Friday, 12 July 2019

The Queen Does Not Tolerate Negative Interest Rates

Central Bank Rates and 10-Year yields in Britain and the Commonwealth appear to be immune to the negative interest plague.

All former British Colonies' interest rates are greater than or equal to 0.71%.

Fair to say the Queen isn't sold on the virtues of Negative Interest Rate Policy.

Central Bank Rates in Britain and the Commonwealth States (Australia, Canada, New Zealand) Trailing 20 Years (%)

10-Year Yields, 2005-2019 (%)

The $12 Trillion or so in negative sovereign bond yields is so far restricted to the EU and Japan.

Saturday, 6 July 2019

Interest Rates: Central Bank Rate Spreads Highest in Over 20 Years

Equally as curious as the new negative interest rate phenomenon is the generous spreads between official Central Bank Policy Rates.

Central Bank Rates:

USD <2.50%
CAD 1.75%
GBP 0.75%
JPY -0.10%
EUR -0.36%

USD-EUR spread = 286bps.

Points of note:

1. The Fed leads the pack (first to act) in terms of interest rate policy, followed by Canada then Britain. Fed policy is a good predictor of global central bank policy.

2. Beginning 2017, The Fed hikes interest rates 8 times, the BOC 5 times and the BOE 2 times; while the BOJ leaves rates unchanged and the ECB actually cuts interest rates further into negative territory.

3. The spread between Central Bank Policy Rates is widest in over 20 years. Post-2008 "central bank policy coordination," is the unofficial policy mantra among policymakers, which implies an eventual conversion of interest rates. This means either The Fed cuts interest rates by about 250bps, or the ECB and BOE hike by a similar amount.

One thing is for sure: interest rate divergences this wide won't last forever.

USD, CAD, GBP, BOJ, & ECB Relative Interest Rate Performance

USD (Blue) vs EUR (Beige) Interest Rate Performance - 275bps Spread

Macro Fundamentals: Interpreting Friday's Jobs Numbers

Do you know why the June Unemployment Rate increased a tenth of a percent from 3.6% to 3.7%?

Because the Labor Force Participation Rate also increased: i.e., more and more people are entering the Labor Force. People who've quit looking for jobs in the past are now actively seeking employment again. 

Only those actively seeking employment get counted in the official unemployment rate; the more people there are seeking employment, the more people there are being counted as unemployed. (Job seekers that drop out of the labor market (stop searching) are excluded from the official number.)

So, the actual rate of unemployed people didn't increase; there's just a greater number of job seekers included in the sample.

To the casual observer, an uptick in the Unemployment Rate appears to be a negative development, but that is not the case.

Market effect
Traders view the number of unemployed people as a general signal of overall economic health, as consumer spending is highly correlated with labor-market conditions, and is also a major consideration for monetary policy at The Fed.
Investors tend to interpret the Unemployment Rate in relation to the LF Participation Rate as follows:

Unemployment Rate ↑ + Labor Force Participation Rate ↑ = +

Unemployment Rate ↑ + LFP Rate ↓ = -

Unemployment Rate ↓ + LFP Rate ↓ = +/-

Unemployment Rate ↓ + LFP Rate ↑ = ++

By forming a general but comprehensive view of fundamental economic data and getting a sense of the potential market implications a trader adds a valuable tool to his tool-belt

Sunday, 26 May 2019

American Entrepreneurs: Rupert Murdoch

Rupert Murdoch: The Untold Story of the World's Greatest Media Wizard by Neil Chenoweth                               

Saturday, 18 May 2019

American Entrepreneurs: Sam Walton

In Sam We Trust: The Untold Story of Sam Walton and Wal-Mart, the World's Most Powerful Retailer by Bob Ortega

Thursday, 18 April 2019

Money Supply: Obama vs Trump

The Fed controls the Money Supply.

Here's the monetary base vs the S&P 500 (SPX) during Obama yrs vs President Trump's first term so far:

Obama (+346%)

Trump (-6.6%)

Decline in the Money Supply since November 2018: -6.6%


The Capacity Utilization Rate is highest in four years.

You will not have a recession without a declining capacity utilization rate, no matter what the yield curve is doing, or how Europe or China is doing.

Related data points released today:

- U.S. Retail Sales m/m: 1.6% (0.9% exp)
- German Manufacturing PMI (Apr): 44.5 (45.2 exp) [< 50 signals contraction]
- Eurozone Manufacturing PMI (Apr): 47.8 (48 exp)
- Eurozone Services PMI (Apr): 52.5 (53.1 exp)
- Eurozone Composite PMI (Apr): 51.3 (51.8 exp)

Saturday, 13 April 2019

Buffett’s Alpha

Warren Buffett’s Berkshire Hathaway has realized a Sharpe ratio of 0.79 with significant alpha to traditional risk factors. The alpha became insignificant, however, when we controlled for exposure to the factors “betting against beta” and “quality minus junk.” Furthermore, we estimate that Buffett’s leverage is about 1.7 to 1, on average. Therefore, Buffett’s returns appear to be neither luck nor magic but, rather, a reward for leveraging cheap, safe, high-quality stocks. Decomposing Berkshire’s portfolio into publicly traded stocks and wholly owned private companies, we found that the public stocks have performed the best, which suggests that Buffett’s returns are more the result of stock selection than of his effect on management.

Link to full text

Re: Ridiculous Buffett

Performance since 2013: Buffett vs the S&P 500 benchmark:

Berkshire Hathaway (BRK/A) +125.09% (+17.62% CAGR).

S&P 500 (SPY) +98.66% (+14.72% CAGR).

Performance since 2008 (year of the Great Recession):

BRK/A +137.89% (+16.12% CAGR).

SPY +107.04% (+7.55% CAGR).

Performance since 2003:

BRK/A +345.75% (10.48% CAGR).

SPY +211.80% (7.88% CAGR).

Quitters Always Win

"I've failed over and over again in my life, and that is why I succeed."
 — Michael Jordan

Last Thursday, before the last game of the season, Magic suddenly decides to announce his resignation as President of Los Angeles Lakers. The PR people are baffled and media is surprised. The decisive move comes as a shock to everyone, and Magic explains the reasons for his actions to the reporters. Subsequently, media unanimously dismisses the decision as a cop-out, and the choir synchronously labels Magic Johnson a "quitter."

But Traders can learn a few valuable lessons from Magic's abrupt decision to step down. Other than the fact that there's value in quitting and quitting fast (when you're wrong), what can we learn from a quitter who has managed to accumulate just under a Billion dollars over the course of his life?

1. When it's time to cut your loss—cut it. Don't hesitate or have second thoughts or begin to rely on hope. One of the main reasons for cutting your loss is to free up idle capital to allocate to a better trade. A loss isn't a benefit at any time. The sooner you dump it the better. In trading and in life.

2. Make the decision to cut the loss no matter what the inner impulses say; even if it's the hardest thing to do. (Once you cut your loss, you're no longer wrong nor losing.)

3. Embrace being wrong. Magic knows he isn't delivering as promised (a lot of bad trades and an excellent trade gone bad) and willingly admits to it. This is why Magic is a big man. It takes a big man to admit when he's wrong. The greatest traders/investors admit to being wrong more often than they brag about being right.

4. Face the music. Keep your chin up when you lose and don't look at yourself as any less of a man for it. Magic's decision to resign in public and in front of the cameras takes...guts. Most people quit via resignation letter or over the phone. Magic shows up and shows you his face and let's you see what it is. Facing the music by being open about your losses is the ultimate form of transparency, and has a lot to do with Accountability, Integrity and Achievement.

5. Ignore stupid people. If you pay attention to random critics, you end up living for other people. Independent thinking is mandatory for the speculator and the investor. Despite attempts from the media to shame Magic into maybe giving it a second thought, you can bet the decision is final. Successful traders quit positions all the time, but they don't take tips.

The gist: by always sticking to the basics, cutting losses short, you're always in the position to have enough dry powder to be able to cash in on the big trade, when it finally comes around.

Friday, 5 April 2019

Is Trump Crazy on Interest Rates?

The media agrarians are now pushing the line of: "If the economy is so strong, like you boast, Mr. President, then why should the Fed cut interest rates?"

The line, and the others similar to it, are meant to suppose that either the economy is not really strong, and the President is a liar (like every politician to ever bless a crowd), or that it is strong and the President is an imbecile, who doesn't understand a lick of economics.

The reality is that Fed has been on a psycho-spasm of nine consecutive rate hikes the moment Trump was elected (which just ended in December with one final 25bps hike) after not raising rates even once for ten consecutive years. 

If the Trump Bump is "fake" and just a "sugar high," (as the Ministry of Truth tells us every day) then why would the Fed suddenly hike nine consecutive times after not hiking once over a ten-year period? Makes no sense whatsoever. No other central bank raised rates.

What happened to "global central bank coordination"?

The Fed can't point to anything to explain its actions, so it's fair to conclude the actions were political/anti-Trump... If that's the case, they ought to return to their previous policy of "central bank coordination," wherein which all central banks move interest rates up or down in unison, not just the Fed.

Why have all central banks stood pat on interest rates (other than little brother Canada that just follows the Fed) while the Fed hiked nine consecutive times?

Because raising rates slows economic activity... So what did Fed's actions do to the U.S. economy?

Slowed it down. So the U.S. is technically overbought on interest rates, compared to the rest of the world.

When it comes to economics, everything is relative—and interest rates are just a reflection of inflation. Nominal rates mean nothing on their own. So when you see Trump's economic advisor saying the Fed needs to cut interest rates, while rates are at 2.75%, always consider both the current rate of inflation and central bank rates in other developed countries (primarily the ECB and BOJ). If the real interest rate (nominal interest rate - inflation rate) is at or near 0%, there's nothing to see/nothing out of the norm. If they begin to deviate from zero percent, then there's something to discuss (and a potential trading opportunity).

When interest rates were at 15%, what do you think inflation was at? 15%. So real interest rate = 0%.

Now that interest rates are at 2.75%, what do you think inflation is at? Just about 2.50-2.75%. So the real interest rate is just about 0%.

Why most governments have a monetary policy that keeps real interest rates at 0% is different subject and a discussion for another day. 

Sunday, 24 March 2019

Why U.S. Stocks are a Good Long-Term Investment

Below is a chart of the Dow Jones Industrial Average (DJIA); note the total percentage gain over the past 105 years: 39249.36%.

A $10,000 investment in the DJIA index (ticker symbol: DIA) 105 years ago is worth to $3.4 million today. A 39249.36% increase, (373.80 percent annual rate of return).

Over the past 30 years, the DJIA has increased 1254.22% (a 41% annual rate of return - better than Warren Buffett's 65-year career average of 23%). A $10,000 investment in the Dow Jones 30 years ago is worth $135,400 today.

Looking at it a different way, a $100,000 investment in the Dow in 1988—say, at the age of 20—is now worth $1.4 million and you're now a 50-year-old millionaire with an option to retire early.

DJIA 30-year (1988 - 2019) performance (%):

The point here: U.S. stocks make good long-term investments. 

Thursday, 14 March 2019

Philosophy is Trading 101


A Novel by Ayn Rand
With a Preface and Notes by Richard Lawrence

 Chapter Quick Links: Foreword  One  Two  Three  Four  Five  Six  Seven  Eight  Nine  Ten  Eleven  Twelve


Tuesday, 12 February 2019

Berkshire Hathaway (BRK) vs S&P 500 Index (SPX)

Why Warren Buffett is the Greatest Investor in Modern History:

Berkshire Hathaway +3669.89% vs S&P 500 Index +678.74%, 1990 - Present:

When you outperform the S&P 500 for 29 years and do it by a factor greater than 4, you're the Michael Jordan (or Warren Buffett) of investing.

Thursday, 7 February 2019

Quote From 'Reminscences of a Stock Operator'

This is in the context of Livermore recounting the fact that he discovers that he wins whenever his trades are based on precedent he wins, and when they're based on blind impulses he loses. 

A quote to remember whenever the gambling instinct arises:

"The desire for constant action irrespective of underlying conditions is responsible for many losses in Wall Street even among the professionals, who feel that they must take home some money every day, as though they were working for regular wages."

Wednesday, 6 February 2019

Finance: The Time Value of Money

Inflation and the Time Value of Money:

Definition of inflation: Rate at which prices as a whole are increasing. 

When a bank offers to pay 6 percent on a savings account, it promises to pay interest of $60 for every $1,000 you deposit. The bank fixes the number of dollars that it pays, but it doesn’t provide any assurance of how much those dollars will buy. If the value of your investment increases by 6 percent, while the prices of goods and services increase by 10 percent, you actually lose ground in terms of the goods you can buy.

Tuesday, 5 February 2019

Dollar Stiff as a Board

Fed goes from 3 hikes 0 hikes in a matter of weeks, fastest U-turn in history made by the largest central bank in the world, and USD stiff as a board. tells me a lot.

Hate to see what happens to Euro during next recession. Sub-zero interest rate policy or more Quantitative Easing only option. Sub-zero rates only untried policy option of the two.

Real GDP +3.4% and that's all that really matters at the end of the day for the U.S; though, Fed's U-turn could imply 3.4% is tentative.

Note: Fed in relatively safe position compared to ECB and BOJ in terms of policy preparedness for next recession. ECB and BOJ are elephant in room. This sets table for bid Dollar near/medium-term.

Sunday, 3 February 2019

Thursday, 10 January 2019

Tuesday, 8 January 2019

Monday, 7 January 2019

Equity Analyst Translations

Equity Analyst ratings changes in plain English:

"Buy" → I have a friend that needs to unload.

"Hold" → I gotta get paid for doing something, so here it is.

"Sell" → I have a friend that wants to load the boat.

"Sector Perform" → Gotta write something about this, so here.

"Outperform" → I have a friend that needs to unload but he isn't that important.

 "Underweight" → This thing was a POS from the get go.

"Overweight" → Best house in a shitty neighbourhood. "

"Price Target Lowered" → We're dumber than we first thought.

"Price Target Raised" → Everyone else is raising it, so we are. Besides, chart says momentum is building up.