A year ago I wrote about a “reset.” The idea that the New Year was the time to move forward with trading and investing, since the previous year had ended and you had closed the book on your P&L for the year. As we assessed our successes and failures and moved on from those, we should simply do the same with our profits and losses. I do realize this isn’t always easy, but hopefully people found some sense of moving on at the turn of the year and entered 2017 with a clear head, open to what the markets might hold. And a clear head was definitely needed. It is pretty much every year for one reason or another, but it’s always fun to explore that year’s reason.

To me, one of the largest surprises in the markets this year (aside from crypto-currencies, of course) was the ability of the S&P 500 to march forward, month after month, with barely a stumble. While there was not a point at which I came out and said “This is the top,” many others did. This doesn’t make me any smarter, I just didn’t get any “it’s over” signals and I can only surmise that others did. It also doesn’t make my work any better than theirs over time, necessarily. What it does show is that we use different measures and techniques.

I have always made it my practice to try not to pick tops or bottoms. I wait for a market to show a weakness on my charts that communicate to me that the overall trend in one direction is indeed reversing, or at least no longer continuing. The broad equity market never really showed that. The fact that it had some periods of going down in its march upward is of course unavoidable. But the degree of these sell-offs and the length of time they lasted, or didn’t as the case may be, didn’t tell me that it was time to change my overall thinking.

Don’t get me wrong. I kept looking for that reason. I’ve been as amazed as most at the strength, resilience, and longevity of this Bull Run. But that doesn’t mean that I’m going to let that get in the way of analysis, and conclusions that are based on that analysis. I could have easily been wrong. My indicators and techniques might have shown no sign of the crack until it was too late. And a great deal of others would have been right. Though ‘right’ is generally a relative term. If you called for the end of the bull market in February and it ended in November, would you have been right? No, but you might have claimed bragging rights anyway.

None of us are right all the time. No matter the technique, no matter the belief in what is important in the big picture, the best analysts have made wrong calls. And the best of those will quickly tell you about them. Oftentimes, it’s a case of them saying that something had never happened before. I’ve said that plenty. Kind of the point. Remember, nothing has happened before…until it happens. And then it has. And no matter your technique, you may account for all of history but you can never account for all of the future.

So what’s the point? Well, it’s pretty simple. It’s about the odds. I’ve often told people that I think a good bookie would be a great trader. They get the numbers. And they’re disciplined (that’s why I said a good bookie). Their business, and that of a trader, investor or portfolio manager is simply to maximize the odds as best they can. Like a casino, but better. A casino knows that an experienced gambler at a craps table can almost get even odds by playing the table right. Almost. I watched my grandfather do it. And that’s ok. As long as the odds are in the house’s favor, they will still win in the long run.

Flipping coins. We all know this one. Flip it enough, it’s 50% heads and 50% tails. But you may go broke if you’re betting on it when it comes up 10 tails in a row. So understanding the odds, and then making your decisions is the only way to proceed. The odds of the S&P having the run it did this year are pretty slim in the overall picture. History says so. We all thought so. But it went up all year anyway.

The thing we need to remember about all those professionals (and amateurs) that were wrong this year is that their decisions, or at least opinions, were based on the odds of the index continuing higher based on their analysis. People called for the end with varying degrees of conviction, but no one guaranteed it. At least no one you should spend time listening to. That’s the key to longevity doing this. No one has a foolproof technique. No one has seen it all. We’ve gone through discussing six sigma moves happening with regularity, bubbles that are actually more prevalent than we want to believe, and all of the amazing things that can catch us off guard.

It’s a lot like the old saying, “When you least expect it, expect it.” If something’s never happened before, be on the lookout for it happening this time. Use your best techniques to maximize the odds in your favor. And always be on the lookout for 10 tails in a row. Because few of us saw this coming in 2017. For varying reasons, most at some point looked for at least a larger correction than we got. Why? Because we’d never really seen anything like this before. Now we have. But here comes 2018. And its own surprises. To quote The Hunger Games, a movie I took my daughter to when she was younger, “May the Odds Be Ever In Your Favor.” If that doesn’t work, “May the Force Be With You.” And as a last resort, flip the coin again. If your analysis is at all decent, it really will come up heads soon.

Wishing all a Healthy, Happy, and Prosperous New Year!

 

While it is no doubt abundantly clear that I am pro-bitcoin and pro-blockchain in general, I’ve tried not to write entirely about those things when writing this blog. As most of my career was spent trading, advising, and charting markets in general long before those things existed, I do have other material to draw on. However, these are the things that seem to be the first topic of many conversations, so I think that writing about the possibility of a new financial ‘bubble’ is appropriate, though as usual I hope to provide a somewhat different perspective…or at least get you thinking.

No matter what you read about bitcoin these days, there is mention of a bubble. The reading, or the conversation for that matter, may be “Yes, it’s a bubble,” or “No, it’s not even close to where it’s going.” Either way, the bubble idea enters the conversation. I’ll start by saying that at some point I do believe there will be a ‘monumental’ collapse in price. But I won’t say when or at what price point. I’m a trend follower. I let the market tell me it’s over…and always a bit after it ended. I’m ok with that. As long as I’m not the last one out, or even better, have time to throw on a short position once convinced the rally is over.

The key word in that statement was ‘monumental.’ And what defines monumental? Just last week we had a price decline of $3,000 in one day. This was 30% of the value. Ok, maybe not monumental, but it was in one day so pretty big. There was of course the time when…And that other time when…Oh, and remember…etc., etc. The point is that this is what bitcoin’s history looks like. Large up moves, sharp “corrections,” and the next large, drastic up move. And every one of those rallies has heard the bubble cries, and as soon as it began coming off, the yells of “I told you this would happen!” Then it doesn’t happen. Bitcoin rallies again to new highs…And again…And yes, again.

Of course, the bitcoin bulls and evangelists, the HODL (Hold On for Dear Life) crowd, all say it can’t be a bubble. It’s more important than tulips. I heard that during the NASDAQ bubble. The housing bubble. We can certainly begin to use that ‘bubble’ term here if we believe that at some point bitcoin will rise to a price of “over-valued,” whatever that really means… since value is what people pay, monetarily or otherwise, for something at a particular moment in time. Then of course come crashing down wiping out all but the lucky few. But we don’t know when that is. And we don’t know what the adjustment in its price will be. Probably not to zero. People still pay for tulips, just not what they once did.

Is it ‘different’ this time? I heard something last week from a friend, and unfortunately don’t remember where he said he first heard it. I’d like to give credit. It really stopped me in my tracks and I realized how interesting the statement was (this is the ‘different perspective’ part). He said that the thing that is undeniably different about this occurrence (not calling it a bubble) and previous financial bubbles, e.g. NASDAQ and housing, is that other bubbles have started on Wall Street and when these investments made their way to the average person, or your friendly cab driver was day trading stocks, it was the beginning of the end. This time, it’s the cab driver who’s the new millionaire while the Wall Street hedge funds and traders are hoping to play catch up via new exchange traded futures, and the big banks aren’t sure what to do at all!

So it is different. It began differently and it seems to be surviving differently. And so the most monumental thing going on in this market right now is the game of catch up being played by the money professionals. And that’s just bitcoin. Bitcoin Cash and Bitcoin Gold, to round out that family. Ethereum, Monero, Litecoin, Ripple, Dash. Just a few of the crypto-currencies being traded globally and making people millionaires. Students, millennials of all shapes and sizes, average people, friendly cab drivers. Well, probably ex-“friendly cab drivers”…still friendly, just not cab drivers.

In some situations, it’s easy to label something based on what you’ve seen before. In other cases, it isn’t as easy. What’s difficult to figure out is which one of those it is when you’re living it. This one is no different. I mean, it is very different, but that’s why we don’t know whether the situation is different, or just the names of what’s involved are different. Remember when the internet was new? I do. It was really different. So different, many were in denial. Just another fad. What value is this technology ever going to have to me (there’s that value word again)? And well, today none of us know how we’d live without it. It’s ingrained in our daily existence. How much is that worth if you could price it? Where would its price have started? Would it have been termed a financial bubble at any or all points along the journey to today?

Will this one end differently? Or just become another chapter in The Bubble Book. This I can’t say. What I can say is that when thinking about bitcoin and other crypto-currencies with their value derived from the blockchains behind them, I would suggest thinking more internet than tulip. More disruption than just a prettier color than last year’s version. Then start thinking about whether the asset is over-valued or not. Your own answer may surprise you.

The VIX has been pretty boring lately. That’s pretty easy to agree on. Which in turn means the S&P has been pretty boring. In this case, the S&P being boring means it keeps going up. Now I’m a very big fan of boring. I’ve told students, I’ve told clients, if steadily making money is boring, then every day you should strive for boring. Boring should be your investing and trading mission.

But for some reason we don’t like boring. It doesn’t feel as fun if the market just goes up. If you just make money every day, where’s the great story to tell. So unless you are one of the few who are happy making money in a boring way, we need to find another playground.

And like an early present for the holiday season, here come bitcoin index futures listed on the Chicago Mercantile Exchange. Yes a real, regulated, US fully legal trading instrument based on that “thing” that would only be used by criminals. Remember those days? Silk Road, Dark Web, or nerd. Those were the only places bitcoin belonged, or so it went. And now that it’s worth over $7,000, everyone wants to play, and now they can.

I find it a bit ironic that at the same time that the S&P 500 is boring, the exchange that introduced us to the world of index futures trading is launching what promises to be a contract that will be anything BUT boring. Bitcoin prices aren’t in the news on a regular basis because they’re boring. Bitcoin prices are up 10x in the last year. So these prices are up and not boring! We all want that right? Well, maybe…

Let’s look at the argument against excitement. The average 24 range of bitcoin over the last month is approximately $400.00. That’s significantly higher than what you’ll find on a boring index like the S&P. The chart below gives a good amount of information about what constitutes ‘exciting.’ The top chart is the basic chart of bitcoin prices over the last 12 months. The second chart is the average range of the daily price, from high to low, over the trailing 30 calendar days, which in the case of bitcoin is one month. Remember, that’s even more bang for your buck…you can live the excitement of bitcoin every day, not just Sunday night through Friday afternoon, like the S&P index. The third chart shows the same range as a percentage of the previous day’s close, with a reference line at 5%. It’s not an irregular day to have a range beyond 5%.

We can look at the same three charts as they relate to the S&P 500. The charts pictured are the actively traded e-mini futures contract. The Average Range chart is using 21 days instead of the same 30 from the bitcoin chart as a month of trading the S&P is approximately 21 days. The bottom chart of daily range as percent of price has been altered such that the red line is set at 2% vs. the 5% line we had used for the bitcoin chart. And yet, we have trouble breaking it even on occasion, to say nothing of a regular basis.

I understand as someone that uses charts on a daily basis that some of this does not always make itself apparent in understandable ways to those not looking at the continuous comparisons these pictures allow. And after all, I’m the first to admit charts themselves are Boring, so if we’re on the topic of excitement, I’m going about this all wrong.

Let’s look at this in money terms. The only thing that really matters when it comes to these discussions of profit and loss. There are no words in the statement “profit and loss” that have anything to do with something other than making (or losing) money. So let’s do our comparison in those terms. We can start with that mini S&P index, as it’s the most familiar price other than The Dow when discussing overall markets.

The average 21 day range in the e-mini is around 13.5 full points. In fact on November 8, the high was 2592.50 and the low was 2579.50, a range of 12.75 points, pretty close to the current average. The dollar value of a move in the e-mini contract is $50, so 13.5 point range works out to a swing of $675 on one futures contract. By comparison, the new CME bitcoin index “BTC” contract has a contract size of 5 bitcoin/contract. Therefore, a $1 move in bitcoin is marked by a $5 per contract change in your account value. So the current average daily range of $400 translates to a daily P&L equivalent of $2,000 per day. And that’s on average. And that’s more volatility than most stomachs can realistically handle. It’s the balance of Fear & Greed on a daily basis. And you can never underestimate the effects of the Fear side of it.

Still bored? That’s the point of this one. Boring can be good. If you need sleep you go for boring. Tired? Fireworks show or golf on television? I’m going with TV golf. Boring in that case, is good. Boring helps you sleep when you need it. Exciting usually means losing sleep. Now this can be good. Celebrations of any sort often fall into that category. But not every day. Weddings are fun parties. But I don’t want that excitement on a daily basis.

Well get ready, bitcoin is a party of a market every day. And now everyone’s got an invitation! Not everyone can handle all that excitement. Does it have its rewards? Of course! But what does it take to get there? That’s the part that becomes a personal assessment everyone should make before jumping in. These new futures give exposure that many have been looking for. But it’s just a first step. If looking to play these markets, get ready for the amount of fear you will experience; and when it’s in the right balance to your greed factor, that’s the time to step up to this table.

ETF’s, while often leveraged, rarely have the actual dollar swings per unit of ownership that futures do. And an ETF can’t be far behind these index futures. Though ETF’s have been rejected on prior occasions, exchanges are competitors, and like many competitors they get jealous. So don’t be surprised if an ETF on bitcoin or other cryptocurrency is approved soon to trade on an equity. Because for now, all the US regulated cryptocurrency trading will be in futures based off of a bitcoin index price. And that’s really exciting! But if you want to invest in these markets, and don’t crave your craziest college parties every single day, have a bit more patience. Your entry ticket won’t be far behind, and it might actually give you a much more tolerable balance of exciting and boring.

“I’ll always remember where I was when…” That’s the beginning to a sentence that is generally reserved for some pretty important occurrences. I don’t remember, I’m not old enough, but I think the first time I ever heard that sentence was people discussing President Kennedy getting shot. Man lands on the moon. Challenger space shuttle blows up. And this week? We’re all discussing (I don’t think reminiscing is quite the right word) where we were, what we were doing when the stock market crashed on “Black Monday.” We’re not just remembering where we were for an event, we’ve coined a name for an entire day around this one.

And it really is a pretty deserving day. The Dow was down 22.61%. That’s almost a quarter of its value! Today, October 19, 2017, the Dow Jones Industrial Average closed at 23,164 and change. To match Black Monday, the Dow would need to lose almost 5,100 points tomorrow. It wouldn’t be a Monday, but that’s not really the point. Imagine how lousy your weekend would be if it started Saturday with the Dow Jones Industrial Average at a little over 18,000. And when it happened on a Monday, people had to go back to work the next day!

I was not yet a full time trader, but I was close. It was just over a month later that I began trading futures in the Gold pit on the Commodity Exchange (COMEX). I sold all my stocks shortly before the crash in order to have liquid assets to begin my trading career. Many a trader has uttered the phrase, “Better lucky than smart.” I’m one of them. And so as a bit of a shock to my young, enthusiastic, and of course optimistic self, I watched the major index that people at the time used as a large measure of their worth, erase almost a quarter of its value. Yes, I remember where I was when…

But what does that have to do with today? Can’t happen again. After all, in percentage terms, that day was a 76% larger loser than the beginning of the even more famous Crash of 1929. It is easy to argue that one was actually worse, because though the Dow “only” lost 12.82% in a day back in 1929, it lost another 11.73% the next day. If it had happened in just one day? It would have been just over 23%. And this actually brings me to the point.

I watched and listened today as the anniversary was discussed. The overwhelming sentiment seemed to be it’s an “outlier,” a statical anomaly. After all, the next worst day wasn’t even close. Remember? Over 22% vs. under 12%. This is one of those occurrences that you just happened to be alive for…statistically speaking. Chances are actually that multiple generations in your family won’t see such a day. At least that’s what statistics tell us. Even Introduction to Statistics covers this much. In an earlier blog I brought up the supposed unlikelihood of a 6 sigma move, or 6 standard deviations from the mean. And I’ve brought up Black Swans. But Black Monday was a move of more than 20 Standard Deviations! I can’t even imagine how many decimal places that is.

On top of that enormity of the event, we’ve got all sorts of circuit breakers. What could happen? We’ve made it so much harder to melt down than melt up (Yes, “melt-ups” happen…do we need to go into bitcoin and ethereum again?). But we had mechanisms in place back then to insure that you wouldn’t lose 25% of your money in one day. In fact, that’s what it was called at the time, “Portfolio Insurance.” It was the idea of buying options as ‘insurance’ against a big move against you in the overall market. Didn’t help most people.

And it wasn’t all that long ago we had the “flash crash.” Also previously covered. And now we’ve put in place systems to, hopefully, stop that from happening again. Unfortunately to me, this sounds much like crime or computer viruses. We always play catch-up. Not intentionally. We’re naturally a step behind. Successful criminals exploit flaws in the legal system, or some other system, to act in ways that were never anticipated. That’s why they’re successful. They think in ways we previously hadn’t. Unfortunately, we’ve found this to be the playbook of terrorists as well.

And so it is in the markets. We react. Something happens and we plug the “hole.” Like the proverbial finger trying to stop a leak in the dike. Another one opens. Think back to the recent “Great Recession.” Those evil bankers invented products that were destined to fail and they did. However!…and this is important…it’s difficult to contend that what they did was illegal, outside of fiduciary duty anyway. What they did was their job, or at least as they perceived it. We can discuss the problem with that on a moral basis, but in the end, their job was to make money without breaking the law. And after they did, we made some new laws. Same thing a couple of years later. Flash crash. High frequency trading. Etcetera. A group exploits the system as it’s built, and then we change the system.

I don’t know what we’re going to blame the next time. Maybe it’s ETF’s. There’s a nice false sense of security. Or cryptocurrencies, once we’re all “lucky” enough to have easy access. Maybe a cryptocurrency ETF and then we can make 2 new sets of rules. But something will happen.

While I don’t mean to be repetitive, I do realize that the theme of this blog in ways is very similar some previous ones. But that is kind of the point. Certain things in markets need to be reinforced. Over and over and over again. Mistakes that you promise to only make once, until you make the same one again. If you’re lucky, the second time will be the last. More often, we do it at least once or twice more than that.

When I teach, the most important thing I ever ask anyone to learn is the importance of discipline. In my 10 rules of trading, Discipline ranks #1; and Remember Rule # 1 rounds out the list. And the discipline we need in trading and investing is to never get too comfortable. Because it’s not just those who forget history that are doomed to repeat it. In markets, there’s always another shock of some sort coming. And then we get to make new rules again. And so on…

Déjà vu: the strange feeling that in some way you have already experienced what is happening now [Cambridge Dictionary]. It’s the feeling I had when I read that London’s transport authority would not renew Uber’s license to operate in the city. Transport for London (TfL) gave reasonable justification for the decision, but I couldn’t help thinking that there was more behind it than this. And that’s why I had the déjà vu feeling. Because when situations like this arise, when a new business is stopped from changing an industry, there are always reasonable explanations…and then there are the conspiracy theories. Personally, I love a good conspiracy theory, so let’s explore this one…in the name of business and finance, of course.

When the decision was handed down, it was after Uber’s request for discussions with TfL had been turned down. It was in spite of the hundreds of thousands of signatures on petitions. It was in spite of the many cities that had not crumbled under the weight of irresponsible drivers once the firm settled in. So it would “appear” (here’s that conspiracy stuff starting…) that the TfL was not necessarily concerned with solving the problems, for in the eyes of the city government, Uber itself is the problem, not the specifics pointed to publicly.

There is of course reason for concern. The traditional taxi business will suffer with the addition of Uber to any city. And when we say ‘traditional’ we mean decades of relationships between owners, drivers, and government. And then the new kid comes to town, supposedly acting as a bully until there’s nothing left of the old guard. A bit dramatic? Probably. Entirely off base? I’m not so sure.

I’m from New York. We have a lot of taxis. And those taxis have always had to have a ‘medallion’ to operate within the city limits. The medallion is something like a liquor license. You need a liquor license to serve alcohol at a restaurant. Otherwise, it’s BYO – Bring Your Own. And the liquor license value is determined by demand. Demand that is fueled by people that enjoy being served a drink in a restaurant from the bar, not their own brown bag. So when times are good, liquor licenses go up in value.

A taxi medallion was similar in many ways. There is a limited amount. You had to have one to transport the general public. And New York city kept getting more crowded, and except for an occasional set back, has been doing steadily better financially since Jimmy Carter’s tour of the burned out South Bronx 4 decades ago. And the medallion prices went up, and up.

Over a million dollars in 2014. Currently, a New York City Taxi Medallion trades around $250,000. 75% discount; like a going out of business sale…hmmmmm. And with the price cratering, there is as always a reverberation. Like other businesses or investments in hard assets, an entire segment of the loan industry in New York centers around medallion loans. And as with the mortgage banks when real estate values tanked, the banks in the business of making loans for medallion purchases are feeling the pain too.

When Uber hit New York, there were cries about the safety of riders and the safety of pedestrians. These cries were mostly from the taxi industry, for as any New Yorker will tell you, there wasn’t a great deal of confidence in passenger and pedestrian safety the way yellow taxis are driven in New York. And as for killing an industry, the newest incarnation has its own competition, Lyft. Lyft is growing, partially due to Uber’s own missteps, but also because that is capitalism. New ways are found to do things, an industry changes, and competition helps these changes create the newest mature version of that industry. Few politicians in New York are currently arguing that Uber and Lyft have ruined our quality of life and endangered our safety. But they’re saying things like this in London…

I do understand this fight. I have definitely seen this movie before. I was a commodity futures trader screaming and yelling in trading pits in what we believed to be the most efficient path to true price discovery. And then the machines came in to take over. Many claimed that there was no way a market could effectively trade only on computer. The computer didn’t ‘understand’ the markets the way a broker did. And there would be lots of technological problems that would doom investor confidence. But the only ones truly yelling that the future was bleak if trading was computer based were the people whose livelihood was in jeopardy. I took the opportunity to learn to develop trading systems. Pro-active is I’ve found, much more effective…or in more common terms, “the best defense is a good offense.”

Exchange members looked for ways to fight it. But this was evolution. This was progress. And in the end, progress always wins. And those who fight it the hardest rather than accept it and find a way to work within the new order are the ones that will indeed suffer the most. And their backers are often called out for standing in the way of actually improving our daily lives. The little things. An easier way to get a ride when you need it. From where you want to where you want. Get in the way of those advances as a politician or exchange governor, and you may find yourself the one paying the price.

Uber will drive again in London. And Lyft is now looking at London as a future destination as the firm seeks expansion outside the United States. Technology has streamlined the way we hire a ride. It didn’t end up hurting more people in New York and I don’t anticipate it will in London. Or in the next city that gets a service like Uber. It’s a better mousetrap. Better mousetraps should be encouraged. It’s been said that every act of creation is at the same time an act of destruction on some level. But like trading, as long as that risk/reward balance is favorable, progress will win every time. That’s why it’s called Progress.

I was going to publish this blog last week. After all, in my last posting I said I wanted to get back to more regular releases. But as I was discussing the topic with an old friend with lots of wisdom I often draw on, I was advised that it was a bit too soon. So I waited. Long enough…at least as long as I could. I’m going to write about hurricanes…

This is not a topic that I’m taking lightly. I have friends and family who narrowly escaped major impact, and others that will be feeling it for years to come. I do understand that the last few weeks have wreaked havoc on large pieces of the country, and that disasters like these should be taken seriously not just with people you know, but as a whole. I hope that everyone reading in the US has found a way to contribute in the time since the storms struck, and that those outside the US do the same when their neighborhood or country endures something like this. This is when societies come together to help each other.  That is why we need and have societies in the first place. And societies drive markets, though I don’t think Thomas Hobbes and John Locke put it quite that way.

It’s well known that wartime is generally bullish for markets. Whether the cause is noble or not, the economy will generally reap a benefit in the form of invention, output, and employment. Wartime means more people in the armed services and less available for private employment. This of course leads to a growing economy as more people are employed, wages are pressured higher, spending expands, and with it the economy.

But what about hurricanes and other natural disasters. If ever there was a cliché that comes into play now, it’s that “Every cloud has a silver lining.” And seeing that silver lining will help us with our portfolios as well. Think about it. There’s a lot of rebuilding to do. A LOT. And while the unemployment rolls may increase, the increase is only temporary. People left their homes. Then they came back to a disaster area and needed to tend to their biggest concerns. Family ok? What can I salvage? Let me stop it from getting worse by emptying the house and cutting walls to prevent mold.

Then what? Rebuilding. And that takes money. So the government “finds” a few billion and then a few billion more and then a few billion more. Who is going to vote against that type of domestic aid? Private individuals like you and I contribute what we can. JJ Watt of the Houston Texans football team was able to raise over $37 million. The Hand In Hand concert raised over $44 million. That’s over $80 million and that’s just two efforts. Add the Red Cross, religious organizations, and the many other groups helping with financial donations and the numbers get pretty large, pretty quick.

Employment? Many people will claim benefits for a couple of weeks, but then will be employed again. Most large firms will bring back former employees to help rebuild, and of course keep them on still when business gets back to any sense of normalcy. The rebuilding effort itself will command a large workforce. Blue collar labor that is looking for work and willing to temporarily relocate won’t have any problem finding that gainful employment. The government programs that are set up for people to draw from for rebuilding can actually be used for rebuilding if people still have jobs to pay for food. This is what further expansion is all about.

Let’s look at retail. Home Depot received a hurricane alert 3 days before Harvey struck Texas. Immediately they dispatched “about 700 truckloads of supplies to its Texas stores in the path of the hurricane.” This was necessary as people prepared for the storm. But while Home Depot certainly worked hard with the idea that people’s lives would be somewhat less impacted with proper preparation such as boarding up windows, etc., the effort was not entirely altruistic. In fact, the title of the article was “How Home Depot Braced for (and Profited From) Harvey’s Impact.”

This was before the hurricane. And after? Building supplies…check. Appliances…check. Furniture…check. Clothes…well, you get it. These will all be bought to start all over. Cars? We lost one in “Super Storm” Sandy. I have told many people how impressed I was with the speed and ease with which my claim was handled. Approximately 250,000 cars were totaled in Sandy. I remember feeling lucky that I had a longstanding relationship with my dealer as many people couldn’t even find cars to buy.

So let’s look at the private insurance part of the equation. Those will be some big checks. And those big checks are really just more money about to go into the economy. The insurance companies will whine, but after all, that’s what the insurance business is. Quietly make money for a long time and then pay some of it back out on occasion. Welcome to just such an occasion…or two in this case.

From Hurricane Harvey the current estimates are around 500,000 cars. From Irma up to another estimated 400,000 cars. So there is going to be a need to replace nearly 1,000,000 cars. One million cars. I wrote it both ways because I’m not sure which is more impressive. Either way, that’s a lot of cars! Unplanned replacements. Insurance money coming back into the economy. It is the insurance money that holds the key to part of the ‘thesis’ of expansion we’re discussing. For it’s that external money for replacement of lost property that negates the “Broken Window Fallacy.”

So out of this tragedy comes some good. The silver lining. For Home Depot and Lowe’s maybe even a gold lining. The people of Texas and Florida will rebuild. They have no choice. And we will all help. We have no choice. But as you pledge a donation, understand that as an investor you’re really just paying it forward. There is a great deal of profit potential for investors in these tragedies. There isn’t anything wrong with that. We invest unemotionally. At least successful investors do. The ones we admire most are those who know when it’s time to give some back…

Yesterday was a Big day. Amazon lowered prices at Whole Foods as they completed their purchase of the grocery chain. ‘Whole Foods lowers prices.’ Never thought I’d see that line in print. As any student of the markets knows, however, the more you think you’ll never see something, the more prepared you should probably be for it to happen. Remember when home values were “never” going to go down. OK, that was easy…

Two related stories, in my mind anyway, came out recently. Another Amazon story was that the company was going to use an old mall as a warehouse. Love it! In fact, I think I must have heard it a few weeks earlier somewhere because I proposed almost the same scenario to my wife lately [I proposed (So I thought…) that the larger anchor sites would be warehouse space and the interior stores could be “departments”]. With mall traffic going down, in spite of my daughter’s regular field trips there, what to do with that real estate certainly becomes a question. I’m not going to go into analysis of the mall real estate companies, but needless to say Westfield Corp. stock, listed on the Australian Stock Exchange but a name familiar to mall goers, is not doing well…

As far as “The Neighborhood” is concerned, Applebee’s recently announced that they are “giving up” on Millennials. Gathering places like Applebee’s, TGI Friday’s, Chili’s, etc. have done a great job through their existence in understanding people’s tastes, both for food and pricing, and successfully drawn crowds to their establishments. I even remember my daughter calling out TGI Friday’s when they changed the recipe for macaroni and cheese. I guess she wasn’t the only one…they went back to the original not soon after. What that demonstrates is that these restaurants had a willingness and ability to listen to their customers and act based on opinions and trends.

I don’t believe they’ve lost that willingness. Listening to your customers is not a new recipe for success. It’s been tested and proven over time. So what’s the problem at Applebee’s? Well, that’s where we begin tying this together.

Amazon has changed our shopping habits. No one wants to leave home if they don’t have to…like going to Applebee’s for dinner or ordering in via seamless.com. And when it comes to books, where it all started, or virtually any other consumer item, we find it, buy it, and review it on Amazon. Amazon (Jeff Bezos) figured out where we’d end up and decided to help us get there, while becoming a behemoth of a company. It was an extremely long term vision…Extremely. That’s not what family restaurants have done. They do what they did with the macaroni and cheese at Friday’s. They sense small changes in the moment or not far ahead of it and react to beat or at least meet the new demand trend.

And malls? Talk of the not too distant demise has risen with Amazon’s stock price, and is now undeniable (unlike global warming?). We don’t need to move from our chairs anymore to shop. So why bother? Add Amazon Prime to the mix and returns are not any tougher than shopping at the mall either. And now we can add Whole Foods to the equation. “Whole Paycheck” is how the chain has been affectionately known. But that’s not what Amazon does. They do what they just started doing on Day 1. They make parts of life less expensive and more convenient. Now you can get Whole Foods quality at an affordable price. Sounds like a successful model to me. I can’t wait to buy some avocados at a reasonable price in time for Labor Day weekend guacamole.

The point here is that if we look at these companies as just stocks, we may do well on an individual basis, but you’ll do much better if you look to macro and behavioral aspects as well. It’s the same as the advice I give on using charts in general. Whatever time period you’re analyzing for your own decisions, look at a chart that is one level of time above as well, i.e. if you analyze hourly charts, look at a daily – if you analyze daily charts, look at a weekly, etc. It gives an idea of the overall tide, not just the last couple of waves on the beach. Much more accurate when you’re deciding where put that beach chair.

We’ve connected Applebee’s and the like, with malls, Whole Foods, and Amazon. Not the first connections you might make, but all can help you make decisions on trading or investing in the respective securities. And as for time horizons? Well, if you’ve got patience, you can be Amazon and lose money for years on your way to world domination. If you’ve got patience, you’ve been long the S&P 500 for a lifetime and have done extremely well, but had to endure a couple of rather painful selloffs. I like to say that “Traders may get rich, but investors get wealthy.” So look at the big picture. Even if you can’t trade that way. At least understanding the long term horizon will keep you from becoming the next Applebee’s.

NOTE: It’s been a slow summer on my blog front but I’m looking forward to returning to a more regular schedule now that it’s school season again.

NOTE 2: I’ve been doing this for about a year now. I know that many blog’s disappear in less time. This one hasn’t because of the feedback and steady increase in readership over that period. I want to say “Thank You!” to all of you that have kept interested in my perspective, as well as to Jason for all the proof reading and pre-publish feedback. I hope you have all managed to find the value in listening carefully to other’s opinions even when you disagree, since those ‘others’ are the sellers every time you buy, and the buyers every time you sell! Looking forward to year 2…

 

“What’s an ICO?” It’s in quotes because it’s a mom question. And when the mom questions start, it’s definitely time for a blog entry. What I mean by this is that once my mom starts wondering about it and actually paying attention, I have to figure a topic has reached critical mass. It happened earlier this year when I decided it was time to blog about bitcoin. Hasn’t taken long for that conversation to evolve into a discussion about ICO’s…why my mom is hearing about them, and how best to describe and opine…

I am a true believer in the use of blockchains to transform much of what we do every day when it comes to agreements, obligations, and payments. The securities and legal industries, to name only two of many, will be transformed in ways that will create new efficiencies not imagined until recently. Progress. Love progress. Embrace it, for resistance is futile. We know this. We don’t always like it, but it needs to be accepted by anyone not wanting to be left behind due to denial. So what about these new fund raisers called ICO’s? Is this progress?

An ICO is an Initial Coin Offering. Companies issue new cryptocurrency coins in exchange for established ones, generally ether of Ethereum fame. So we use one cryptocurrency to help a company create another? Why? Because the company is looking to raise capital. By taking in ether, they have raised a liquid asset and issued an illiquid one. And who is doing this? Companies involved in blockchain technology as a way to accomplish ‘something.’ And it is that ‘something’ that the investors are betting on. A new use of blockchains to solve a problem by a company that understands how to conquer that problem in a way no one else has…maybe.

This is where we come to the first issue I have with ICO’s. What are you actually buying? A well designed, heavily tested, oversubscribed technology that can be put into use tomorrow? Well, maybe…or maybe not. When I was first introduced to blockchains and bitcoin, I was told that it was a realm for “kids with code.” This was the description of the faces behind much of the innovation that was going on. Smart visionary developers that understood answers to problems most of us don’t even realize or acknowledge exist. Better mousetraps when the old ones seemed to be working fine. But business sense and experience? Not so much.

This was and is a problem. For me, it was an immediately apparent problem as I sought with a small group to buy ASIC based computers to mine bitcoin. There were a handful of companies that popped up around the same time promising the latest and greatest machines built for just that task. So we signed up. The company’s generally were low on capital and looking to create computers selling for five figures. So they set up pre-orders and took our money. And then they set about building these machines. And we waited…and waited…and waited.

Please understand, or remember if you’re better versed, bitcoins constantly get more difficult to generate and therefore constantly require more computing power. Or, it takes longer with the same computing power to mine a steady amount. So a three month delay in delivery was costly to us as ‘investors.’ And those behind the companies building these machines were not seasoned business professionals for the most part. Ownership scrambled to handle these delays. And generally any reaction was too little too late. So in that most American of exercises, they got sued. And most went out of business. I’m not sure if the founders all ended up losing the money they were able to pull out of the up-front payments and profits generated, but it definitely was not a possible scenario they planned for.

So now we have ICO’s. The latest and greatest way to fund your blockchain related startup. Proof of concept? Overrated…a simple white paper about how you’re going to change the world is really all you need. And some believers…or at least evangelists. And then you strike. Get all these dreamers to invest their crytpocoins in your new one. And the reason they do this is in the hope of investing for pennies in the next bitcoin. Or even Ethereum. Insane growth not available in more traditional market offerings. One of the recent ICO’s was for EOS. One of the things that’s interesting about this one is that the founders stated in writing that the EOS coins being bought had no real use in the EOS application itself. In other words, you really bought nothing of value. But you did help a handful of people raise a couple of hundred million dollars. The EOS coins ran up to over $4 and now “trade” just under $2…for really nothing.

This ICO thing begins to sound more and more like traditional investments…actually more traditional investment scams, schemes, or some other unflattering word. Pump and dump scenarios have been attacked by our regulators for years. And that raises another interesting trait of these ICO’s. Many of them are intentionally closed to US investors, and if the issuer notes that your IP address is US based, you can’t apply to participate. It could just be me, but if these things were so legitimate (“legit” being one of the more overused terms these days) I’m sure the smart people behind them would want to welcome US investors.

I’m sure that this new funding mechanism called an ICO can have some benefit. But it seems like a bigger time Kickstarter without the product at the end that you can hold and use. Don’t get me wrong. There are definitely people making money on these. But like the legal IPO’ s of the late nineties where favors were called in to get initial share allocations, all the way through pump and dumps and real Ponzi schemes, the ones getting rich aren’t the small investor taking a shot at instant profits or riches. No, as usual, those are the people that will most likely end up on the wrong side of the trade.

Attention spans get shorter and shorter it seems. The 24 hour news cycle seems to have gotten whittled down to a 24 minute news cycle. Once in a while though, a story has a great deal of impact and is referred to as an example of ‘something’ over the long term. This goes back in my memory to at least Watergate. Think about it. The scandal that enveloped the Nixon administration and led to his resignation is known by the name of a hotel in Washington D.C. at the time. The Watergate Break-In is now just “Watergate” and refers to more than just a break-in. There’s a plethora of ‘gates’ after that one, even deflate-gate when the entire football world was in a tizzy over a couple of psi of air in a ball.

Now in the markets we’ve had ‘crashes’ since 1929. And more recently, we’ve had “Flash Crash” added to the lexicon. It was just used again in the Ethereum market, so I guess now flash crash is up there with anything “-gate.” And as soon as it happened the cry was this is the end of the Ethereum market and all the other crypto-currencies with it. See what a bubble it was? Etc, etc…

Ethereum is working its way back up. And any flash crash is immediately followed by a bounce as violent as the drop. I guess that’s part of the definition, though since it’s a new phrase still finding its footing, that part may still be up for interpretation. The fact that we are applying a newly accepted term like flash crash implies, to me at least, that the market in question is not “over.” When there was a crash in 1929, I don’t think that people were immediately terming it that. “End of the stock market” is probably closer to what was thought at the time. The term crash would have been a more hind sighted expression. After the dust settled. No doubt before the market recovered, but probably not a coined phrase the next day either.

When it happened in 1987, “crash” was the term used to compare the two events. And when the “flash crash” happened in Ethereum last week, the expression was used to compare it to the flash crash in equities in 2010. Hind sight. We’ve seen this before. All of those equity indices are still around. Thriving, even. It wasn’t the end of the stock market back then, it’s not the end of Ethereum now. These markets find a bid. Buyers emerge. That means that the markets in question will continue as there are still people that think there is value to be had.

This move in Ethereum (and in turn other crypto-currencies) was actually a pleasant “coincidence” of timing in my mind. Now the move itself was attributed to a “multi-million dollar” sell order hitting the market all at once. A “fat finger” order was one of the suspected causes, i.e. someone putting in an order larger than they intended. Like with an extra 0 on the end of an order…Selling 10,000 instead of 1,000 is a prime example. Maybe that is what happened. Fat finger is another term that was invented for errors or occurrences in our standard, regulated markets…and the fact that we recognize the expression means it was not a one-time only event.

The pleasant coincidence is that the market needed a catalyst for a large correction. Not that large, but the fact that it has not fully regained the lost ground means it definitely had a real impact. Whew! Needed that. The last couple of week’s financial news has had an amazing number of mentions and articles about the run-up in Bitcoin and Ethereum. Everyone wants to get in on this get rich quick trade. No downside. Like buying NASDAQ stocks in 1999. And people call them bubbles along the way. But the money chasing easy money pours in anyway. And then much of it vanishes. People gambling and losing money because they never thought they’d lose the money.

So the “weak longs,” as they’re often known, get into the market and quickly chased out. They are not buying Bitcoin or Ethereum with any long term opinion. In fact, many don’t even know what they are buying. But if other people were making quick money, they wanted in. And got what they deserved. Cruel? Don’t kick someone when they’re down? Well, none of this is easy. It’s not supposed to be. Buying a parabolic move in anything generally skews the risk to a level not worth trading. And if you do buy one of those moves, it should always be with an understanding that reversals happen quickly and violently in such markets, so buy for the long term or not at all…and be prepared for some pain.

The point I’m making is that crypto-currency markets are much like other markets. Young ones are very thinly traded, people get rich or go broke in short periods, and the moves they make are the same ones made by traditional instruments when they were newer to market. The idea of regulated markets would do much to change the trading of these instruments. I believe it would quell a fair amount of the volatility they experience, like an old pink sheet stock becoming listed on an exchange. In the end they will trade as instruments across all asset classes find a way to trade from time to time. Unpredictably. Charts or fundamentals, unpredictability is what happens at some point and drives prices in ways we can’t believe have ever happened before. Until we remember that there was even a name invented for it one of those times it did.

As we’ve gone through these ‘chapters’ I’ve avoided the elephant in the room. That elephant is Washington D.C. Almost as much drama as a 15 year old daughter. And yet we make new highs in equity indices like it’s all sunshine and roses. And the VIX?…Oh, the VIX. How low can you go?

I’ve been trying to figure it all out. This is not to pass judgement on anyone or anything. Just trying to figure out how the television, internet, and those remnants of days gone by, newspapers, are dominated by tweets, hearings, interviews and the like coming out of the Presidential administration with no large reaction in the markets. I think we can all agree that this does get in the way of doing business when it comes to Congress and the future of our country. Yet the markets all but ignore it.

There are reasons to be wary. Not because anything wrong has definitely happened. But remember, the price of securities is driven by perception. And the perception seems to be that there is this huge distraction sucking our attention away. The rhetoric is continuous. So how does this all get ignored? I’ve come up with a theory, and that is all it is. But if what we focus on when analyzing price is what is going to happen in the future, than it stands to reason that the overall market is driven by this focus on a broad basis.

So there are a couple of possibilities. One is that the storm will pass and soon the focus will go back to things that drive the country and in turn the market. That sooner than later, we will be talking only about infrastructure and tax cuts. And that is an optimistic thought that I think we’d all like to subscribe to. I know I would. Those are the things that truly interest me when it comes to analysis and making sense of the charts (The stories behind the pictures).

In addition to the VIX constantly going lower and the markets in turn going higher (doesn’t really matter which is the dog and which is the tail), gold is not in a huge rally. It’s in a small rally, we’ve made multi-week highs, but it certainly isn’t reflecting a large flight to quality, or flight to security. It’s actually in the middle of a multi-year range. Ten year notes? Rallying as well. This can be perceived as a small flight to quality like the gold market, or it can be looked at as a reflection that the economy may not have as much steam as we thought a couple of months ago.

I do think it’s positive the way the markets are shrugging off the drama. But I still find it to be a bit confusing. And this is what leads me to my theory. I’m interested in what others think. Remember, the markets move on crowd opinion and perception, and you’ve read here before that it’s always good to know what the competition is thinking. Sometimes these thoughts are somewhat subconscious, but that doesn’t detract from the influence on our investment and trading decisions. This is more about investment than trading, as trading is a short term perspective in my opinion, but investing is based on what’s going to happen over a longer horizon.

So what’s my explanation? Well, I don’t know that it’s an explanation as much as another possibility that I know has been brought up by a few and generally just fades into the background. Are the markets pricing in the expectation that before too long our president’s last name will be Pence? Boom. Said it. Not wishing it necessarily but putting it out there as a possible explanation of why there is not more of a reflection of the drama among our country’s leaders.

Let’s examine what’s going on in Washington compared to the most dramatic time in the presidency in my memory, as well as many others. Nixon. Watergate. There were of course more factors at the time than that. There was an oil crisis. Lines at the gas pumps. This truly interfered with our ability to function in our usual manner. And the markets reflected all of this. Investor confidence plummeted. The stock market went down from soon after Watergate news hit. Those results cannot only be attributed to waiting in line to fill the tank.

Today, we also have other factors at work. It’s becoming a scary world. Terrorist attacks make the news more and more often. Worse than figuring out if it was an odd or even day for gasoline. And the market goes up. And the VIX goes down. Confidence doesn’t seem to be an issue. Are we all just acting like kids? “La, la, la, I can’t hear you?” I don’t think so. I honestly believe that there is the possibility we’re pricing in a change in the White House before 2020 or 2024.

Donald Trump is a wild card. We’ve not seen a President like this. We’re accustomed to career politicians. And whether or not you agree with any single politician’s opinions on issues, let alone the major party agendas, they are predictable based on their history. Donald Trump is not predictable. This we can all agree on. But Mike Pence is. There is a certain calm in society when we debate only issues. Right/left, the lines are relatively well defined. And this leads to a bit of stability. Even in bear markets, we have a reasonable opinion of what will happen tomorrow based on our leadership. And if indeed we are pricing in a Pence presidency, that predictability, that stability, both return. Agree with him or not, none of his tweets would be fodder for the types of reactions on both sides of the isle that we have now, if he would tweet at all from the oval office.

I’m not here to advocate for this result. I already stated that I don’t want to judge or bring my opinion of the drama into it. I just want you to think about what’s truly behind your decisions, and those of all the other people faced with the same question…am I bullish or bearish and why. This is quite the rally we’re in. And despite the contrarians, there is an extreme erosion of a volatility index. So don’t completely discount the theory without contemplating it. Because if what others are thinking is indeed part of the decision process, some people are thinking the same way I am.