Trick or Tweet

            vote_pumpkin                     ht_trumpclinton_pumpkin03_mcm_hb_161013_12x5_992

Twitter lost $103 million last quarter, and is even laying off workers. In the age of Internet company revenues, this should hardly be news. In the age of Social Media, however, it’s definitely worth examining. Particularly in the case of Twitter, as its influence is much larger and more widespread than merely a bunch of athletes and celebrities sharing their most interesting and deep thoughts. And on top of the loss, Twitter quickly followed with an announcement that it will be shutting down Vine, the home of the 6 second video.

Now it’s true that as one gets older, life seems to go by quicker. This is easy math. At 10 years old, a year is 10% of a lifespan, at 50 years old, that year only makes up 2%. Ask a parent…goes by quick. But Twitter? Vine? Here to stay. Oh, that’s what we said about MySpace, if I remember correctly. In fact, we seem to say that about a lot of things these days. Life goes by quick. Even the election will be over soon.

The shutting of Vine is probably less of an impactful event than Twitter losing money and growth rate. But it does go hand in hand with the point I’m getting to. That is, the things we quickly think of as constants are less and less constant or long lived. No wonder we can’t “invest” for the long term anymore. Short term trading is almost the entire life span of some of the most valuable companies. Recently, the long running magazine show 60 Minutes did a story on social media influencers, with a good amount of focus on Vine. And just like that, it’s gone.

As the father of a 14 year old daughter, even I knew Vine was “old news.”  Yet, I wouldn’t be surprised if many viewers had never even heard of it, though they’ve all heard of Kim Kardashian. Vine was deemed so world changing among social media apps that Twitter purchased it before Vine even launched. And it really was the king of that ‘genre’, short homemade clips that for some reason people cared about. That was 2010. Some reports gave Vine a top effective value of almost $1 Billion dollars at one point. Not bad, except almost as quickly as it rose, the Vine rocket has crashed back to Earth.

Heck, I haven’t even mentioned the true gorilla in the room yet; Facebook. The advantage I do see in Facebook is the number of small or even home businesses reaching customers via the app. A downside? When I look at the age distribution of Facebook users, it seems to me the skew is moving older.


More grandparents than grandchildren on the site soon? That doesn’t bode well in the social media world.

However, for that same $1 Billion value that Vine reached at its peak, Facebook bought Instagram. Recently, Forbes estimated Instagram’s value at $50 Billion. Nice return. On top of which, it’s a site my 14 year old can’t live without!…until the next one comes along.

So, back to Twitter. While working at Bloomberg, it was impossible to ignore or discount the influence of Twitter on the industry. Social media had finally come of age, as Bloomberg, its competitors, and many other firms looked for ways to filter the immense amount of noise around some actually pertinent tweets. Twitter’s influence on today’s investment community cannot be overestimated, let alone ignored altogether. Stories take on added importance based on retweets, often at the expense of fact. I’m sure again soon we’ll all put our faith in the next new and improved, and then be forced to move on from that one as well.

But this is what we do, and have done as long as the securities industry has been around. We take information, process it, and make decisions based on our conclusions. Previously, the effort was in finding the information. Now the effort, and computing power, is used to actually filter Too Much Information. Just like security prices, there is a large swing of the pendulum in how we ascertain value, probably prior to returning to some sort of mean, or normalcy. The more things change…and all that.

Or is this “The New Normal?” I’m not a big believer in the new normal. I’m a bigger believer in 20:20 hindsight. The world just doesn’t change that much in such short periods. Instead, we just keep searching for the best way to get the best information we can, and before anyone else. Then we look back when we’re wrong and say, “D’oh…It was so obvious.” So the next time there is a new phenomenon, or bandwagon, or whatever else you want to call it, it’s actually just a part of the constant move forward, unfortunately often happening too quick for a glance in the rearview.

As my uncle wisely said almost 15 years ago when my daughter was born, “Don’t blink, you’ll most certainly miss something.”


ETF, On the rocks – with a twist…

There was an ETF recently launched based on whiskey prices. This alone may or may not be deemed as a truly newsworthy event, but with an affinity for Single Malt Scotch Whiskey (Islay region to be specific), it certainly got my attention. The obvious discussions can be about; is the make-up of the ETF broad enough to truly cover an entire industry and is the ETF issuer backed well enough to guarantee both liquidity and long term viability? There are of course many other similar questions that can and should be asked about a great number of ETF’s, particularly the more esoteric ones, like whiskey prices.

I do think ETF’s have a place, so this is not a statement on their validity, but merely a statement on the obscure nature of some of them and their place as financial securities. I believe the long time justification has been that they can give the general investor access to specialized instruments that attempt to track entire industries or specific indices. And in the age of cheap trading they have certainly added to overall liquidity. Heck, one like this is even FUN!

The other instruments that are traded with reasonable liquidity in multiple places are binary options, i.e. you’re right or you’re wrong. These can even be single day or week bets, oops…I mean investments. And in Las Vegas there are plenty of places to wager on other events. What I’m not sure about anymore is really how these lines are drawn. I can ‘wager’ on the future price of Whiskey, but wagering on sporting events is made much less accessible to the general population, legally anyway. I can ‘wager’ on the close of the S&P Index, or even the weather via exchange products, but not how much the unemployment rate will go up or down next month.

Many would argue that sports gambling is regulated the way it is to avoid game fixing. For the most part, this works. Like anything else there are exceptions; the Black Sox, Boston College Basketball, Tim Donaghy (ex-NBA basketball ref), and a handful of other publicized occurrences. But when you read about John Stumpf, the now former CEO of Wells Fargo who resigned due to a policy of opening phantom client accounts to show the company meeting metrics, I would say price fixing and influence is being exercised in the financial markets as well. The value of a CEO’s bonus granted options are tied to stock price. Meeting your target metrics always pleases the fundamental analysts, which in turn should lead to higher stock prices. There is an inherent desire to make the price go up. Just like my inherent desire to see the New York Giants win the Super Bowl, which is only open to legal gambling in Las Vegas, not via an E*TRADE account.

Currently, we have what would probably be the largest betting pool item in history; the US Presidential election in a mere 20 days. I can’t imagine with the polls having spent so much time within the margin of error that people would not have enough interest to wager. There was a website that for a few years did facilitate this. It was called and was billed as a “prediction market.” It was definitely that. In the 2008 election, the predictions were within 1 electoral vote of President Obama’s returns. And I miss that accuracy. Intrade was shut as a result of both government action and financial ‘issues.’

What we currently have are polls to predict. But this is even more imperfect than usual. Polls suffer from many inherent flaws; question bias, sample size, etc., which can all lead to results skewed to the author’s intent, be it intentional or not. In this election, we have access to more information and faster than at any time in history. It should be easier to decide on this than it has ever been. Certainly we’ve got more information at our fingertips than we do on the supply chain of Apple products.

Yet we now have an election where discussion or dare I say debate, let alone declaration of a position on which candidate we support does not seem to be taking place in any public manner.  Taken a drive recently? Walked around your neighborhood? I find the lowest numbers of bumper stickers and lawn signs for Presidential nominees that I have ever seen (unscientific, I know).

It’s easy to understand this phenomenon, this election is between the two least liked candidates in history. And this is why I miss Intrade. If I want to bet on the direction of whiskey, I definitely want to bet on this, but in a financial sense, not in Las Vegas. Both whiskey and the election are important to me (depending on election outcome, whiskey may move up), but the excitement of the election is more akin to weekly fantasy football from FanDuel or DraftKings than it is to a season long fantasy league where you know after week 9 you have no chance. So we’re back to the line in the sand. Back to the problem of ‘influence’ in sports betting.

For me, there is less chance of a truly rigged election than there is of a rigged football game, or a rigged company balance sheet. There is certainly enough interest for adequate liquidity. There is an easy way to measure being correct (Intrade used a 1 to 100 scale to effectively show percent probability). We have lots of elections and we have many other real time scenarios that people would wager on, fixable or not. Music and film awards (fixable) or number of new generation iPhones sold on release date (less fixable). In fact, the iPhone prediction market would actually open up investing in Apple on a short term basis that could be less expensive and therefore more accessible to the average citizen.

Will we ever really be able to legally make financial security level investments in these short term events? The way things are going, I’m guessing probably. File it under the handling of OTC contracts within Dodd-Frank. When you look at it, there’s not a big difference between an opinion on the price of oil in November and the winner of an election in November. And the similarities of the election and the legal financial markets just continue from there. The election is really an investment, just like a whiskey ETF, but even more important. So we should all invest in those Futures, even if you can’t do it with money.

Or maybe it’s just a tummy ache…

There was a recent University of Cambridge study that was mentioned in the Wall Street Journal and the Financial Times, among other media outlets, regarding the actual success of using “Gut feelings” for trading success over using machines. Of course, an article like this also flew around LinkedIn, at least among the types of people I am primarily linked to. At first I chuckled and then began to ponder…

If you’ve read my About page (if you haven’t now is a good time) you know that I ‘grew up’ in futures trading pits. This was a true bastion of gut trading. While I did also learn technical analysis (charts – oops, I mean “Data Visualization”), much of what all of us did was act on our body’s reaction to what was happening around us. A lot of times “I know it’s going up” was the reason to load up on a position. What’s humorous is that somebody else’s gut was telling them it was going down at the same time. If all those guts where right at the same time we’d never have had a functioning market.

“Our results suggest that signals from the body, the gut feelings of financial lore, contribute to success in the markets,” is how it was phrased in the study.  While the articles I read didn’t seem to mention a direct comparison to machines and algorithmic trading, most of those same articles did mention this implication, that ‘gut feelings’ can outperform those computer models. Having used both approaches in my career, I’m not sure which way to lean on this, but really can’t stop chuckling at the study itself.

One of my favorite college Political Science professors also did work for one of the major polling firms at the time. He taught us how easily any survey can be “rigged” to reflect the pollster’s intended results, and they usually are. This political season has certainly given us the opportunity to hear this refrain. No matter which side you’re on, the reality of this shouldn’t be denied. Not that we should stop surveys and polls, we just need to understand the inherent ‘flaws’ in the results.

And so it is with trading and investing. The Cambridge University article was published on September 19, 2016 and more widely publicized in the 2-3 days following. And yet, at the same time, a column was written on Yahoo Finance titled, “The Old Wall Street Trader Is Dead, Algo’s Now Rule The Day.” Here we’re told that “Big Data” is now what drives trading. The ability to analyze unimaginable amounts of information in equally unimaginably short periods of time has to over-rule gut, intuition, intelligence, etc. So how do we reconcile these two equally valid yet diametrically opposed viewpoints?

As a fan of ‘whatever works,’ I wonder if we really have to. As to the gut feelings, I’ve always actually compared this to the work I’ve done on automated trading models. In trading and investing, Discipline is generally accepted as a necessary trait, perhaps the most important. And the reason for automating trading, be it mean reversion, the generally accepted ‘aglo’ style, or automated trend following, where I spent most of my own programming and testing, or both, is to enforce the discipline of repeatable action. This was my best method of taking my emotion or gut OUT of my trading. Huh? One thing I learned about my own gut was that the feeling there was more often indigestion than a correct hunch. I don’t, however, completely discount the gut feelings of the “broad” study sample of 18. Really? All those articles for a sample of 18? Given the sheer number of ‘gut’ traders out there, I’d call that a rather limited group from which to draw such an impactful conclusion…maybe we’ll cover that part of statistics another time.

I chalk up the successful gut trading to the unconscious recognition of previously successfully acted on conditions. In other words the situation, or setup, has some resemblance to a previously successful trade or investment. And it is that recognition that fuels the body reaction. For myself, I needed to put it all in code. But these guys (it was 18 males in the study) were able to judge the difference between being right and feeling ill. And isn’t that what the use of charts is all about? It’s a way to see the effects of people’s decisions based on what they felt in their guts and brains. And then I took those charts and programmed the repeatable pictures I was looking for. So here we have, what in essence is the combining of the case of relying on your gut, and the use of programming machines to all accomplish the same goal, profit.

No matter what side of this your opinion falls on, I prefer to just lean on the idea of “Whatever Works.” I always return to my charts because I find it the easiest way to interpret what You are doing and then acting in response to that. The beauty of this industry and the reason it thrives is due to all those differing ways of processing the available information. Research, programming or indigestion, they all work and they all fail. Pick the solution that fits your strengths, and keep the Discipline. The rest is noise.