commodity currencies outperform USD
• Cyclical sectors (Technology, Cons. Disc., Materials, Energy) outperform non-cyclical sectors (Cons. Staples, Utilities, Health Care)

When the dollar is strong, you typically see the reverse of the above relationships.

You can see these themes in the data below. 

 

 

Notice that US stocks (S&P 500), commodities (CRB Index), and emerging market equities (relative to the S&P 500) tend to have an inverse correlation with the Dollar. In the chart above, the USD Index is shown in green (and inverted for directional similarity).

In general, when the USD is rising (falling in chart) commodities and the S&P 500 are weak, and emerging market equities underperform the S&P 500 (2008, early 2010).  As stated, the converse is also true (e.g., 2009, late 2010-early 2011).

So, the question is whether you think the Dollar is bottoming?

For more, visit Financial Sense.

Related articles

• U.S. Dollar May Weaken on Debt Ceiling Breach, Citigroup Says (businessweek.com)
• U.S. Dollar Index Components & Swings (ritholtz.com)
• The Nosedive In The Dollar Is Ending And The Currency Is Going To Zoom Higher (businessinsider.com)

Here Are Some Reading Links That Caught My Eye Last Week

Business Posts Moving the Markets that I Found Interesting Recently:

• Hussman Says This Market Is Setting-Up Like Some of the Worst Markets of All Time (BI)
• Economic Warning Signs: China, E.U. & U.S. All See Manufacturing Decline (AdvisorOne)
• U.S. Under Attack: Invasion of the Chinese Reverse Mergers (Y!Finance)
• The Dollar’s Reign is Ending:  Long-Live the Multi-Currency Monetary System? (FT)
• Correlation Charts for S&P 500 Index & Other Asset Classes  (SignalFG)

Lighter Ideas and Fun Links that I Found Interesting Recently:

• 5 Traits of a True Innovator – Are You One?  (Y-Entrepreneur)
• The Economics of True Love: Nobel Prize Winning Theory of Signaling can be a useful tool.  (BT)
• A Billion Wicked Thoughts: The Neuroscience Behind Sexual Desire  (Freakonomics)
• Study finds Netflix is the largest source of internet traffic in North America (EndGadget)
• Work hard, Play Hard: Students Get a Free Xbox 360 with Windows 7 PCs (VentureBeat)

Simple Is Better - An Example for Trading the Markets

Traders are often confronted by mixed signals. 

Personally, when I have to choose between something straightforward or something complex - I remember the phrase "simple is better".

For example, when large "Smart Money" traders show their directional bias, it often pays to follow in their tracks.

Another technique would be to bet against the smaller retail "Dumb Money" traders (because historically they are often wrong at major turning points.

However, if I have to decide between following "Smart Money" or doing the opposite of what "Dumb Money" does ... then in the absence of other information, following Smart Money wins because it is more straightforward and simpler.

Here is an example.

Retail Investor Are Putting On Their Bear Suits.

"Small traders" are showing extreme pessimism by buying a very low percentage of call options (bullish bets) compared to the total options purchased. 

As a reminder, many traders consider excessive bearishness from small investors a sign that markets are set to go higher. This is considered a contrarian buy signal. The question is whether it is a reliable buy signal? 

Over the last several years when this number gets below 30%, the market was at, or near, the start of another significant push higher. Here is a chart.

 

 

Something to consider is that the crowd is often wrong at major turning point because they are too bearish before a big push up (or too bullish before a big push down).  Here, we may have a different situation.  Small investors have lost confidence even though the markets are near recent highs.

Before we look at what larger "Smart Money" investors have been doing, let's look a little deeper into the Put/Call Ratio.

 

What Does the Put/Call Ratio Measure?

The Put/Call Ratio is an indicator that shows put volume relative to call volume.

Put options are used to hedge against market weakness or bet on a decline. Call options are used to hedge against market strength or bet on advance.

The Put/Call Ratio is above 1 when put volume exceeds call volume and below 1 when call volume exceeds put volume.

Traders use this indicator to gauge market sentiment because it shows what type of protection they are willing to purchase.

A Different Put/Call Ratio Suggests that Smart Money Is Looking for a Pullback.

Unlike the CBOE Total and Equity Put-to-Call ratios, the OEX Put-to-Call Ratio is not considered a contrarian indicator.  Why?  Because OEX options are normally traded by larger "Smart Money" traders. 

Likewise, there is more put buying in the OEX because OEX options are one of the instruments that large money managers use to hedge their portfolios.

To put things in perspective, historically, Smart Money traders buy 100 to 150 puts per 100 call purchase.  Consequently, a ratio hovering around 1.50 (150 puts purchased/100 calls purchased) is pretty normal.  However, you must take notice when Smart Traders are buying puts hand over fist.  Last week the Smart Money traders bought a little more than 3 puts per 1 call, closing the OEX Put-to-Call Ratio at 3.36.

ZorTrades posted this chart.  It shows how often a high OEX Put-to-Call Ratio results in a market downturn. Click the image to see a larger version.

 

This chart marks the times where the OEX Put-to-Call Ratio has closed above 2.40 (meaning that Smart Money was buying more than twice the amount of puts than calls).  As you might guess, the outcome has not been pretty when this has been the case.  Notice above that 6 out of 7 occurrences resulted in significant moves down.

As my Dad used to say: "You can fool everyone some of the time; but you can't fool all of the people all of the time.  Perhaps the small trader isn't always wrong?  And, perhaps, simple is better.

Related articles

• Divining Risk Appetite - It's Different This Time (pragcap.com)
• Active Managers Still Bullish, But Losing Conviction (blogs.wsj.com)