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samedi 21 août 2010

MUSING ON MARKETS: A Reply to someone competent in Corporate Finance Not onFinancial Markets. Playing-improperly and improperly suggesting on Markets. Could it be an hobby? Indeed , with other people funds..

"How do you know what you vehemently affirm to know? "


Waltz Lannes said... …. Seems like the market action and the Market Auction isn’t completely understood here. One thing is to be “simple” another is being “simplistic”. 
If the first is for the sake of the readers with the final aim of being “widely understood” the second is …detrimental bringing-eventually- to significatives mistakes. Do the reader appreciate your attempt to give an explanation to “the drop” and the 75.000cts traded on the offer side by Waddell ( which is NOT a small firm but a rather chunky one , for detail sake…) ?

 I guess so . 
You are showing a savvy approach and a deep intellectual honesty which is a rare merchandise nowadays. 
However I feel compelled to try to straight the things up, adding few cents….most of them in common sense non deterministic humbleness. 

  •  Is there a need for an explanation? Markets go Up and down according to a number of reasons . They may be even… choppy -although there is no choppiness in physics. It depends on how you want to look at markets: what you see on weekly is rather different of what you see on other time frames . Matter of factly the lower you ‘ll go down in Time , the wider the swings ,impulses, extensions , retracements’ you’ll be able to appreciate.Any (serious) investor and even more an active professional traders MUST define ex ante what KIND OF “GLASSES” WANTS TO USE  LOOKING AT THE MARKETS DYNAMICS.  It means that any defined time frame regroups participants’ at the auction with same expectations since they look at markets from identical perspective. This practice is utterly important for will let you UNDERSTAND WHO IS IN COMMAND in that precise moment: Commercials without short term expectations, Big Speculators, Small Speculators and finally dumb money.  Once I know who is driving the auction than I’ll be able -at least- to try to understand what is going on in that precise moment. Nothing more nothing less counts, except: WHAT IS GOING ON IN THIS MOMENT. All the rest is non influent and belongs to the realm of “Hope”. HOPE in financial markets is the best synonym of LOSSES. But let’s go back to the question #1: is there a need of an explanation? No. If market’s move affects the operator negatively means that that position was for that extent WRONG. There are no excuses. What matters is HOW much affects it negatively: if too much means that the position was not properly secured . And there is a wide array of tools to secure a position. 
  •  The Drop.                                                                                                                                                                                        Hold a sec…:                                                                                                                                                                                                                                                a.) You haven’t properly described what a Future is. Commodities Futures - in this case Emini ( or any other Index Future)- we buy the right to buy an amount of the a foresaid underlying which will be delivered (for physical indeed at expiration) in a defined future. Generally speaking the longer the delivery the larger the PREMIUM incorporated in the future where for premium ( or discount)we intend the difference amid the Cash price of the commodity (Spot Price) and the future value defined during the auction [ Contango or Backwardation concepts aside , for the sake of ...simplicity ]. For futures with intangibles underlying as the case of “ Indexes”, there wont be –indeed- a delivery for physical as would happen with Canola, Wheat, Cable ( Sterling) Soy, Gold. The premium formula you quote Futures Price = Spot price (1 + riskfree rate - dividend yield) is correct but purely ….scholastic just like a Cox Rubistein or B&Scholes Models and is simply theoretical; you will not find it cogent during an auction. The Index “EPREM ” shows you every 30 sec if the derivative is at discount or at premium so that you can evaluate his position against the cash (spot).                                                                                                                                                                     b). During these years , Markets have shown PRECISELY and EMPIRICALLY that reality is different : triyng to linearize a non linear environment and define it via models relying on “human” assumptions whereas the drivers are fundamentals or technical has been as much inconsistent and unprofitable as devastating ( cfr. the damages caused by VAR.) However…. I’m not expressing an OPINION but just empirically reporting what we on markets have all experienced operating daily; simple handy outcome in spending zillions of hrs in front of screens and charts and tapes….                                                                                               c). This premise is almost indispensable to understand how market works. Since a Derivative ( a future, an option) REFLECTS directly  smart money expectations towards the CASH, so it is its fair value . Insofar if the future’s fair value goes down at discount … generally will be an anticipation of the cash drop.                                                                                                                                                          d). A future at DISCOUNT has –therefore- a high relevance: meaning that I can “wipe off” the time component of a financial instrument (value) actually buying a proxy (the derivative) at a lower price for a” future deferred delivery” than the value of the real commodity traded NOW for cash (spot price). Which simply means that something in the overall valuation of the commodity is pointing strongly toward south… Put it simply and practically: the participants at the auction (buyers) are willing to pay less and less amounts of money for that specific commodity obliging the offer side (sellers) to constantly lower the price in order to be filled and have the auction going . (Liquid auctions- indeed- where the spreads between bid and offer are not larger than 2-3 ticks at maximum in specific fast market, as happened in certain moments May 6th) . In fast markets you just see a simple “join the bid ‘n take the offer …. “                                                                                                                                                                                                                 e). So isn’t the CME or CBOT affecting directly the cash market -unless some inefficiency in the markets arises. And markets ARE inefficient, thanks to the Almighty…. Without being deterministic, Cash Markets will NOT drop with a directionality ( aka for several days in the same direction up or down) ) because of derivatives : is an epiphenomena… In the other side markets it will just react simply with SPIKES, which will be likely to be reabsorbed during the auction likewise during news release.. Not properly a mean reverting action but a rebalancing, a regrouping of the actors in the arena, the sellers and the buyers towards a real bias …if ever.                                                                                                                                                                                      f). Waddel sold a large quantity of emini during almost 2 hrs. So no mistake , no rogue trade,no panic. AMOF It does not have any influence if was a rogue trade or just a massive long covering or a concerted action or a black box triggered by a fair value hitting threshold or by a down tick. Waddel did it . Period. All the rest has no relevance. The only thing is that markets they go up and go down and anyone should be responsible for his long /short position and responsible for the losses he she wants to bear and for how long (here vis the ….hope…).
  •  g). Any serious speculative trader cuts his losses: if mr. market shows a positive bias (or the operator believes in it…) than he will buy back BELOW at discount what he had sold above . Unless In the meanwhile he will be properly hedged in calls or secured with spread or other strategies . Just an amateur has a plain naked equity portfolio. Playing Black jack by the book is less risky manner to lose money. 
  •  . Arbitrage: I beg your pardon, but your example is out of scheme since your assumption(s) is ONLY NORTH ( prices going up). An arbitrageur working the fashion you describe would end up broke in 3 days… not in 1 year; you ASSUME WRONG       ( where in the hell do you infer  that an index future you bought at 1000 will rise to 1045? ) not because of you but because you make an ASSUMPTION. The Assumption is the problem. Inferring is the problem.We - simply- look at what is going on and leave the assumptions to the realm of the… naïve (fools?). You point your finger at the moon quibbling on risible topics - like being able to borrow at such and such I.R. % ….- but the serious problem is another: you assume that an arbitrageur will act in the way you describe . What you describe is not only incorrect , is again naïve… 
  •  An aberration May 6th? Why? Simply and naturally has  happened what had to happen. There are no aberrations in nature(b&l...),in the free flowing of  prices and  reality…these are simply facts .I sell you buy you buy I sell. Period. Nothing more nothing less. I can be smart enough to spot market’s inefficiency’s and ARB. on these, and take profit of those chances often inter-markets. But a falling Market is not an aberration: is just a a f-a-l-l-i-n-g market. And the delta in exchange's capitalization is not destroyed value : being simply a form of moving assets from one pocket (yours) to another (mine). AMOF there is always someone buying falling markets….(I remember just one exceptional different case where there was no counterpart in buying and an enormous spread between bid & ask : Real Estate CDS in August 2007….which was prodromica to the meltdown far away any expectation…..) 
  • ---------------
  • Why does it fall? Who gives a damn. Markets gives constantly opportunities on either sides every seconds 24 hrs a day 345 days a year every given year on this earth. And with a VIX rising to 46/50 there will be even more opportunities than with a VIX at 21 and lower. What an amateur sees as a threaten – a volatile market- is exactly what a pro is expecting. 
  • 5. I respect your approach :“…In fact, as an intrinsic-value driven, long term investor…”. So just because of that and your shown intellectual honesty, casting judgments on different non deterministic approaches or bringing in some “dubious” examples ( you have the total right in doing so , though) won’t bring any good to your corporate finance blog. Financial markets are the only “environment” where numberless realities could coexists. 
  • Nevertheless the only one that counts is the year end P&L statement bottom line figure … Best to you. Waltz 
May 21, 2010 8:52 AM Aswath Damodaran said... : Waltz, I think you need to start your own blog. I cannot make sense of half of what you say and the other half is in serious need of a rewrite
May 24, 2010 2:38 PM Waltz Lannes said...:  Oh la la... le gamin a-t-il répondue? Non , évidement pas, car incapable du metriser un... métier. Bien, je vous laisse liberté de choix sur le cela: Prof. ou Ingénieur financier? Pardon. Did you reply, ? Obviously not, (kiddo).You ain't got the tools to manage the "idea" of markets. And you take yourself too seriously. More: enter into dialectics; bring in fundamental as well as practical issues on how deal on markets or "how spot value in some undervalued equity for a long term investment" Not far from the same walls in the vilage I loved 31 years ago, traders will call you -nicely-moron... Rather than being so improbably chic, exibit -once in a while- a statement from a clearing house, showing real positions (not paper trading ) Beating the market making money counts: all the rest has just no relevance. I sound harsh kiddo, but there's no reply since you have no idea of what I'm talking about. Simply you do not grasp the ain't got the idea of what I'm talking about. But a Brealey Myers last edition is enough for you. Ouais, what else you may need? Best to you. Ps: No wonder your publications are of little or no academical relevance. May 24, 2010 2:56 PM 阿楊 said... 完成一個小目標,會把自己推向一個大目標............................................. 
May 24, 2010 6:58 PM matis said... Waltz Lannes - Maybe You could recommend me some literature about Your theories. I am looking to get smarter and I know that most of the financial readings are misleading. I would be very grateful, if I could learn some more. 
May 25, 2010 4:28 AM Waltz Lannes said... Dear Matis Mine are not theories, I am not that arrogant to play that role. Very simply is how market works. Stay in touch. Best to you Waltz 

May 25, 2010 7:49 AM matis said... Dear Waltz, I am willing to study hard. I have watched US Equity markets all day more than a year, but I still feel that I lack the intelligence to beat the markets. May 25, 2010 9:03 AM Gaurav Mehta said... Hi Waltz, thanks for the excellent words but just couldn't understand what you were trying to point out....... and i don't take my self too seriously.:)... How ever let me clarify a few points that made sense.....although non sense... "Just an amateur has a plain naked equity portfolio. Playing Black jack by the book is less risky manner to lose money." ----- WARREN BUFFET .... does it strike somewhere? "Why does it fall? Who gives a damn. Markets gives constantly opportunities on either sides every seconds 24 hrs a day 345 days a year every given year on this earth. And with a Vix rising to 46/50 there will be even more opportunities than with a VIX at 21. What an amateur sees as a threaten – a volatile market- is exactly what a pro is expecting. ---- nothing new, a trader requires volatility"....WHO doesn't know that... unless you are trying show off ur newly learnt knowledge... "Period. All the rest has no relevance. " ....If this was the case there would not have been a discussion to solve the issue....Just because you think this makes no sense won't give it the FED approval... i hope not atleast :) May 25, 2010 9:39 AM Waltz Lannes said... Gaurav Thanks for your notes. in bullet points: * You quote "Just an amateur has a plain naked equity portfolio. Playing Black jack by the book is less risky manner to lose money." ----- WARREN BUFFET .... does it strike somewhere? --> Thank you: nice handle. a) Warren Buffet does not work with a not secured portfolio. Believe me and if you do not want to believe ask people in B.H. b) quoting: By Jesse Westbrook in Washington November 8, 2005: Warren Buffett's Berkshire Hathaway reduced a bet against the US dollar after losing more than $US900 million ($1.23 billion) from foreign currency investments this year." Every time WB gets into speculation on derivatives get a bad hit. We were trading on a tangled problem btw: on Katrina news marktes kept on going up. Strange. But those are markets. this example is a sort of "strangeloop" to empirically explain my previous words... WHAT MATTERS IS SIMPLY THAT NOONE WORKS ON PLAIN NAKED PORTFOLIO. UNSECURED PORTFOLIO. * YOU QUOTE: "Why does it fall? Who gives a damn. Markets gives constantly opportunities on either sides every seconds 24 hrs a day 345 days a year every given year on this earth. And with a Vix rising to 46/50 there will be even more opportunities than with a VIX at 21. What an amateur sees as a threaten – a volatile market- is exactly what a pro is expecting. ---- nothing new, a trader requires volatility"....WHO doesn't know that... unless you are trying show off ur newly learnt knowledge... ---> amof . CFR my previous reply . Markets work that way. I just report how markets day by day work. No theories. Just hard empirical and technical work. The worts thing is try to reinvent the wheel. Markets go upo and down. not only up. Single direction is a META-REALITY More empiricism and less questions , and move on markets. Which are made by men engaged in an auction.. Best to you Waltz May 25, 2010 11:49 PM matis said... No theories. Just hard empirical and technical work. The worts thing is try to reinvent the wheel. Markets go upo and down. not only up. How to make that work? Can You teach me? May 26, 2010 2:15 AM Waltz Lannes said... Matis Gents. I spend , we spend zillions of hours in front of screens I'm nobody... -:) Markets are at the same time very complex but simple per se. Not rocket science but not everyone is fitted for. I cannot teach nothing to nobody when it gets to "money". We can discuss about topics, certainly, with pleasure. Or you make an internship at my company....;)))) Best to you and stay in touch. May 26, 2010 5:15 AM matis said... Waltz, Where is Your company located at? If I could cover my living expenses, then I would be interested. May 26, 2010 7:00 AM Gaurav Mehta said... Waltz, I'd just say to each its own, Warren Buffet does get into derivatives as well for example the 2019 and 2038 bets that markets would at certain levels. The point is, these bets are very small compared to his whole portfolio....he could have done without this and made enough money but since he found these bets to be alluring with his equity portfolio he speculated with these. I did never say that trading is bad and you can't make profits out of it, all i just said was that have a pure long term good equity portfolio can make u a lot of money as well. That is all that the professor has been is a lot based on news, where does the news come from??? Companies (M&A, Results, Losses, profits) or Macroeconomic - (Countries data, recession, growth, Euro zone ect) - both of which is what fundamental analysis is about. Alternatively it would be wrong to assume just long term people make the market infact that would be incorrect for its the traders and market makers who trade make the market by trading and providing liquidity for long term guys to benifit from those prices. In a market one can't exist without the other and both can make a profit using just one technique.... Hope this May 26, 2010 9:40 PM Waltz Lannes said... Gaurav fIRST: I don't understand what follows: "as well for example the 2019 and 2038 bets that markets would at certain levels." Nevertheless: Your intention is to show that there's more than one way to skin a cat? Certainly. For there is nothing definitive and sure in our reality in our world; except few physics laws. ( BTW in the latter domain with 3 law you may attempt to succesfully and scientifically explain the 80% of scientifics phenomena. Alas, with 80% of Econo-laws-so-beloved-by.economists you are -barely- able to "expalin" 3% of the events....if ever...) Here hence a GREAT DOSE OF HUMBLENESS and a mandatory attitude NOT to FORECAST OR DIVINE THE FUTURE. Yes, just for pleasure or fun, could be done just as an academical essay or (with) the Gods. Want it more tangled? There are multiple realities as per our subjective perception and archetypes and mental representation though (in part outrlined in behaviouralism, mimetism, or ...cfr. Festinger) . So the way you see the markets - if interpreted not with a sane skepticism , empirism is different from someone else . Expecially if YOU want to DIVINE (forecast) the future...(starting from some assumptions and working on pure inference thereon) However (and so said): Profits: the only good way is the one that brings more profits than losses over a protected/secured environment Losing money: if you "pretend " to trade the markets losing money is an absolutely acceptable part of the job. As much as is for Valentino Rossi or Casey stoner fall down from their bike in rehearsals or racing. would you lose money driven by the attitude of ..." the (naked) "expectations" AKA no Risk Management? would you make assumptions ( in derivatives but in plain equity too) and than - afterwards - complain because market does not comply with the direction you were (epistemically) fallen in love? ( aka not cut losses....) would not to work by inference aka ...castle cards. I'm not getting into WB topic again. The fact is that every time he gets into specualtion he shows lost money. His risk mangement allows him to keep losses within the acceptable. But trading IS NOT BETTING... is READ what market is telling you JUST RIGHT NOW. May 27, 2010 10:11 AM Waltz Lannes said... There is NO stochastic evidence , but some statistic yes, that a long term portfolio will yield roughly a 10 % over a 30 years time frame. the vast majority of the fly-by-night analists , they do not know wjhat they are talking about since most of them are inetersectorials. Means they have the arrogance of talking and evaluateing of different equities belonging toi differents sectors or clusters. So a kid ( or a seasoned pompous senior analist) will dictate: the "value" -advising buy-hold-sell-underperform-overperform blah blah- of CATERPILLAR without having the palest Idea of how the sector is PROFOUNDLY STRUCTURED since he never worked in the sector but his experoience is limiuted to sector ratios and to news ( the worts thing: we do not need news. News are resolving themselves onto spikes most of the times) and balance sheets. Whch , by definition, are made of can sterch them as much as you like and window dress them at your will.... The value of a RALPH LAUREN or HERMES INT'L or LVMH without being BARELY ABLE TO UNDERSTAND HOW MUCH OF VALUE IS IN ...GOOD WILL. INTANGIBLE. WHICH I CAN WITH NO PROBLEM INFLATE DEFLATE AT WILL. HERMES INT'L Had a range of 33 -35 P/E and 11-15 EV/EBITDA... OR WHY LVMH HAS AN INDUSTRIAL MARGIN OF ...70-75% So this KID, unable in stock picking for he has NO EXPERIENCE , unable to take a long position on a stock without cover himself with an ETF either on the same equity or on the INDEX, should tell ME and to the world how the market will perform? C'mon. So is for our He believes he knows. But actually he is funding his "knowledge" on assumptions and on a less than superficial sectors/groups/subgroups/share analisys ... We work on this We work on rotations. we rotate , we spin markets into gyrations to buy cheaper what we sold fkng expensive.... on and on and on....untill a rotation can became a rally ( behaviour) or in a strong sell off ....directional. Transfer that to markets , transfer that to the "assumptions".... Take care. PS: Now let's have philosophy, humanism a lovely predominance on economics, over our entire Gaurav, tell me : how do you know what you vehemently sustain to know? where your knowledge came from? it's a simple epistemological affaire.... May 27, 2010 10:11 AM Waltz Lannes said... BREAKING THE CYCLE A Conversation with Emanuel Derman Watching that interrogation of the bankers at the Senate hearings, I had the feeling that this is the way karma works in the universe. Everybody is going to do something not quite right as they act out their destiny mechanically, doing what they unthinkingly believe they have to do. The Wall Street people are going to reflexively overshoot and be too greedy. The Senate people are going to reflexively grandstand and be too uninformed and try to reign them in. There isn't going to be an elegant solution to any of this. Introduction When The Reality Club (the forerunner of Edge) was launched in 1980, one of it's founding members was the late Heinz Pagels, a particle physicist at Rockefeller University and president of The New York Academy of Sciences. It was around that time that Pagels began to talk about themes that revolved around "the importance of biological organizing principles, the computational view of mathematics and physical processes, the emphasis on parallel networks, the importance of nonlinear dynamics and selective systems, the new understanding of chaos, experimental mathematics, the connectionist's ideas, neural networks, and parallel distributive processing. ..." He understood that the computer provided "a new window on that view of nature." This led to interesting insights into how the new sciences of complexity would impact global financial markets. He had the intuition that we were on the brink of a new epistemology that would transform the scientific enterprise and the way we think about knowledge. Pagels was having similar conversations at Rockefeller during this period with Emanuel Derman, one of his fellow particle physicists who soon after left academia for a position at Bell Labs, and from there went on to spend 17 years at Goldman Sachs where he became managing director and head of the Quantitative Strategies Group. It was Derman who brought the ideas floating around physics in the 70's and 80's to Wall Street, and in the process came to embody the word "quant." Writing in the New York Times ("They Tried To Outsmart Wall Street" March 9, 2009) , Denis Overbye observed: Dr. Derman, who spent 17 years at Goldman Sachs, and became managing director, was a forerunner of the many physicists and other scientists who have flooded Wall Street in recent years, moving from a world in which a discrepancy of a few percentage points in a measurement can mean a Nobel Prize or unending mockery to a world in which a few percent one way can land you in jail and a few percent the other way can win you your own private Caribbean island. May 27, 2010 10:13 AM Waltz Lannes said... They are known as "quants" because they do quantitative finance. Seduced by a vision of mathematical elegance underlying some of the messiest of human activities, they apply skills they once hoped to use to untangle string theory or the nervous system to making money. Derman, Overbye noted, "fell in love with a corner of finance that dealt with stock options." "Options theory is kind of deep in some way. It was very elegant; it had the quality of physics," Derman told him. I recently sat down with Derman to ask about his thoughts on the financial crisis, the role played by Goldman and the other big banks, and what new questions we need to ask to get our heads around the big problems which, to some, seem intractable and unsolvable. Concerning the last point, Pagels was on to something, when, in his 1988 book Dreams of Reason: The Rise of the Sciences of Complexity, he wrote: Mathematicians and others are endeavoring to apply insights gleaned from the sciences of complexity to the seemingly intractable problem of understanding the world economy. I have a guess, however, that if this problem can be solved (and that is unlikely in the near future), then it will not be possible to use this knowledge to make money on financial markets. One can make money only if there is real risk based on actual uncertainty, and without uncertainty there is no risk. — John Brockman May 27, 2010 10:13 AM Alessio said... Waltz... despite you may think otherwise, the circumstance that you're not writing in your first language doesn't justify anything. What were you trying to demonstrate by writing here in french? That people from a country wich official language is french, can *actually* speak -and write, too!- french? Well, no wonder... :P Personally, I think your walls of text are both difficult to read (I doubt that's because of their content) and distasteful. Distasteful because you've abudantly crossed the line of criticism: you didn't sound harsh, only terribly arrogant, presumptuos and kinda hateful. "nondeterministic HUMBLENESS"? Maybe we have really different ideas of humbleness :PP In the future, if you want readers (at least one of them, which happens to be me) to pay more attention to you and what you have to say, you may consider following these few guidelines: - have your graphomania cured - avoid personal attacks - fix your english I am not telling this to provoke you, sincerely. PS: english is neither my native language, so I apologize in advance for any mistake. May 27, 2010 2:47 PM Gaurav Mehta said... Thanks Alessio, for writting this up, else i'd have to do exactly what you just did... :) May 27, 2010 7:53 PM Guru said... Waltz As much I would admire your dialectic, philosophical and to a great extent analytic skills, I guess this is not an ideal forum for it. Nor it is really relevant to post picks from "Edge" onto this blog. Wolfram would be prouder with your posts. Though not relevant, I would certainly like to read the translated version of your views on "36 arguements...." Best Shivagurunathan May 27, 2010 8:06 PM Waltz Lannes said... Alessio You are right.Running on the keyboard too fast does not excuse mistakes. Definitively correct. Let's get to the points. The fact I wrote -even- few lines in French has no relevance. Does it? Readers problem? Maybe. Whatever, no relevance.I'm used to speak in different Idioms , so I write. Hurting with criticism. Interesting subject. In a dialectic exchange it is a risk. There is no exchange here, so... All the rest belongs to subjective...sensitivity. I do not write to be popular. Period. You don't like my style ? again your problem. Not mine. Do not read me. But if you do,please, would you kindly get into "contents" and/or technicalities and not if I do sound arrogant or whatever? You don't? your problem again. I basically made my point. And that's it from my side. I'm not looking for a "polite" or "unpolite" audience". I write what I think within the border of politness. Take care! Waltz PS: Guru, for the 36: that is an excellent Idea! Thanks! May 27, 2010 11:53 PM Waltz Lannes said... The tenor of your - superficial?- communication lents itself to a reminder. Alessio read my lips so you will understand what I say ;): -Official Language in Monaco is MONEGASQUE. - French is Administrative. - 6720 Monegasque Nationals in Monegu are speaking their language. - Proudly. Porte toi bien, jeune homme. 

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