Bubble Talk

I  believe most people have by now caught on to the market acumen of Barry Ritholtz. I have personally been an avid reader of his by-internet-standards ancient blog (The Big Picture) for many years now.

Since starting his blog, Barry has become a household name and his visibility has rightly increased in proportion to his subtle understanding of Wall Street, its psychology, its behavioral blind spots. His analyses have been right a lot more often than most and way more often than the proverbial dart-throwing real and metaphorical monkeys. His ability to separate noise from signal has also been stellar.

It just so happens that he's been consistently calling out and challenging the perma-bears, the bad-faith bears, the political bears and all other types of bears who have been a vocal, most often hateful, angry, numerous and wrong-headed presence since the current bull market started in early 2009. And therefore, along with a growing following, Barry has accumulated an incredible portfolio of very very angry haters. But that comes with the territory and if anyone has the mettle to deal with that many haters, I would say he is.

I would also like to clarify that I don't know Barry personally. Any insights I have on his personality and his ability come from having read dozens upon dozens of his blog posts.

What compelled me to write this post is his just-penned very informative Bloomberg piece (on the markets, on his intellectual process and on his outlook) that just about anyone interested in trading and investing should read.

I will excerpt a few paragraphs that I particularly enjoyed but you should read the whole thing:

[...]Over the past few weeks, I have been trying to push back against the usual contingent of bears. In particular, I have argued that this bull cycle is not yet over, markets are not in a bubble and that people have been sitting for too long on way too much cash. 

[...] 

First, our discussion on recent surveys of affluent investors revealing them sitting on $6 trillion dollars and as much as 50 percent cash in their portfolios was about investor psychology. That pile of cash is not likely the result of carefully studied market history and astute observations of timing. Rather, it is most likely the result of fear. It has been a drag on portfolios for at least four years; it typically reflects a combination of poor planning and emotion. 

[...] 

Second, the classic problem with too much cash is the investor's ability to re-enter the markets. A broad contingent of cash-heavy investors never seems to be able to get back into a properly balanced portfolio. To quote Peter Lynch, "Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.” That quote succinctly describes the circumstances for many since the March 2009 lows.

          [...]

Finally, I have been calling this the “most rally hated in history” since 2009. The vitriol directed at the Federal Reserve, forecasts of hyper-inflation and currency debasement, the worship at the Altar of Gold are part of the liturgy of equity dislike. Coumarianos suggests these are strong words requiring an “impressive knowledge of the sentiment of previous rallies.” I hope that its something I have demonstrated previously (See this and this and this). 

I continue to see signs that sentiment has gotten frothy. We are long overdue for a 10 percent to 20 percent correction. But I do not see any market internals suggesting that this bull market is over. Perhaps that discussion is worthy of a column unto itself.

          [...]

The Five-Year Itch?

Josh Brown from the reformed Broker blog, brought back some memories (of the panicky type) with his recent post on what happened 5 years ago at about this time (emphasis mine):

[...] That morning, a Monday, Treasury Secretary Hank Paulson had announced a proposed bill that involved the US government buying $700 billion in mortgage backed securities to stabilize the housing market and the banks. The first vote on what would become known as TARP was set for that afternoon and President Bush was confident it would do the trick. Democrats in the House of Representatives voted for it (140–95) while Republicans voted it down (133 against, 65 for) and the legislation failed. 

The stock market's judgment was swift and merciless. Wall Street - itself the epicenter of the crisis - was now weighing the effectiveness of our elected officials in Washington - and they had been found wanting. Consider: 

The Dow Jones Industrial Average, what Mom and Pop look at when they want a gauge of the stock market (and economy) fell 777 points in the vote's aftermath. We sat on our bar stools stunned. It was the Dow's single worst point drop ever, with some $1.2 trillion in market value wiped out.[...]

This was the bloodbath that the pols needed to see, unfortunately. It made headlines around the nation and around the world. Federal Reserve chairman Ben Bernanke met with Congressional leaders, pointed at the destruction and told them the sky would absolutely fall without a bailout. He was right. Inaction was never an option. 

A few days later, now scared straight, the Senate passed a revised version on the evening of October 1st with Wall Street's plunge fresh in everyone's minds. The House got another crack at the TARP vote on October 3rd and this time it passed 236-171. 63 Dems and 91 Republicans had still voted no, but common sense triumphed. Bush signed it a few hours later and the markets eventually stabilized (although the bear market was far from over.) [...]

Must the same kind of thing happen to force the politicians' hand to "do the right thing" (i.e. stop playing with fire) this time too? I'm sure you'll find some bearishly-positioned traders and a lot of non-market people rooting for just such a market event. Need I state the obvious here? Be careful, nay be very afraid of what you wish for.

What Say You, Mr. Market? (the 2013 Edition - Continued)

Picking up right where we last compared Paul Krugman's opinion about the stock market to the chart of the Dow Jones Industrial Average (and nothing but the chart), this is what the financial markets are saying to Professor Krugman these days:

" [...] Major stock indexes are now higher than they were at the end of the 1990s, which can sound ominous. It sounds a lot less ominous, however, when you learn that corporate profits — which are, after all, what stocks are shares in — are more than two-and-a-half times higher than they were when the 1990s bubble burst. Also, with bond yields so low, you would expect investors to move into stocks, driving their prices higher.

All in all, the case for significant bubbles in stocks or, especially, bonds is weak. And that conclusion matters for policy as well as investment. [...] "

And again, here is the 20-year monthly chart of the Dow Jones Industrial Average with only one technical indicator (Bollinger Bands with the 20-period/2-standard-deviation default settings) updated to cover the 4/30/1993 to 4/30/2013 period (click chart to enlarge):

To be continued...

What Say You, Mr. Market? (the early 2013 Edition)

This is what the market is saying to Paul Krugman:

" [...] What, then, are the markets actually telling us?

I wish I could say that it’s all good news, but it isn’t. Those low interest rates are the sign of an economy that is nowhere near to a full recovery from the financial crisis of 2008, while the high level of stock prices shouldn’t be cause for celebration; it is, in large part, a reflection of the growing disconnect between productivity and wages.

The interest-rate story is fairly simple. As some of us have been trying to explain for four years and more, the financial crisis and the bursting of the housing bubble created a situation in which almost all of the economy’s major players are simultaneously trying to pay down debt by spending less than their income. Since my spending is your income and your spending is my income, this means a deeply depressed economy. It also means low interest rates, because another way to look at our situation is, to put it loosely, that right now everyone wants to save and nobody wants to invest. So we’re awash in desired savings with no place to go, and those excess savings are driving down borrowing costs.

Under these conditions, of course, the government should ignore its short-run deficit and ramp up spending to support the economy. Unfortunately, policy makers have been intimidated by those false priests, who have convinced them that they must pursue austerity or face the wrath of the invisible market gods.

Meanwhile, about the stock market: Stocks are high, in part, because bond yields are so low, and investors have to put their money somewhere. It’s also true, however, that while the economy remains deeply depressed, corporate profits have staged a strong recovery. And that’s a bad thing! Not only are workers failing to share in the fruits of their own rising productivity, hundreds of billions of dollars are piling up in the treasuries of corporations that, facing weak consumer demand, see no reason to put those dollars to work [...] "

According to pure technical analysis doctrine, price action and only price action should matter. Whether one agrees with that or not is an ongoing century-old "conversation" (some would strongly object to this understated way of putting it) better left for another day, a conversation beyond the scope of this post (and probably of this blogger). But, if you accept this very "severe" view of market analysis for a second, one of the better (but in no way the only) ways of visualizing pure stock market price action is taking a look at the 20-year monthly chart of the Dow Jones Industrial Average (DJIA) with only one technical indicator (Bollinger Bands with the 20-period/2-standard-deviation default settings). Here it is, covering the 2/28/1993 to 2/28/2013 period (click chart to enlarge):

What is the market telling you? To be continued...

Tim Geithner

Despite the post's title, I will not try to pass sweeping judgement on Tim Geithner's soon-ending tour of duty as Treasury Secretary. It seems like every newspaper, magazine and blog has done just that already so I probably have nothing new and/or intelligent to add.

This interview of him by Lords of Finance's - a decent book, although I remember it as a bit confusing/confused at times - author Liaquat Ahamed in the New Republic is interesting in that he answers some questions in a less politically correct and less guarded way than one would expect in an "exit interview", although still couched in fairly diplomatic language. Just maybe, Tim Geithner's book (because, surely, there will be a book) will make for more original/informative reading than most of the books written so far by some of the actors of the 2007 - ???? financial and economic crises.

Excerpts:

[...]  

LA: Was the talk about “fat cat bankers” counterproductive? 

TG: I’m biased but I felt that in the basic strategy that the President embraced and that we put into effect, we did something that was incredibly effective for the broad interest of the economy and the financial system. I feel the President’s rhetoric over that period of time was very moderate relative to the populist rage sweeping across the country. And I never quite understood why the financial community took such offense at what was such moderate rhetoric relative to what we have seen in other periods in history. 

[...] 

LA: Now you’ve had a pretty full four years as Treasury Secretary. What’s been the hardest and most frustrating part of the job? 

TG: [...] I knew with a fair degree of confidence by the summer of ’09 that the cumulative actions we took, on top of what Paulson and Bernanke did, was going to work. I was very confident about that by that time. Even though we still had a long, rough road ahead of us. 

The most frustrating part of this work, but in some ways it’s the most consequential, is how effective you can be in relaxing the political constraints that exist on policy. You can see that most compellingly now in the fiscal debate. Paulson before us and the President were very successful during the crisis in getting a very substantial amount of essential authority essential to resolving the crisis. But it has been very hard since then to get out of the American political system more room for maneuver both on near-term support for the economy, as well as reforms that would lock in a sustainable fiscal path. That is the most frustrating thing, to get the political system to embrace better policies for the country. 

[...]

Update 02/09/2013: There will indeed be a book!

01/18/2013 Session

No trades.

Standing order for 01/22/2013 - 01/25/2013 sessions:

Buy YMH13 @13,502 with 13,484 stop and 13,538 take-profit.

(Weekly Pivot Point @13,513)

[ For some background and a disclaimer, please read this post and especially this post. For a more general disclaimer, read the section at the bottom of the blog. ]

01/17/2013 Session

One trade:

Sold YMH13 @13,498, stopped out @13,517; P&L: - 19 points.

[ For some background and a disclaimer, please read this post and especially this post. For a more general disclaimer, read the section at the bottom of the blog. ]

01/14/2013 - 01/16/2013 Sessions

No trades.

Standing orders for 01/14/2013 - 01/17/2013 sessions:

Buy YMH13 @13,302 with 13,284 stop and 13,338 take-profit.

(Weekly S1 support @13,298, weekly Pivot Point @13,367)

Sell YMH13 @13,498 with 13,516 stop and 13,462 take-profit.

(Weekly R1 resistance @13,502)

[ For some background and a disclaimer, please read this post and especially this post. For a more general disclaimer, read the section at the bottom of the blog. ]

01/11/2013 Session

No trades.

Orders for 01/14/2013 session:

Buy YMH13 @13,302 with 13,284 stop and 13,338 take-profit.

(Weekly S1 support @13,298, weekly Pivot Point @13,367)

Sell YMH13 @13,498 with 13,516 stop and 13,462 take-profit.

(Weekly R1 resistance @13,502)

[ For some background and a disclaimer, please read this post and especially this post. For a more general disclaimer, read the section at the bottom of the blog. ]

Behavioral Economics Newest Enthusiastic Convert

I might be unfair here: maybe David Brooks, the New York Times' main "useful conservative", has been bullish on Behavioral Economics for a long time, unbeknownst to most of his readers. Strangely, I don't remember ever reading a column of his mentioning the subject (then again I can't say that I read all of his columns; actually it could be said that I very rarely read any of his columns, for some reason I forget just now).

At any rate, I respect him all the more for writing a column embracing Behavioral Economics wholeheartedly and even bemoaning the fact that its techniques aren't used more widely and for much more ambitious aims than just, say, gently nudging people to eat better, exercise more or stop smoking. Ambitious as in:

[...] How do we get people to restrain government commitments now so that debt down the road won’t be so ruinous? How do we calculate the multiplier effects of tax cuts or spending increases among different subgroups of the population, or under different emotional conditions? How do we rig the context of budget negotiations so participants can actually come to a deal? How are people in different cultures likely to react to drone strikes? How do we structure sanctions against Iran to cause the greatest psychic humiliation? [...]

Say what? Oops, I think I've been had! Now I remember why I don't read David Brooks so much.

MOOCs

I am a fairly recent user of Coursera, a leading Massive Open Online Course provider. I have started but not finished (which is, I understand, what happens to the "massive" majority of people who sign up) a few classes on statistics and programming. I am, however, trying to hang in there for the excellent Introduction to Computational Finance and Financial Econometrics by University of Washington's Professor Eric Zivot.

There is a lot of hype along with some controversy (for an overview, read this New York Times article for example) over this MOOC phenomenon, one that has only very recently reached critical mass (no pun intended here) and gained media attention. I find this post from the Simply Statistics blog sheds a welcome no-nonsense (which is what you'd expect from a Statistician) light on this new approach to teaching and learning:

[...] Top researchers end up at top universities but being good at research does not necessarily mean you are a good teacher. Furthermore,  the effort required to be a competitive researcher leaves limited time for class preparation. To make matters worse, within a university, faculty have a monopoly on the classes they teach. With few incentives and  practically no competition it is hard to believe that top universities are doing the best they can when it comes to classroom instruction. By introducing competition, MOOCs might change this. [...]

01/07/2013 - 01/10/2013 Sessions

No trades.

Standing order for 01/07/2013 - 01/11/2013 sessions:

Buy YMH13 @13,152 with 13,134 stop and 13,194 take-profit.

(Weekly Pivot Point @13,155)

[ For some background and a disclaimer, please read this post and especially this post. For a more general disclaimer, read the section at the bottom of the blog. ]