Capitalogix

Here Are Some Links For Your Weekend Reading

Déjà vu?

 

 

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

 

Lighter Links:

• 5 Tips for Finding Flow: A High Performance User's Guide for the New Year. (Forbes)
• Science Says This Personality Trait Predicts Job Performance. What's your guess? (BI)
• Why Airlines Want to Make You Suffer. (NewYorker)
• CIA Predictions for 2015 from the Year 2000. (Business Insider)
• Coming Data Deluge Means You’ll Know Anything You Want, Anytime, Anywhere. (SingularityHub)

 

Trading Links:

• 10 Legendary Investment Rules from Legendary Investors. (Zero Hedge)
• Big Banks Manipulate Physical Market Prices | The Big Picture. (Ritholtz)
• Information in Financial Markets: Who Gets It First? (Papers)
• High-Frequency Trading Payoff Tied to News. (MarketWatch)
• Oil Companies’ Predicament: Who Should Cut Production? (Wall Street Journal)

Chart Showing U.S. Bull and Bear Markets Since the 1920s

At this point, the S&P 500 is up over 200% from its March 2009 low.

This bull market has lasted 68 months, which seems like a long time ... until you compare it to the length and strength of other bull runs.

This chart shows the history of Bull and Bear Markets in the U.S.

 

via @jerrykerns.

The blue areas represent past bull market durations and returns (total and annualized). The red areas represent past bear markets.

 

Note: this chart is a little dated - it was originally published in May.

 

Nonetheless, it is a good reminder of the bigger picture.

Here Are Some Links For Your Weekend Reading

Hope you are having a Happy New Year!

 

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

 

Lighter Links:

• How to Form a Habit:  A Scientific Approach. (Sqwiggle)
• What Peter Drucker Knew About 2020. (Harvard Business Review)
• The Unusual Books That Shaped Billionaires and Prodigies. (Tim Ferriss)
• Kermit the Frog Gives a TEDx Talk, and Twitter Loves It. (TED)
• Why Sadness Lasts Longer Than Other Emotions. (BPS Research Digest)

 

Trading Links:

• 2014 Portfolio Review: What Strategies Worked & What Didn’t? (PragCap)
• David Tepper Warns 2015 Is Poised To Be Like 1999. (ValueWalk)
• Saudis Tell Shale Industry It Will Break Them; Plans to Keep Pumping. (NakedCap)
• The Leading Robo-Advisers Now Manage $19 Billion and Continue to Grow. (BI)
• Florida Becomes 3rd Largest State Following CA & TX, NY Drops to 4th; Political Implications. (Global Economic Analysis)

What Happens to the Best Old Traders?

I visited the trading floor of the CME this week with Bobby Schwartz.

 

 

Notice his badge number. He used to be one of the largest volume traders on the exchange.

While there, Bobby quickly slipped into his old rhythm, and I had a chance to experience his old persona.  He showed me the hand signals he used on the floor. It was complex, fast-moving, and cool to see.

On one hand, the mastery was undeniable. On the other hand, it's a reminder how fast things change. It doesn't matter how good you are, or what your edge was ... times change, markets change, and so does what a trader must do to make money consistently.

Bobby is a great example of that. He now runs one of the largest IBs and has shown, many times, that adapting quickly is the way to survive - and thrive. 

There's Usually Some Pain to Endure On the Road to Good Market Returns

No matter how you look at it, big stock market sell-offs happen regularly.

For example, we've seen two violent sell-offs in the second half of 2014. The first came when the S&P 500 quickly tumbled 9.8% from its then all-time high of 2,019 on Sept. 19 to as low as 1,820 on Oct. 15. The second came when the S&P plunged 5.1% from 2,079 ion Dec. 5 to 1,972 on Dec. 16.

Buy and Hold investors must stomach significant drawdowns to get their returns — even in 'good' years.

This chart shows S&P 500 intra-year declines compared with calendar year returns. The bars represent year-end returns since 1980, while the purple dots mark each year's market low.

 

Business Insider via JP Morgan Asset Management.

 

Basically, you have to understand that 10-15% pull-backs are normal (perhaps even healthy) for the market.

For reference, here are market correction averages and their historic frequency. Since 1900, we've seen:

• 5% market corrections: 3x per year.
• 10% market corrections: Once per year.
• 20% market corrections: Once every 3.5 years.

Interesting.

 

And yet, the S&P often recovered those losses and then some.

Importantly, these big sell-offs often occur during years when the markets head higher. 

Despite average intra-year drops of 14.2%, annual returns have been positive in 26 of 34 years.

Bottom line: Sell-Offs happen. And sometimes they're big ... But they're normal.  So, stay calm and carry on.

Best wishes for a Happy New Year!

Here Are Some Links For Your Weekend Reading

Here is a picture of Obama rocking a tiara like the leader of the free world should.

 

 

(h/t JB via ABC News)

The president understood that he was broke a cardinal presidential rule.  "Here’s the general rule," Obama explained: "You don’t put stuff on your head if you’re president.  That’s politics 101. You never look good wearing something on your head."

Chief White House photographer Pete Souza posted a photo to Instagram showing the president donning a tiara alongside a group of Girl Scouts from Tulsa, Oklahoma.

Some things you find on the internet actually happened.

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

 

Lighter Links:

• The 25 Top Personal Development Leaders of 2014. (Success)
• 22 Pictures That Prove That 2014 Is Already the Future. (Buzzfeed)
• See the Most Beautiful Data Visualizations of 2014. (Fastcocreate)
• 5 Most Insidious Conspiracy Theories of 2014. (Alternet)
• The 20 Best Songs of 2014. How many do you know? (Vulture)

 

Trading Links:

• Citigroup to Move Headquarters to U.S. Capitol Building. (New Yorker [Humor])
• The Federal Government Now Employs the Fewest People Since 1966. (RTE)
• Top Market Themes for 2015. (Goldman Sachs)
• Frequent - But Inefficient. HFT might reduce liquidity, not boost it. (Economist)
• A Good Problem to Have During the Holidays: Vatican Finds Hundreds of Millions of Euros 'Tucked Away'. (Reuters)

Here Are Some Links For Your Weekend Reading

This cartoon made me chuckle. Perhaps you know someone like this?

 

 

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

 

Lighter Links:

• Lockheed Martin's New Fusion Reactor Might Change Humanity Forever. (Sploid)
• Which Technologies Will Dominate in 2022? (Wired)
• The Odds, Continually Updated. A surprisingly understandable look at Statistics. (NYTimes)
• Mind Expanding: 7 ways to fine-tune your brain. (New Scientist)
• How Pixar Uses Math to Make Characters Look Perfect. (Gizmodo)

 

Trading Links:

• Big Banks Manipulate Physical Market Prices. (The Big Picture)
• Tony Robbins: Mastering the Game of Money. (Interview)
• The Decline and Fall of Fund Managers. (WSJ)
• Future Opportunities, Future Shocks. 6 Trends Reshaping the World Economy (Citi)
• Attack of the CyberMen. Sophisticated viruses will be the workhorses of 21st-century spying. But there should be rules. (Economist)

A Jazz Quartet Explains High-Frequency Trading

There was an opinion piece on MarketWatch about how information flow influences how often you should trade.

As part of it, there was a video that explained how algorithms effect trading (using a jazz quartet).

 

via Marketwatch.

The Meaning of Money: Listen to how computer algorithms changed the music of the market.

 

Faster trading brings up important economic questions: What are the costs and benefits to investors for speeding up trading? Is there an “optimal” trading frequency at which the financial market should operate? And does a faster market affect one group of investors more than another?

 

Here are a few of the points made:

• A higher-frequency market is more responsive to new information.

• The optimal trading frequency depends on how the benefit and cost balance each other.

• The more frequently the market allows investors to transact, the stronger their incentive to split orders over time to avoid price impact.

From my perspective, faster trading is inevitable.  However, as more traders gain access to it, speed for the sake of speed will lose its appeal.  What will continue to matter is the speed at which a trader can identify an edge and capture its profit opportunity.

A Look at Black Swan Market Risks - Or Not

Have you noticed that people keep using the term "Selfie" to describe tons of pictures that aren't selfies?

Same with "Spoiler Alert" ... People use the term to mean a variety of things now ... few of which are actually spoiler alerts.

There is something similar happening in the financial world. People have latched on to the term "Black Swan".

Here is an example. 

Wall Street was up for the sixth straight week, despite the oil rout.

What could go wrong?  What are the "potential Black Swan events"?

To annswer, Société Générale releases a quarterly chart  of "Black Swan" risks. 

The most recent example is below.

 

 via BusinessInsider.

The concept of a "Black Swan" event takes its name from Nassim Taleb's 2007 book "The Black Swan."

But there's a slight problem with the chart above: acknowledging an event's possibility means it can't be a Black Swan.

The chart suggests that further deterioration in the economic situation in Europe poses a risk to the market. However, a "Black Swan" is an event or occurrence — a tail event, as Nassim Taleb would call it — that is so remote that it is completely unforeseen. 

In his book, Taleb uses the Thanksgiving turkey as an example.

"Consider a turkey that is fed every day," Taleb writes. "Every single feeding will firm up the bird's belief that it is the general rule of life to be fed every day by friendly members of the human race 'looking out for its best interests,' as a politician would say.

"On the afternoon of the Wednesday before Thanksgiving, something unexpected will happen to the turkey. It will incur a revision of belief."

Here's what it looks like in chart form. 

 

 

This is basically the book's entire message wrapped up in one graphic. 

"Consider that [the turkey's] feeling of safety reached its maximum when the risk was at the highest!" Taleb writes.

"But the problem is even more general than that; it strikes at the nature of empirical knowledge itself. Something has worked in the past, until — well, it unexpectedly no longer does, and what we have learned from the past turns out to be at best irrelevant or false, at worst viciously misleading."

And this is really what the problem of Black Swans is all about. 

It isn't that we can't know the future, but that we delude ourselves into thinking we can ... making forecasts about events that are inherently unforecastable and giving us false belief about what can (or will, or might) happen in the future. 

When a Black Swan event occurs, it seems outside what had previously seemed possible.

However, Taleb suggests, the event only seems outside previous beliefs about what was possible because of how we arrived at those possibilities ... by using the past to forecast the future.

Here Are Some Links For Your Weekend Reading

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

 

Lighter Links:

• The 25 Best Inventions of 2014. (Time)
• Peter Thiel's Very Negative - And Very Useful - Advice For Entrepreneurs. (Fortune)
• Google Glass Failed, but Here’s the Path Its Successors Will Take. (MIT TReview)
• Why Do People Believe in Conspiracy Theories? (Scientific American)
• Will NFL Broadcasts Ever Embrace Advanced Stats? Sabermetrics changed pro baseball. Now comes football. (MMQB)

 

Trading Links:

• The Science Behind Casino Profits. (The Week)
• Facebook 'Newspaper' Spells Trouble For Media. (BusinessInsider)
• U.S. Economy: Four Indicators Paint Very Negative Picture. (Business2Community)
• USPS Takes on FedEx and UPS with 7-day Delivery This Holiday Season. (B2C)
• Black Friday Online Sales Up 8.5% Over Last Year, 20% Of Sales Came From iOS. (TechCrunch)