What Goes Up Doesn’t Always Come Right Back Down

Value. Worth. Two words constantly used when espousing how much something should cost. Be it a fidget spinner for $5 (undervalued!) or Tesla stock. And we seem to hear a lot about what things are worth, especially when indexes and stocks have been having such a bull run. I pointed out in a recent blog about the price of bitcoin (which was written a couple of months ago with bitcoin at half(!) its current price) that things are ‘worth’ what someone will pay for them.

What we need to understand from this is what’s been written by many including me before; the market is always right. Over the years, this cliché has served me well. I repeat it like a meditation mantra when a position is against me and I’m convinced it shouldn’t be. Not quite as quick to say as “Ohm” but definitely more useful to me through the years. We keep getting told the S&P, Dow, and any other broad index you can name is “too high” and will need to go down soon. Why? Well, the reasoning is that these things are overvalued. And we’re told the same for individual stocks. A favorite these days? Tesla.

This is a very popular refrain recently. Heck, even Elon Musk said so a few days ago! This comes just a month and a half after he defended the price. What’s changed? Well, Tesla stock has gone up further since then, but so has the broader market. In the specific case of Elon Musk’s change of mind, it may just come from the fact that he can’t fully explain what’s up with the stock price either. That’s ok. He’s Elon Musk and is probably thinking about more important things. More important even than an upcoming model that many analysts say holds the key to the future of the stock price…unless it doesn’t…

He’s probably spending time thinking about solar power from roof shingles, larger and better batteries for storing power, and a bunch of things involving rockets and space. We can excuse him if the stock price is not the most important thing on his mind. And that’s good. Too many CEO’s survive or get fired based on stock price. People like Elon Musk and Jeff Bezos don’t worry so much about that. They’re busy changing the world.

But what about those analysts that say it can’t maintain this upward move. Same thing we’ve heard about the stock for years. Just Google “Tesla Stock Overvalued.” 2017. 2016. 2014. People want to be contrarians, and many an analyst has made a name, and a career, by making one of those “This is the top” calls and being right. It only takes being right once, as long as it’s loud and very right. The incorrect calls get lost amongst all the other incorrect calls that are constantly made. As a contrarian at heart, I often want to do the same. Thank goodness for charts to keep me honest…and let me know that I, like many others, am just not smarter than the overall market.

Being a contrarian is what can lead to that one correct opinion that makes you famous. It can also lose you a lot of money before and after. The broad indexes have experienced this recently. And the story that illustrates that even better recently is the VIX Index. The “Fear Index.” It’s trading at extremely low levels, and recently reached its lowest in decades. Even with the drama in Washington, it only picked its head up briefly. Now back down it’s gone. Kind of odd when you think about it. But that’s value. It’s worth what people pay. And it’s worth less the higher the stock market goes.


That’s the way this one works. Negative correlation to stock prices. Look at the chart. It’s more of a mirror than a Rorschach picture. The volatility has left the building, and no one is expecting it back anytime soon. Except the ‘professionals’ that keep saying something has to happen. Why does something have to happen? Because the crowd has to be wrong. We can go into contrarian views more deeply another time, but really, it’s semantics to me. The crowd is right a lot longer than they’re wrong. And the crowd is what drives the market. Not the professionals. A bit counterintuitive, but so are investments many times.

So what’s the point? The point I’m trying to make is that we can’t always determine what or why. We just need to understand that all we’re really getting are opinions and giving people the opportunity for face time on TV. Or supporting their careers, waiting for those one or two ‘amazing’ calls amidst all the noise they produce. I’m not completely discounting the professional analysts. They do provide a great deal of information to help us make our own decisions. It’s just that oftentimes they’re blinded by their own “intelligence.” We need to always remember that we’re not trading or investing to be right. We’re doing it to make money.

Markets in general and stock prices more specifically are driven by the rest of us. And if we think that Elon Musk can change the world in measurable ways, which I obviously do, then we invest in the person as much as the company. Amazon lost money for years. And the stock steadily went up. Thankfully I never shorted it on the way. But I sure did want to! Because I was trying to analyze too much. And I didn’t necessarily see the bigger picture of what Jeff Bezos was doing. I’ve never wanted to short Tesla. Because that would be like shorting Elon Musk. And to me, Tesla’s “value” is Elon Musk. And I’m a big fan.

Unfortunately, that’s not something professional analysts focus on. They focus on car sales. They focus on current and upcoming competition in the electric car space. They say since something hasn’t been done before it can’t be done now. And the VIX? Where does that fit in here? Well, it does and it doesn’t. There is no Elon Musk behind the VIX. But there are a lot of professionals telling us why the price is wrong. And why it has to adjust. Me? I’m smart enough to know I’m not that smart. I just watch, wait for a sign from the VIX itself, and then I’ll act. Based on the market. Not my opinion. Not my ego. I leave those mistakes to the professionals.


Risk On, Risk On

Trading Places 2

I like risk. I’ve spent the greater part of my adult life taking risk. I stood in the futures pits of the COMEX and NYMEX for almost 14 years. Must be something about risk that kept me coming back…Oh yeah, the reward part of the saying. Risk/Reward. It seems simple. But it’s difficult to comprehend sometimes what real risk can feel like at any given moment. The government and the brokerage houses have a great deal to rules to address this. Certain instruments are only available to specific investor classes deemed able to accept it.

There are a few ways to become able to trade or invest in these instruments and methods. One is to be rich. When you’re rich, or at least rich as deemed by a government guideline, you can pretty much do whatever you want. And that seems fair. First of all, chances are you can afford to lose some money. Also, there’s a good chance you’ve done something or some things in an intelligent enough manner, financially speaking, to understand the downside. Or maybe you were lucky enough to be born rich, and we figure somewhere along the line it was all explained by the elder generation.

You can take tests. Series this, series that, CFA, etc. There are lots of industry tests. And passing these tests implies at least that you have an understanding of what can go right, and more importantly what can go wrong with different investment vehicles. So once you pass a test saying you can help others to make money in your chosen discipline, it’s often ‘assumed’ that you understand it for your own purposes as well.

Experience. The more experience you have with financial investing and trading, the more the portfolio of allowable products may grow. If you survived one level, you get to play, I mean move on to the next level. Seems logical. Not all of these approaches open every door. But they all open some, as far as what you can buy and sell, or invest in. We generally start out with basic equities, move on to margin trading, options, from simple strategies to being given a longer leash and being able to try more risky strategies. Maybe this is how video games were designed. Games following life, but with no real risk involved, just the risk of some silly music playing as your character is killed.

I’ve mentioned my background as a futures trader in the COMEX and NYMEX pits. It was funny when I applied for a stock account after trading futures for my own account for a couple of years. I was told I was approved for everything. I guess the risk of the pit, every single day, gives you some ‘street cred’, as it were. So for me, risk is fine. In fact, I have often referred to the fixed income part of our industry as akin to watching paint dry due to less risk…for the most part. But that’s just for me. And fixed income has made a lot of people a lot of money. So I’m not knocking the profit side of the equation on that one. It just isn’t the same as the world of futures and the leverage afforded those participating in that part of the industry.

So this thing the government has about bringing us along at a reasonable rate to work our way up the risk ladder is probably one of the more logical things they’ve passed rules about. The Political Science major in me often says that one of the primary roles of government is to protect people from themselves. We don’t want to have constant bailouts for every person that didn’t understand the risk involved in getting short natural gas futures when there’s a hurricane on its way. Or any other similar trade.

Then I read this article. The SEC on Tuesday approved a request to trade quadruple leveraged exchange-traded funds, ETF’s. Those initially approved seek to make four times the daily performance of the S&P 500, either up or down. And the symbols? Up and Down, of course. Cute. Trading is many things, cute is not supposed to be one of them. But that’s marketing. And speaking of marketing, how are ETF’s listed and marketed? As equities. And since ETF’s are equities, just past that first video game level is using margin on equities. We just increased the leverage. So when I saw the article yesterday, it was a “Wait…What?” moment of sizeable proportion.

As a kid we were all told at some point, “Sure it’s fun, until someone gets an eye poked out,” or at least a similar phrase. And that’s how I feel about these new ETF’s. They’re going to be fun for people while the market trades with some semblance of normalcy. It will go up. It will go down. People will get addicted to the comparatively outsized returns available with that type of leverage. Until…

Now this isn’t to say that the market is going to crash anytime soon. But with that kind of leverage it doesn’t have to when you’re wrong. We can short them too…this is really starting to sound a bit more risky than buying shares of McDonalds. But that’s ok. Go ahead. What could happen? Everyone understands the risk involved. Oh wait, we’ve already decided that many of the people trading equities don’t fully comprehend the level of risk involved in many types other of trading. We actually learned that when the NASDAQ bubble burst.

What if the market does crash? It’s happened. More than once. And I know that one of the toughest things for a trader or investor is to admit they’re wrong and get out. Remember the blog about finding your nearest exit? That’s what I’m worried about. Crashes happen to the degree they do because they feed on themselves. No one wants to get out…until everyone wants to get out. But I’m a fan of risk, though maybe I should say understood risk. And I’m even a fan of giving people access to taking a shot on things beyond basic corporate ownership in the form of shares. But in this case, I’m not sure the government is really doing a good enough job of protecting people from themselves.

For the professionals, there are futures contracts on the S&P. Plenty of risk for those qualified. There are single and double and even triple levered ETF’s to trade the indexes. Seems like we’ve got to be far enough down the road by this point. Do we really need to narrow the gap between the most and least risky instruments that much? Does everybody have to have access to outsized risk? Like so many other things in the world of investment instruments, I believe we should be careful what we ask for. Before we get it.


You May Not Want to Fly Them, But You Do Want to Chart Them

As we are all very much aware, on April 9th a passenger was forcibly removed from a United Airlines flight, and faster than that plane can fly, the video had already traveled globally via social media. Obviously this blog is not needed to further explore that this was wrong in so many ways, and right in none. But the name of my blog is “The Story Behind the Picture,” and I do believe that this story warrants a look at that picture.

One of the biggest headlines associated with this story was the effect on the price of United stock (UAL) the day or days immediately following. So I decided that this is a good opportunity to actually look at that price action and perhaps add some perspective on what damage, if any, this news really did. After all, the outcry for boycotts and general disdain for the company as a result of this action should all have a profound effect on the stock price and overall value of the company…or so we’ve been led to believe.

And yet the picture seems to tell a different story, and my career has been spent looking at those pictures and thinking about the story for further clarification only after many of my conclusions have already been reached. So let’s look…

UAL vs SPX trimmed

 The top chart above is United Airlines stock (UAL); the bottom is the S&P 500 index. The first day that people were able to buy and sell United stock after the incident was April 10th, the date referenced by the arrows. The charts show that these two securities have moved in a correlated manner since early March and actually over the last year at least. In fact, the correlation over the past year is 0.853, where a value of 1.00 is an indicator of completely correlated values, i.e. as one moves the other moves exactly the same. We would look at this 0.853 value as a high correlation. If United’s stock had tanked in the week since this went viral, that number would certainly be lower. The correlation over just that week is even closer to 1.00 as it calculates to 0.957, though we don’t have a very large data set and that’s why I ran it for a year. As goes ‘the market’ so goes UAL.

Either way you look at it, United stock has certainly not performed poorly relative to the broader market measure. Since the 7th, the last trading day before Dr. Dao was dragged from the plane, United stock is down just over 1%. I would not look at this as an indicator that United won’t recover from this debacle. If I was a stockholder, I might even be impressed with how well the stock is holding up. So why even cover this topic if there’s so little going on? Because that’s the point. And that’s why charts are so valuable!

We live in a world of information. I would say we live in a world of TMI – Too Much Information. Especially if you are one to invest based on the fundamentals. When assessing the fundamentals in this case, an analyst would have to go beyond earnings, percentage of seats filled, cost of jet fuel, seasonality, etc. You would be hard pressed to ignore the outpouring of negative press associated with the video and story. But in the end, will it really cost the airline all that much?

There is not much of a warm fuzzy feeling around flying anymore. Forget the business formal dress attire that marked the early days. We no longer have a good feeling about much of anything when we fly. JetBlue serving up free wi-fi, a soda and a bag of chips is as good as it gets. No full meals, free or not. Blankets? Pillows? Bring your own; if you’re lucky the flight attendant can sell you one. Average height or taller? Discomfort awaits. And the cheap fares one might expect from this level of service and comfort has no correlation to what we’re getting. When Peoples Express was created and began our fare wars, at least we knew with them that we were getting what we comparatively paid for. Not anymore.

Flights are packed. All the time. So the risk of United losing many passengers is actually pretty low. There aren’t a lot of other places to go. Fewer airlines and fewer flights translate in the real world to book whatever you can get. Spring break is one or two weeks. We all need the flights at the same time. Whether it’s JetBlue or United, most of us will choose the least expensive at a somewhat convenient time. And if that’s United, then United it is. Same price, same time? Sure, I’ll choose someone different. But I rarely get that luxury.

And all of this information is contained in the top chart of UAL stock price. Per the chart, this is not a big breakdown. There has not been a mass exodus of stockholders, and those that chose to sell based on the news, the fundamentals, may very well buy their shares back soon. They certainly aren’t looking in the rear-view mirror declaring victory. The consumer? Even less victorious. Because while United has changed some policies based on what happened, our personal flying experiences will not improve all that noticeably. So what seemed to be extremely impactful news is really more of a snooze.

Don’t take my word for it, look at the chart. Numbers don’t lie, as the saying goes. And all of our negative sentiment is reflected in the price move, or lack thereof. So listen to the news, check your Twitter feeds. Find out The Story Behind The Picture. But don’t lose sight of the picture when doing it, because your best information is right in front of you; and as mentioned in a previous blog, you don’t need a business degree to interpret it.

Whose (de)Fault Is It? Cars, students, and countries.

As I was looking for a topic to write about, I was struck by the articles I’ve read over the last few weeks pertaining to debt. In many ways, debt is good. We buy houses using mortgages and for many it is the equity they build over the years that helps fund retirement later in life. Student loans are there to help us have a more educated workforce. Auto loans move inventory, and in the years of shorter vehicle life spans, kept us all on the roads. Countries borrow, of course. Our own bond market is one of the largest trading markets in the world.

Debt is good. But only if managed properly. The mortgage crisis is beginning to fade into our memories a bit. The pain endured by so many is no longer at the forefront. When the crisis hit, we all thought about that pain. Now only the people still left with underwater home values or other continuing negative circumstances directly attributable to that crisis think about it regularly. And what happened to cause that crisis. Everyone got loans, the money flowed easily. Rates were not high by historic standards. Builders built. And built. And built.

Good thing that’s a distant memory. Won’t make that mistake again, right? Hmmmm…Car sales figures come out this week. We’ll start there. I hope the numbers are good. We need continuing signs of economic strength. We have a record breaking rally underway that no matter your opinion of the causes, none of us is wishing for a crash. Well, a few maybe, but they’re just talking their positions, so to speak.

But the auto industry may not be so healthy no matter the sales figures. The level of car debt has been getting a great deal of press. That press is not positive. And a look at the chart shows no “Record Breaking Rally” going on in that industry.

Auto stocks v SPX with commentThe number of people delinquent on car loans is at a high. Subprime auto loans have exploded, and delinquency rates on those loans as calculated by Morgan Stanley Research is over 4.5%, and close to the level reached during the financial crisis. While not near the cost of a home loan default on the economy, cars are one of the larger purchases most people make.

When we look at the impact of debt on our economy, both directly and indirectly, we can’t discount student debt in the equation. In fact, I believe we should be paying much more attention. Remember unlike car loans, most student debt is government backed. Some people are paying attention. Like those betting against our expansion of home debt a decade ago, there are fund managers betting against the student loan levels (dare I use the word “bubble?”).

Michael Burry was featured in the Michael Lewis book “The Big Short.” John Paulson also made billions from that mortgage move. But like the mortgage crisis, there are not a lot of people outside of a few fund managers that are going to see a big benefit if this is a bubble that bursts. And how does it get handled? How much more money can the government print for bailouts? The housing crisis bailout was pegged at $700 billion. We were in the Trillions with a “T” if you count emergency lending. That’s a lot of bailout. We could have bailed out virtually all student debt at the time with the same amount. But it was the banks, not the students that were too big to fail.

Like housing debt, there are large implications of student debt. The effect of these loans built from educations that can easily cost $250 thousand, yes a quarter of a million dollars for college(!) is something that weighs on an entire generation. And while we have not seen much inflation to speak of the last few years, the cost of college education has not stopped going up. Since the financial crisis, student loan debt in the government portfolio has increased over 100% since 2008, from under $600 million to almost $1.3 trillion, per the US Department of Education. We are at well over a trillion dollars. And delinquency rates are over 10%. This is not a pretty picture. We’ve already forgotten we started the blog with car loans…

So let’s move on to the last part of the title…countries. Makes you cringe just thinking about it. Venezuela’s economy is collapsing, but we don’t pay too much attention it seems. We watched the Greek economy pretty much do the same. The Pound has taken a bit of a pounding to say the least, based on Brexit. Now there’s talk in France by the far-right National Front Party of exiting the Euro. This is not simply like Great Britain exiting the European Union and whatever downstream effects that will have. This is exiting the Euro, the currency. And while not probable, we’ve seen some improbable stuff lately.

This would have far reaching impact and could easily disrupt the stability of the EU overall. France’s exit and its exiting the Euro currency would be viewed as a default on the country’s debt, according to Moritz Kraemer, head of S&P’s sovereign ratings. With or without that Frexit, France is at the top of many lists for the next economy to watch for possible collapse. The last couple of years have brought a number of impossible events into the world of possible.

I have little worry about the US economy collapsing. We’ve already dealt with “Too big to fail,” and seem to be coming out the other side intact. We’ve started raising rates. A good sign in a couple of ways. It signals expansion has seemingly taken hold. It also ‘should’ help curb some of that borrowing. But there is a lot of debt already in existence. And much of the larger debt, including education and cars, is in shaky shape. Debt is a double edge sword of the sharpest kind. Again, the US dollar and economy collapsing? Not anytime soon. Impossible? I for one have stopped saying anything is impossible. From easy space travel becoming a reality, to first world countries collapsing, it’s all possible.

And we are all to blame. We love debt. It’s addictive. Especially at low rates as we’ve enjoyed for more than just a few years now. Remember, debt is like a trading position. Properly managed debt is good. Improperly managed debt will break you. So keep an eye on the numbers. Keep an ear out for the possible solutions. But all the while, don’t ignore macro factors that you don’t think will affect your micro investing. We’ve created a world of economic influence where all of this matters. A Lot.

Man Smart, Woman Smarter


That’s the title of a song made famous by Harry Belafonte on his Calypso album released in 1956. I became well acquainted with it after hearing it at countless Grateful Dead shows in the 1980’s and 1990’s. The song popped into my head last week when I read an article about a study done on the different success rates of male and female traders. The study was conducted by Professor Peter Swan of the University of South Wales, working with researchers Joakim Westerholm and Wei Lu.

Unlike a trader study that I mentioned in a previous blog entry that drew conclusions from a sample size of 18 traders, this was a study of almost 1 million traders in Finland over a 17 year period. Those numbers definitely add a sense of validity to the results. And the results were that women make the better traders.

I’m not sure if the results were released to nearly coincide with International Women’s Day, but it certainly was a good coincidence if not. With a 15 year old daughter in the house, the confluence of these two things made me pay attention. Being a male former trader, I couldn’t help but be drawn in. This is not the first study to draw this conclusion, but it is probably the broadest in the sense of sample size and time. So let’s examine….

According to the results, the women outperformed the men across the board. One conclusion was that the women traded more as contrarians then men. This style makes sense as very often the most profitable trades are also the hardest to make. Selling a security, in this case stocks, as it’s running to its highs, or buying as momentum drives it lower is very counterintuitive to me. I trade momentum. Buy a new high, short a new low. The women didn’t peg those absolute highs and lows, so they did experience some short-term losses. But they held those positions and beat the men across the board.

Why? A few reasons mentioned as well as some of my own conclusions. They traded less. The females seemed to zero in on the best stocks to buy or sell. They didn’t just trade to trade. The author mentions that they didn’t diversify as much. They had their targets and stuck to them. The women also profited more when using their own funds in a personal portfolio. I would conclude that this is because they were better able to choose exactly what they wanted to trade whereas an institutional trader is often handed a “universe” to watch and trade. This was an additional indicator of the better focus of the women over all.

Having traded in futures pits as well as within a “prop-trading” firm, I was usually surrounded by men. There is no doubt that historically males have dominated our trading venues as well as the industry as a whole. And it makes you think how much better the industry would have performed if this study’s results could somehow have been available decades ago. No doubt there would be fewer glass ceilings remaining that still need to be shattered.

The futures pits were easily over 95% male. We justified it as it was too physical for those delicate women to endure. It was also an environment that as a dad, I would not want my own daughter to have to exist in. Upstairs, the trading desks were much the same. Not so physical, but almost as chauvinistic and crude. The industry at that time carried the unequal treatment of women as far as it could, and always found some sort of justification. This study just makes us look dumb, for if our true intent was to just make money, we should have invited and embraced women sooner to accomplish that objective.

It seems from the study that women had patience the men did not possess. They held fewer positions and held them longer. The machismo of the trading pits was not there. The need to prove something to others in the pit or on the desk or anywhere else probably was not a part of decision making. The ability to stick to the singular goal of a positive P&L over the long term was the driver. It’s interesting as men often try to brag about buying the low and selling the high, yet the women came closer to doing just that over time than the men in the study. We (males) talk a big game, the women just win.

I also realized that the one place I have been able to accomplish more of what the women did, that is zeroing in on the correct position to take and letting it ride to long term profit, has been in my researching, testing and implementing of automated trading models and strategies. And this makes sense. The women did better analysis. They had patience and the good sense to only trade the best opportunities. Emotion was not the driver of their decisions at any point, just like my computer models.

This is what optimizing and testing trading ideas is all about as well. Don’t be driven by emotions. Analyze actual test results and listen to them in order to improve the strategy over time. Don’t get out of the trade just because there’s a profit. Get out because the research has led to a successful exit strategy. Trade the signals. Don’t just trade. And make sure that the research that went into all these real time decisions is valid. Patience in the amount of time it takes to do proper research pays off with more successful results. It seems to me that these practices are what the women were doing in a subconscious way without the necessity for all the computer programming I’ve had to depend on.

I love this study. I learned a great deal from a very short article. It opened my eyes to why I still have the belief in well researched automated trading strategies. The research is done before the positions are ever put on. No ‘skin in the game’ to lead to emotional, and wrong, decisions. Just the ability to analyze the market in a rational way and only then act on the decisions your research has led to.

We can all learn from this study. And it encourages me that we have more proof of women having the ability to have at least as much success as men in the financial community. The females I taught and mentored while at Bloomberg were additional proof of this every day. So keep shattering those glass ceilings. Every shard on the floor brings us all closer to having more success at whatever it is we are striving to accomplish.

Pay Attention To The Man Behind The Curtain


This week S3, a part of Amazon Web Services (AWS), had an outage that affected many large internet companies that we all use in our regular routine. Netflix, Spotify, and Pinterest to name a few, had problems related to their use of the Amazon cloud services. Things we’ve started taking for granted over just the last few years were suddenly removed from us, or at least moved slower. Amazon soon announced that this wasn’t a computer glitch, but actually human error. It wasn’t that long ago that everything on the internet moved slowly. Dial up modems have given way to high speed data movement that allows us to not only post pictures quickly and easily, but to even watch movies without a glitch in front of our computers, or with an iPad in our hands, and this has become the norm.

The use of computers in our daily routine, or for use in very critical parts of our lives, is something we not only take for granted but depend on with increasing importance and breadth. We all know that our cars will soon be self-driven, and the new wave of investment management is known as robo-investing. Not a niche, but something offered by major investment houses. And all those robo-investing actions are the result of human programming.

This trend interests me greatly, as I’ve been both an active trader as well as having back tested thousands of automated trading ideas to build robust automated strategies. I recently read a piece on LinkedIn about the lack of gray hair on trading desks across the securities industry. The trend is toward hiring young ‘quants’ and programmers to create computer models that make money by analyzing huge amounts of data and deciding what to buy or sell and when. Don’t get me wrong, I started using computers myself to do this over 20 years ago. Not as a quant, but as someone who believed a human only has the capacity to monitor a very small amount of markets or securities on their own.

So is there a problem with this? Well, let’s go back to those cars for a moment. In the 2004 movie “I, Robot” a police detective is saved in a car crash at the expense of a 12 year old girl. The robot behind this action decided whose life was more valuable. And our self-driving cars will at some point need to make just those types of decisions. But maybe that 12 year old girl that is lost in our real world was going to cure cancer, figure out space travel through worm holes. At the time of the accident she’s just a kid getting ready for the awkwardness of adolescence. Who knows? The next Bill Gates. The next Steve Jobs.

And this has what to do with your robo-investments? One more movie reference and I’ll tell you. I watched the movie “Sully” yesterday. In the movie, Tom Hanks has a line that prompted me to write this blog entry: “Everything is unprecedented until it happens for the first time.” This is not only true in our lives, it’s true in the investment world. We call them Black Swan events. In quant investments, people are using statistical analysis to find the best odds of mean reversion. The place where things are so out of whack that they have to return to normal.

This has led to major profits for those that can program this math in ways that analyzes all that data. But, it’s also led to spectacular losses. In 1998, Long Term Capital Management (LTCM) used analysis techniques developed by Myron Scholes and Robert Merton to put on large positions across security classes around the globe. These were Nobel winning smart people. And the hedge fund had outstanding returns. Until it all blew up and we the taxpayers bailed them out. Heard that before? What happened? That unprecedented event.

I’ve mentioned an early student of mine, a physics major, who was amazed at the frequency of six sigma moves in commodities. Six standard deviations away from normal market action. The standard bell curve doesn’t even go out that far. They’re generally drawn to 3 standard deviations because in statistics, that includes 99.7% of the probable outcomes.

Standard Deviation

Those points all the way to the right and left are the tails. They just don’t happen. Until they do. Like Sully noted, they happen for the first time. And this goes on with more regularity in the markets than we realize. It can be something financial like the implosion of LTCM due to a foreign currency crises. Or a political event, like Brexit or the unpredicted election of Donald Trump as President.

The point is, the programmers often don’t take this into account because it hasn’t happened…yet. Or maybe just a human mistake slips in, like this week with S3. All the computer models, even those involved in robo-investing for the average investor designed to level the playing field and supposedly take out the human factor of your chosen advisor are programmed by people.  And all of those people have human thoughts and biases that go into those models. It can’t be avoided. There are forks in the decision process that must be taken. Not like Yogi Berra, “When you come to a fork in the road, take it,” but one direction or the other. And as time goes on, the models may learn and get ‘smarter,’ but they still start somewhere, programmed by someone.

And the lack of gray hairs is what gives me pause. How many Black Swans have the programmers experienced? We can’t plan for everything, and that’s when the unplanned event usually occurs. Experience has always been of great value in the investment world. The more unexpected events an advisor or trader has lived through, the more they will take this into account in their decisions. Remember, risk/reward, in that order. And if all you’ve experienced is a bull market over the last 8 years, do you really take into account what happened at LTCM? Do you even think about the internet bubble that burst in 2000? The mortgage crisis is the most recent large Black Swan, and many of these investment and trading strategy programmers were kids. Are they thinking about auto debt risk? Student loans? Whatever might be the next event trigger.

I’m not trying to imply that automation of trading decisions doesn’t work. I had success doing it both for myself and clients. It broadens the ways you can allocate money in just recently unforeseen ways. What I am saying is be careful. Because tail events happen. There are Black Swans swimming all the time. We just need to be sure to look out for them.

You went where? You studied what?


I may not be telling you something in this blog you don’t already know. Or haven’t already heard or read. In fact, I do hope that you’ve heard this elsewhere recently. Liberal Arts lives. I grew up in the securities industry, and have met more than my share of finance majors. I can’t count how many parents I’ve spoken to that were pushing their kids towards schools with stellar reputations for the finance majors they churned out. This isn’t even the traditional, and broad, economics education of old. It is a focused, blinders on, pursuit of a degree pointing students to a very specific career path. Finance. That’s where the money was going to be, so why learn anything else. And if you wanted the best job, the thinking was, this would give you the preparation employers were looking for. Someone who could step right in and understand what they were looking at when presented with a stack of balance sheets to analyze.

I was a Political Science major. Actually at my school, Clark University, it was a Government major. I planned on being a lawyer. Midway through my freshman year I decided not to go down that road. The question became “Now what?” I was lucky enough to land a job at Bear Stearns in the Management Training Program. This allowed me to get exposure to a broad array of roles within the firm and decide which route to go down. Investment banker was the path of choice for many, but those many were primarily business and finance majors. Interestingly enough, I went on to spend 14 years in the commodity futures pits, where many of the most successful traders had never graduated from college, or even attended at all.

More recently, while at Bloomberg, I had the opportunity to speak to a group of students from my alma mater. And they were? You guessed it, finance majors. In fact, since I left, Clark added a Graduate School of Management. Go figure. This was a school known for its Psychology department, riding the coat tails of having had Sigmund Freud speak there. And students majoring in Government, Philosophy and Sociology were what the school churned out. The current business school students had no connection to this. They thought I must have been a business or finance major as well, and they were very interested in my career path.

The question I enjoyed answering the most during their visit was, “What was the most valuable thing you learned at Clark?” I answered that as a liberal arts major, Clark had taught me how to think. Not to think about the value of a security, but to think about the world around me. The world and the people around me determine the value of a security. My own approach to trading is to look at charts. I use these charts because they are displaying price, and price is the culmination of everybody else valuing a security. Many of those people are finance and business majors. I’m happy to let them interpret a balance sheet. I just need to look at the results of their analysis on the charts to make my own interpretation of future price and value.

I like to simplify things as much as possible. I explain to students when I teach that my opinion of the markets is they are large experiments in sociology. What is the crowd doing? If more people are buying the price goes up. If more people are selling, they all believe the security is overvalued and the price goes down. Having this perspective allows me to not have to try to compete with the finance majors at their game. It allows me to understand their analysis results without needing to drill down and understand all that fundamental information. That’s my game.

This isn’t to say that I have no interest in the information. After all, I named my blog “The Story Behind The Picture.” I do think it’s important to know the information. I just accept that I won’t know it all, and I definitely won’t know much of it as quickly as others. Students have heard me say many times that I take for granted that any information I have, someone else has more and had it sooner. Then those people trade, set a new price, and I try and determine whether that price indicates the probability of the security going up or down from there.

So where does the liberal arts education come in? Well, when I try and ascertain the information, I can process more than just a balance sheet, supply chain, and current regulatory influence. I can find a way to put the information in real world terms. Things that are simple to relate to, often even obvious after the fact. There are no ‘blinders’ involved. I can think about it from a political perspective, a philosophical perspective, and a sociological perspective.

What has made me smile recently are the number of news stories that are now encouraging the same. America Online (AOL), Adobe, and Paypal all had liberal arts majors among their founders. Steve Jobs was a college dropout, we all know. What many don’t know is that he dropped out of a liberal arts focused university. And that’s just tech! Many of our great pioneers of recently successful (understatement) companies, weren’t focused on tech. And many of the most successful hedge fund managers are now focusing on hiring liberal arts majors. In fact, one of my favorite young colleagues at Bloomberg, who I had the pleasure of teaching and mentoring was a Classics major. He just landed his dream job at a hedge fund. I always said, “He gets it.” They must have said the same after his interviews.

Recently Mark Cuban, who’s had a bit of success himself, said during an interview with Bloomberg that we need more liberal arts majors in the next 10 years. He spoke of perspective. One of my favorite words. My first blog entry described the Friday Wrap’s I conducted at Bloomberg. The idea was for the younger employees, most of whom were finance and business majors, to gain perspective on the markets. What makes them move. How to interpret everyday events and find a way to translate them into investment ideas.

And that’s what more and more people are realizing. That it’s not the early “blinders on” focus that matters. It’s the ability to grasp the ‘big picture.’ Look beyond some basic finance or business education training. Look outside the balance sheet and supply chain. Grasp the impact of everything around you. This is what leads to broad investing success. It exposes opportunities you might not otherwise see. It allows you to think, not just crunch some numbers in a repetitious fashion. The more you look around, the more you think, the more you learn, the more you’ll make. That’s what makes you smart, the MBA is merely some icing on the cake.

Focus People!

This one’s been tough. I generally look for a pertinent news piece or an event, even as simple as a plane flight, to trigger a topic I’d like to cover that is relevant to the markets or trading and investing. It hasn’t been easy the last couple of weeks to get that spark. I don’t think anyone would be surprised, given that the daily headlines and much of our daily conversations revolve around the first 2 weeks of the Trump presidency, and speculation about what the next 4 years (- 2 weeks) will bring. These discussions seem completely focused around politics and the unfortunate us vs. them our country has become. We’re as separated as we’ve been in a while, but while unfortunate and disappointing on a personal and social level for many, there is more to it than just right vs. left, with a few curveballs thrown in.

I realized that this is the most pertinent topic out there. Not to inject my political opinions or leanings, and certainly not to editorialize on the moves President Trump has made. Honestly, I can debate both sides of many of them to some extent. Thank you high school debate class. But all of what’s going on in the news, as divorced as it may often seem from our business conversations, is affecting us all monetarily on a daily basis. And yes, there are cycles and trends at work as there always are, you just have to want to get away from much of what is headlines, and look at the same things we always do. It’s been more difficult as it’s all just moving a bit faster these days.

You may have missed some of the stories out there related to what we try and do, have an advantage in our decisions, or at least learn more perspectives and seek more information before making decisions. We can start with the US Dollar. From the chart below we see two things very quickly. First, the dollar is almost exactly where it was when the election was held. So we’ve survived the news cycles both pre and post inauguration and effectively gone nowhere. Second, we’re 4% off the high reached the first week of the year. Not a major correction by any means, but it certainly has the chart looking less bullish in the short term.


The major market indices are trading at record highs. Overall perception (which of course is reality) is not that the sky is falling. Respected technicians, Louis Yamada among them, are calling for corrections before we head even higher. At the same time, it is not difficult to find calls for doom and gloom. I won’t argue against a gold rally (I’m a gold bug at heart) but I’m not sure I’m on board with the gloom and doom crash ahead.

We’ve got Snap Inc., parent of Snap Chat, indispensable to my previously mentioned 15 year old daughter market signal, looking forward to a $3 Billion IPO. Crude Oil is near the top of its recent range with many calling for a breakout. I personally think crude is a great mean reverting market by nature once it’s found a range, so I’m not a believer. Doesn’t make me right…Does make a tradeable time in that market.

In the area of cool things that always catch my attention, Lady Gaga had a spectacular show including over 300 synchronized drones. Way cooler than synchronized swimming, and much more important to so much of our corporate future and lives in general. There is no current shortage of articles about self-driving cars. I think that these will be like cell phones, going from gimmick to integral part of our lives in less time than anyone would have imagined. From fascination to need at 100 mph. And when you really want to learn about something that will affect the way we live and work, check out the newest WOW! The Hyperloop. With Elon Musk helping drive this one (pun intended), I’m not going to be the one that doubts the viability, or the timetable for when you and I can use it.

My point is, we are easily distracted, and the media on both sides is doing a great job of grabbing our short attention spans. But success in investing and the markets is driven by getting past the distractions. Most often, the volume isn’t as loud, but the noise always exists. As always though, there are plenty of places to look for opportunity. There are plenty of ways to conduct traditional research and analysis, or if you’re more of a gambler by nature, take a shot. The difficult part is having confidence in the tools that have always worked for you, and understanding that they are more powerful than network news cycles. IPO’s like Snap deserve attention and analysis. Earnings season will always be earnings season. These are constants. They are constants with Republicans or Democrats having the power in our government. They are constants through foreign currency manipulation accusations. And keeping an eye on trade agreements has always been an important thing to consider.

I always go back to my charts, because they help me filter the noise. Others tell me it’s voo-doo, and that’s fine as well. Different techniques breed different opinions. Different opinions breed active and healthy markets. In my last blog, I touched on making a plan. If a type of plan has worked for you previously, then focus on that same type of plan. Understand that it has worked for you before. It may not work every time, but it will work again. Be consistent. Put on some noise cancelling headphones (figuratively). Set them to pick up the information that you find pertinent, and cancel out the rest. There will always be noise. Sometimes quieter, sometimes louder. It’s still noise as it pertains to your investment decisions. Politics unto itself is not noise. It drives our economy. The hard part is figuring out what are the drivers and what is noise…to you. But through it all is opportunity. And that is what we’re after. Now find it, and you will quickly realize that all that our country is going through, on an investment basis, is giving you information to absorb, process, and hopefully profit from. Then sit back and take in the rest of the noise. Act on it socially if that is what drives you, but don’t let it interfere with your investment plans and goals.

“Please take a few moments to locate your nearest exit.”


Recently I had the opportunity to take a couple of flights and as always, that was one of the pre-takeoff instructions from the flight attendant. I thought, “Wow, that’s what I tell people when I’m discussing trading rules!” And a new installment was born. For some reason, locating the nearest exit on the plane is something I’ve done since before they began that instruction. In fact, I actually count the rows so if the lights are out, I don’t need to think about it at the most inopportune time. I’m bringing this up because exiting is often the last thing people think about when trading, and when it does come time to exit, you usually wish you were better prepared. This is not only for losses, but for profits as well. Have a plan.

It’s been written in many places that people involved in fantasy sports leagues spend more time on their team draft than they do on their investments. More time on the less important of two disciplines. Sounds ass-backwards to me. Unfortunately, an ass-backwards approach is what I believe drives most trading as well. So much time is spent on the entry, we have little inclination to spend much time or effort on the exit…“I’ll worry about that later.” I personally believe, and teach, that this is the approach that often leads to the wrong outcome. Profits turn into losses, or losses into bigger losses. This is not something I’ve seen in just newbies, but experienced traders as well. It is entirely possible I’m the one that has it backwards, but I’ll explain my reasoning.

As it’s not a profit or loss until the exit, I espouse spending around 20% of your time and effort on entries and 80% on the exit; and plan that exit in advance. Just like on the plane. Now granted, the plane exit thing is an extremely rare event…thankfully. That’s ok. Still have a plan. Because before you trade, just like before takeoff, your thought process is much more rational than when you have “skin in the game.” Getting out of losers is painful, we all hate taking losses. Getting out of winners is never easy. We don’t want to get out too early and watch it go further, we don’t want to get out too late and look back with 20/20 hindsight wishing we had gotten out sooner.

Planning ahead without our money on the table yet is what I believe leads to consistent results. This isn’t even to say that you need to make money on most of your trades. But if you plan correctly in advance you can still make money overall. I’ve been told, “I want a system that has 70% winners.” This is one approach. But if those losers are consistently 3 times as large as the winners you lose money overall. If you only win 3 out of 10, but the winners are 3x the losers…well you get the math. A lot to think about when you’re in the middle of it all.


The S&P 500 reached a peak in early 2015. Before the end of August, it was down just under 10%. In technical analysis, 10% is a healthy correction. Add to your position, if you’re so inclined. Establish a new long position if you’ve got none on at the moment. But while we were approaching the 9.54% bottom, that’s not what was in the news or on many people’s minds. The attitude was the new bear market is upon us. Why? Because people were long and now losing money or at best, giving back hard earned profits. The last thing being discussed by the majority of news outlets was this is actually very healthy for the market. If you brought up the idea of just a correction, which I did (I have witnesses…or it didn’t happen), people thought you had no idea what you were talking about, or it was wishful thinking. The index declined even further in February 2016 after an intermediate rally, and the bear market talk was even louder. Understand, the accepted definition of a bear market is 20%, not even close! If you get out quickly to lessen your pain and ‘it’ goes up again, you can always get back in, commissions are pennies/share.

If you were long the S&P, or your specific securities were going through a similar correction, it was probably painful. You didn’t get long at zero. So your personal pain level was higher. You were not thinking rationally about your positions at that point. You were very likely driven by emotion. Never a good idea in trading.  And here’s where planning ahead comes in. I’m not condoning any specific approach. You may trade with profit targets. You may trade with trailing profit “stops,” accepting in advance you’ll never get out at the top. You should ALWAYS be trading with “stop-losses” either entered when you get into the position as a good till cancel order, or as a mental stop, as long as you will remember and listen to it at the time. You may average your position and buy more. All of these approaches can and do work. Just like profits on 70% of your trades, 30% of your trades, or somewhere in between can and do work. As long as it’s part of the overall plan.

Remember, when you get on the plane, you have multiple possible outcomes. The most likely is to get off at your intended destination, hopefully near your intended time. If the *#%@ hits the fan, you’ve planned your exit. And if it’s somewhere in between, like they lose your luggage, it never hurts to have a backup plan for that either. No matter what, always have a plan in advance. It leads to more profits. It leads to less pain. And whatever the plan, Stick To It. I promise, you’ll sleep better.

Bulls and Bears and Bitcoin…Oh My!

My original intent was to do a blog entry on the Consumer Electronics Show (CES) as I’m both a nerd and I love electronic gadgets. With so much of the show being dedicated to the Internet of Things (IOT) and drones, I figured I’ll have plenty of opportunities to discuss those things and their impact. Plus…I’m not sure how much we really need to discuss a $1,100 wi-fi showerhead (installation cost not included).

Then my mom started discussing bitcoin with me for the first time in a while, and I decided I’d go there first. I initially got interested in bitcoin about 3 ½ years ago, when a co-worker described it all to me. The trader in me said that’s great, we have something new to trade. I told my colleague I thought bitcoin was a “2 year trade,” but the Blockchain is the key going forward. In other words, I thought bitcoin would be worth pretty close to zero by now. My argument was that some country would replace paper with a Blockchain based electronic currency and that would be when the crash to zero comes.

That was 3 ½ years ago. Bitcoin was trading around $100. Now, around $900 after eclipsing $1,100 last week. Just another trade I was a bit wrong on. Thankfully (?), it wasn’t easy to short them.


5 Year Weekly Bitcoin Price Chart

My mom asked me “Why are bitcoins worth $1,000 each?” I said because that’s what someone will pay for them. Simple enough. Everything is “worth” its current price. If someone is willing to pay “$ X” but not “$ Y” then the asset is worth X. That’s why we have exchanges and markets. So why is bitcoin worth nearly $1,000? Because there are people, the buyers, that think so. And since others are selling them up there, obviously some people think bitcoin is worth no more than that. The sellers.

Sure, it can be used to buy some things. Overstock.com made a splash in 2014 when they agreed to accept bitcoin for purchases.  It receives bitcoin for under 1% of sales. Closer to a small ripple than a splash. Not even news worthy anymore. And yet, it’s currently trading in the $900 range. Primarily, it is taking on a role as one asset to use when in doubt about a currency system. Much of the purchasing is said to come from China. And the Chinese government has a way of crushing these rallies with a sentence or 3 about how disapproving they are. Boom. $1,150 to under $900. Just like that.

While trading gold futures on the COMEX in New York for many years, people asked me why gold was worth anything. Back then, it went from over $550 an ounce when I began trading down to under $300. This was after hitting a high of over $800 a few years earlier. There were those who said it was going to go down much further. After all, it’s just a shiny yellow metal. It’s not iron ore, necessary to build buildings. People wear it to look nice. And that’s much of its use. Yet, here we are today with gold, like bitcoin, in that rarified $1,000 price tag range.

When I was asked the question of why it’s worth whatever the price was at the time, I said because “perception is reality.” There has been a perception for thousands of years that gold is a store of value. When confidence in currency values wane, or the perception is that the value that of paper will go down, people buy gold. I continued by explaining that it’s awfully difficult, if not impossible, to reverse thousands of years of perception in a just couple of years. Gold wasn’t going to zero.

So that’s the idea. Things are worth what is paid for them at that precise moment in time. Cabbage Patch Dolls caused fights, near riots, and a robust secondary sales market when first introduced for the holiday season in 1983. I believe it was Tickle Me Elmo dolls that were flying around our trading floors for hundreds of dollars in 1996. Retail price? $35.00. Crazy, huh? I’ll bet a lot of those “Don’t unwrap it, this is an investment!” Elmo dolls have a serious layer of dust. Cabbage Patch too. Did your kid ever cry in the last few years because you couldn’t locate a Cabbage Patch Doll? Didn’t think so. But I’m sure they cried over something else, maybe Hatchimals most recently, because demand was so great you couldn’t get them in time for gift giving. Seems puppies aren’t what they used to be.

These are “Spot” markets, which is how bitcoin currently trades for the most part. This could easily change soon with ETF’s and exchange traded futures. So now people will not only buy bitcoins at today’s price, or value, they will be able to bet, I mean invest in future price movements more easily.

And mom keeps asking, “Why?” To that, I don’t have a real good material answer. I just know that something I bought first at about $120 is now either side of $1,000; 20/20 hindsight, “Wish I bought more.” But at the time I saw the long term value in the backbone of bitcoin. The technology.  The Blockchain. And I do believe Blockchain technology will revolutionize record keeping worldwide. Securities, Legal, Real Estate, etc. But I’ll leave that to another day. Can’t write about both parts in one entry, too much to say.

Bitcoin itself? We’ll see. Can’t hold one, like a gold bar or a Cabbage Patch Doll. Most retail establishments don’t see it as money for purchases. But it’s worth around $900. Perception. Bulls vs. Bears. That’s what makes markets great! Even if mom still doesn’t get it.