Quote of the Day

"Of the various competing methods
for achievement, ECONOMICS is
the most superior
BECAUSE
it is scientific, empirical, the product
of more than 200 years of scholarship.

"It is not anecdotal, not the idiosyncratic
personal stories or 'secrets' of
would-be best-selling authors.
It does not offer get-rich-quick
schemes, simplistic slogans or magic
recipes for those who will not think."

-- Larry Smith, U of W Economics Professor

Five Takeaways from Alan Greenspan's Five Minute Interview

Greenspan recently sat down with Bloomberg for a brief five minute interview, and in showing us how brilliant he really is, left us with five hours worth of additional research. Here are five takeaways regarding the current state of US economy:

1. A necessary condition for the type of GDP growth required to outgrow the entitlements funding gap is a per-hour output growth rate of two percent.
2. Current output per hour growth rate is roughly 0.5%.
3. To get an estimate of what GDP will look like, he multiplies the workforce population with the output growth rate and few other variables.
4. There's a 9% average annual increase in entitlements that's technically eating away at the domestic savings of the economy; which in turn is a critical requirement in getting capital investment growing, which is the key element in productivity growth.
5. No Democrat or Republican will ever touch the subject of entitlements - if they do, they lose automatically.

To add: The CBO projects a substantial increase in the budget deficit over the next ten years, which will reach 5% of GDP in 2019.

Quote of the Day

"I must study Politicks and War that my sons may have liberty to study Mathematicks and Philosophy. My sons ought to study Mathematicks and Philosophy, Geography, natural History, Naval Architecture, navigation, Commerce and Agriculture, in order to give their Children a right to study Painting, Poetry, Musick, Architecture, Statuary, Tapestry, and Porcelaine."       -- John Adams
U.S. president, 1735–1826

What I'm Watching This Week

One of the interesting things Jack Schwager says he learned from his Market Wizards interviews is that there is no Holy Grail in trading. Every trader has a different approach.

The fundamental guys say technical analysis is voodoo, and the technical analysis guys say the fundamental stuff is outdated, and every time they tried to use it they lost money. Similarly, the fundamental guys say every time they tried to employ technical analysis, they lost money.

What traders can take away from this, is that markets in the short term are largely determined by psychology and philosophy. The calculus varies with the approach or the approach varies with the calculus. Even algorithms are programmed by psychologically heterogeneous human beings.

And so we can monitor price levels that we know the algorithms and other traders will also be watching, and incorporate them into our systems after testing for their validity. E.g., we know that 2740 is an important psychological level in the SPX because it has four or more technical inflection points, so there are 4X as many not-so-savvy participants using it for entries and exits.

The price indicators at or near this level on a daily chart are: 20SMA, 40SMA and the 78.6% Fibonacci level. The stochastic oscillator indicators should also be close to reversing, giving an "overbought" signal after a six-day run up.

We can also factor in all of the people that bought after the first week of 2018 who are still losing money or have sold out at a loss and are now "revenge trading." 2740 is a point of hope for them to stay in or to get back in, so it's likely to be used as bull bait lunch for the stop runners.

The only way for us to close above 2740 by a significant margin is if the buyers are stronger than the sellers at that price. If they are, the first move above 2740 will likely be the head-fake.

So, look for: 1. a significant close above that level, to suck in the chasers; 2. a pullback to shake out the weak hands; 3. some sideways price action for a few weeks to shake out the impatient; then 4. another correction back to that level on a weekly basis, but on a concave slope that only gradually turns positive.

IMO, that could possibly be used as an anchor to see if the market really believes in the Powell Put. If they do, the only thing standing in the way of a return to the Goldilocks days is a recession that's statistically overdue and rising interest rates.

Now it's the Fed vs the Facts

"Whatever it takes." 
-- Mario Draghi, ECB President

The two forces now jockeying for position in the market are The Fed and the bond market. After the first sharp decline on 2/6, "Bond Vigilantes" instantly replaced the pervasive clear skies narrative and even the President went radio silent about the stock market. Given the political tensions surrounding the Fed, the market assumed that - without a guarantee from the new chairman - this time they might not support the market and could leave Trump stranded. That selling pressure ceased on 2/13 after Powell released a statement essentially saying the Fed will intervene if necessary - i.e., they are willing to do whatever it takes to keep prices up.

Now, the questions are:

1. Will Powell's single statement be enough to guarantee a Put and thus push us higher into 2019, or can bear forces push us down further in order get a crystal clear guarantee from Powell that he'll step in with more QE?

2. Even if Powell does guarantee a Put, will it really be enough to push us higher given: a. Higher interest rates (which historically move inversely with stocks), b. Quantitative Tightening (QT) as opposed to QE, c. Selling pressure from the unwinding of the $4.5T balance sheet, and d. The high probability that the economy could be in recession within the following two years, if history is any guide.

3. What specifically is the Fed's policy prescription for the overdue recession, and how will that model be consistent with tighter monetary policy?

Unless you're a professional or believe you have a natural talent, it's probably best to remain on the sidelines until the smoke clears. Th reckless buying by fund managers and retail is on hold, as the fear from the big sudden drop hasn't dissipated from the investor psychology.

This is also the phase of the bull market where the secondary consumers digest all of the primary consumers that haven't developed new survival mechanisms yet.
 

Quote of the Day

"In a bull market your game is to buy & hold until you believe that the bull market is near its end. To do this you must study general conditions & not tips or special factors affecting individual stocks. Then get out of all your stocks; get out for keeps! Wait until you see—or if you prefer, until you think you see—the turn of the market; the beginning of a reversal of general conditions. You have to use your brains and your vision to do this; otherwise my advice would be as idiotic as to tell you to buy cheap and sell dear." - J.L. 

Trading the Seasons

For every strategy there is a season,
a right time for every approach —
a time to buy and a time to sell,
a time to hedge and a time to short,
a time to be bullish and a time to be bearish,
a time to act and a time to wait,
a time to be foolish and time to be cautious,
a time to fully invest and time to be in cash,
a time to speculate and a time to invest in value,
a time to ride the trend and a time to trade the day,
a time to long volatility and a time to short volatility,
a time to trade the pound and time to trade the yen,
a time to trade commodities and a time to trade currencies,
a time to own stocks and a time to own bonds,
a time to be patient and a time to be swift,
a time to win and a time to lose.

Crash Model Generates Signal for First Time Since 2011

A surprise visit from Lady Luck:

Date: January 30.
Time: 10:00 AM.

Position: Short.

Red

VIX Prediction (Updated)

Volatility Index Up +342% Since Warning

S&P500 Down -8.62% Since Crash Model Went into Effect

Dow Jones - 1929 Crash and Bear Market

Volatility Index Signal

VIX Up +87.7% Since

Quote of the Day

"[t]he unexpected and even the unexpectable will happen. Disaster may come from a convulsion of nature or from the weather, from your own greed or from some man’s vanity; from fear or from uncontrolled hope." - J.L.

Crash Model Goes into Effect as of 1/26/2018

Rare Back to Back Red Days

Ten General Takeaways from Q&A with Marty Schwartz

Ten takeaways from Danny Riley's interview with Marty Schwartz: https://youtu.be/TAKMRFf0Mb0

1. Qualitative and quantitative pattern recognition helps him successfully adapt to the rise of algorithmic trading. He uses the habits of algorithms to his advantage.

2. He advises against Pyramiding.

3. Back-tests can deceive. Markets keep changing. What worked yesterday won't necessarily work today, so be flexible in your approach.

4. Search out ways to adjust your strategy to fit the current conditions.

5. Old dogs can learn new tricks. The last five years have been some his best in terms of returns.

5. Most work is done after market hours and outside of actual trading.

6. He sincerely believes that anything can be achieved. Any limitations that you put on your performance will be the hurdle rate for someone else.

7. No one should outwork you.

8. "You can't desire action more than you want to win."

9. Given the number of tradeable financial products created since the '80s, opportunity is greater for us today than it was for him 20-30 years ago.

10. He was among the first to trade the SP500 futures when they were listed on CME in 1982.

Quote of the Day

"You can't desire action more than you want to win." -- Marty Schwartz

Milton Friedman - Understanding Inflation

Ontario's minimum wage increase is officially in effect and the response from business owners isn't being received very well by the politicians. Nevertheless, a 32 per cent increase in the minimum wage is significant additional evidence of mounting inflation that is making its way into the labour market. Here is great 15 minute primer on Inflation by Nobel Prize-winning Economist, Milton Friedman. https://www.youtube.com/watch?v=GJ4TTNeSUdQ

Quote of the Day

"I sometimes think that speculation must be an unnatural sort of business, because I find that the average speculator has arrayed against him his own nature. The weaknesses that all men are prone to are fatal to success in speculation—usually those very weaknesses that make him likable to his fellows or that he himself particularly guards against in those other ventures of his where they are not nearly so dangerous as when he is trading in stocks or commodities" - J.L.

Yellow Day for first trading day of 2018

Year 2018 starts with a very yellow day pic.twitter.com/37QgZUZsvQ

— Vic Niederhoffer (@VicNiederhoffer) January 2, 2018

Rare Red Day

2017 12 19 Red Day pic.twitter.com/BhkIK1e603

— Vic Niederhoffer (@VicNiederhoffer) December 19, 2017

Yellow Day

2017 12 12 Yellow day (stocks up, bonds down). pic.twitter.com/ZsHPMBR611

— Vic Niederhoffer (@VicNiederhoffer) December 12, 2017

Ten Reasons not to Buy Gold

"When you know what not to do in order not to lose money, you begin to learn what to do in order to win. Did you get that? You begin to learn!"
-- J.L.

1. Interest rates and the price of gold have an inverse relationship and the expected path of future rate hikes are to the upside.

2. Fed funds futures indicate that a rate hike of 25bps is the most likely scenario.

3. The rate of interest rate increases is the highest in ten years.

4. The Fed's main concern is containing potential runaway inflation.

5. Economists suggest that GOP tax bill is inflationary.

6. The infrastructure bill will probably be even more inflationary.

7. A wise man once said that buying gold is a way of going long on fear, and business and consumer confidence have hit all-time highs.The infrastructure bill will probably be even more inflationary.
.
8. Bitcoin.

9. Palindrome's protege dumped his gold holdings on the day of the election and we're still trading below the opening price of that week.

10. GLD: After a short run-up during the week beginning Nov 27, bears have resumed full control, taking out key support at 120 and closing below August's lows at 118.48.

Yellow Day

2017/12/08 When prophecy fails. Stocks returned more than either tbonds or gold. pic.twitter.com/mjuYg6MZlN

— Vic Niederhoffer (@VicNiederhoffer) December 9, 2017

Yellow Day

Yellow day, patient stock bulls rewarded, tbonds (and gold) down substantially. Winner of tomorrow more likely among the latter than the former. pic.twitter.com/tMtZaXXk5k

— Vic Niederhoffer (@VicNiederhoffer) December 7, 2017

Quote of the Day

On the importance of determining the type of market one is trading in: 

"I recalled old Partridge’s favourite remark—'Well, this is a bull market, you know'—as though that were tip enough for anybody who was wise enough; as in truth it was."

-- J.L.

Real Cost of a Bitcoin

Bitcoin crossed the $13,000 mark today, up from $11,500 yesterday, as bulls resume control of a temporarily un-shortable market.

That makes the current opportunity cost of owning one bitcoin: 5 S&P 500s, 77 shares of Apple, 60 shares of Exxon Mobile, 240 barrels of oil or 10 ounces of gold.

Quote of the Day

"Observation, experience, memory and mathematics—these are what the successful trader must depend on. He must not only observe accurately but remember at all times what he has observed. He cannot bet on the unreasonable or on the unexpected, however strong his personal convictions may be about man’s unreasonableness or however certain he may feel that the unexpected happens very frequently. He must bet always on probabilities—that is, try to anticipate them."

-- J.L.

Quote of the Day

On the importance of compound interest.

"Life is like a snowball. The important thing is finding wet snow and a really long hill."

-- Warren Buffett

Trump Trade is Fed's Latest Challenge

Less than two years ago, US inflation dipped below 0%, and the Fed's primary concern was avoiding Deflation. Today, its main issue is preventing Hyperinflation.

Average inflation rate YTD: 2.08%

Average inflation rate 2015-16: 0.5%.

A four-fold increase in 11 months.

Overshadowed Bullish Items Over the Weekend

Three bullish news items over the weekend that were overshadowed by Flynn-related fake news:

1. The tax cuts are basically a done deal. The discrepancies between the House and the Senate bill are negligible. The "22%" rumour is false. Both Senate and House versions have the corp rate at 20%.

2. The tax bill effectively scraps the Obamacare individual mandate - which means an uptick in M&A activity. Weak, under-capitalized insurance companies lose the subsidy and are zombies for the most part. Think of those companies as the dead trees and debris that are swept away during a healthy forest fire - the nutrients return to the soil, replenishing the forest.

3. Goldman Sachs raises its 2018 GDP forecast to 4% (Jan Hatzius has a strong forecasting track record).

Anti-Trump, Anti-Bear Market

Note that MSM is now equating bitcoin prices with stock prices, but they neglect to report on bitcoin when stocks close in the red. More agrarian innovation in subtle sweeps at Prez.

the greater the frequency of anti-Prez "stories" on MSM, the higher the spoos. never fails. just pray they keep up the negative coverage.

— Walton McGuinty (@rwalton22) October 5, 2017

Quote of the Day

On judicious manipulation as a form of stock advertisement (see: Square (SQ)):

"It is well to remember a rule of manipulation, a rule that Keene and his able predecessors well knew. It is this: Stocks are manipulated to the highest point possible and then sold to the public on the way down." -- J.L.

Blue Day

Month of Dec begins with blue day. Stocks partially recover from sharp drop, down only 4 at close. pic.twitter.com/CuE1BJm8iQ

— Vic Niederhoffer (@VicNiederhoffer) December 1, 2017

Quote of the Day

"Consult not your fears, but your hopes and your dreams. Think not about your frustrations, but about your unfulfilled potential. Concern yourself not with what you tried and failed in, but with what it is still possible for you to do."

-- Pope John XXIII

Yellow Day

Last day of November: yellow. Gold (the metal, not the color) down again like yest. pic.twitter.com/MFSFwJvkxI

— Vic Niederhoffer (@VicNiederhoffer) November 30, 2017

Quote of the Day

"We can ignore reality, but we cannot avoid the consequences of ignoring reality."

-- Ayn Rand

Red Day

Red day with 4 musketeers down: stocks (esp. Naz), Tbonds, Crude, Gold pic.twitter.com/204XhUHjiU

— Vic Niederhoffer (@VicNiederhoffer) November 29, 2017

Quote of the Day

"Never argue with an idiot. They will drag you down to their level and beat you with experience."

-- Mark Twain

Green Day Yesterday

Green day as stocks make all time high. Up up Zimbabwe. pic.twitter.com/OlY8RZGTgR

— Vic Niederhoffer (@VicNiederhoffer) November 21, 2017

Yellow Day

yellow day a contrary day from morning to close pic.twitter.com/KxMaYG8vMV

— Vic Niederhoffer (@VicNiederhoffer) November 20, 2017

Blue Day

Week ended on blue day, bonds up, stocks down. I prefer to eschew bonds over the weekend and on Monday.a shocking day pic.twitter.com/SIlyqRJRrs

— Vic Niederhoffer (@VicNiederhoffer) November 17, 2017

Quote of the Day

"Old minds are like old horses; you must exercise them if you wish to keep them in working order."

-- John Adams, 2nd US president

QOTD

Take Time 

Old English Prayer 

Author Unknown

Take time to work, it is the price of success.

Take time to think, it is the source of power.
Take time to play, it is the secret of perpetual youth.
Take time to read, it is the foundation of wisdom.
Take time to be friendly, it is the road to happiness.
Take time to dream, it is hitching your wagon to a star.
Take time to love and be loved, it is the privilege of the gods.
Take time to look around, it is too short a day to be selfish.
Take time to laugh, it is the music of the soul.

 

Oldie but Goodie

A history of successful SQ predictions (daily chart)

"The recognition of our own mistakes should not benefit us any more than the study of our successes." - Livermore

Did You Know?

Okun's law posits that the unemployment rate increases by 1% for every 2% gap between real GDP and full-employment real GDP.

via Amosweb

QOTD

"The markets are the same now as they were five to ten years ago because they keep changing— just like they did then."
-- Ed Seykota

Sadhguru on Risk and Skin in the Game - 13:05 Mark

QOTD

"Of course, after a while, I heard a lot of calamity howling and the old stagers said everybody—except themselves—had gone crazy. But everybody except themselves was making money. I knew, of course, there must be a limit to the advances and an end to  the crazy buying of A. O. T.—Any Old Thing—and I got bearish. But every time I sold I lost money, and if it hadn’t been that I ran darn quick I’d have lost a heap more."
-- Livermore

QOTD

    

"One cannot but pity the man with sallow face and sluggish gait who when everybody else is feeling the happy impulse
of a common prosperity persists in believing that the country is going to the dogs, and steadily sells stocks while everybody else is buying them. He is simply ruining himself" (Clews, 1908, p. 19)

Reference: Clews, Henry, and Victor Niederhoffer. Fifty Years in Wall Street. J. Wiley & Sons, 2006.

How The Fed Could Raise Rates Without Ending The World

If it's a no-brainer that bonds should sell off as Fed unwinds, and if there's no such thing as a free lunch, then bonds ought not to be sold.

If Fed hikes then emerging markets take a hit. If emerging markets take a hit, there will be a flight to safety. If there's a flight to safety, then Treasuries get bid up. If Treasuries get bid up, the price of bonds gets bid up. If the price of bonds get bid up while Fed is unwinding balance sheet, then the unwinding will be successful. If Fed unwinding is successful, there's really nothing to be bearish about aside from over-stretched valuations and the economic cycle.

Bottom line: if bonds rally while Fed unwinds, then the Fed's operation will be successful.

Bitcoin

The only people more ignorant than the people buying bitcoin on the way down are the ones that didn't buy it on the way up.

QOTD

"If you want to know everything about the market, go to the beach. Push and pull your hands with the waves. Some are bigger waves, some are smaller. But if you try to push the wave out when it's coming in, it'll never happen. The market is always right." - Ed Seykota

Why Bitcoin is a Derivative, not a Currency.

In order for Bitcoin to be considered a currency it must satisfy three conditions: 1. be a store of value, 2. a medium of exchange and 3. a unit of account.

What separates fiat currencies from BTC is the fact that they satisfy the most critical condition: being a unit of account. The US Dollar is considered a real currency because it satisfies that critical condition. 1 USD is just that: 1 USD. It is backed by nothing other than the full faith and credit of the United States Government. It is not a derivative.

BTC, on the other hand, is a derivative, and is not a unit of account, as it is backed by the nominal value of the USD, which, in this example, is the independent variable.

In order for something to be considered a unit of account, it must have an independent value metric. If it does not have an independent value metric, then its value, by definition, is derived from some other thing. When the value of an asset is derived from the value of an underlying, that asset is defined as a derivative.

Eye on Opiant

Indices are strong this week, however, certain overextended stocks are dropping like rocks; e.g. OPNT (Opiant Pharmaceuticals) is doomed re: opioid crisis. Gov't shutting down.

Tesla Stock and Rocket Man's Incentive

At some time, 28.7M shares of Tesla common stock (TSLA) must be purchased in the open market by the short interest, which is ~$10,390,659,760 of buying power. If Rocket Man shorted $1B worth of TSLA at today's close and put the price up 10 by bidding to cover, he would lose $28M on the trade, however, his total net worth would increase by $382M, and presto: a $354M net profit or >1,200% risk adjusted return, by shorting your own stock. A thing of beauty.

QOTD

From the Brilliant Ed Seykota:
"The Zero Point, or Zero Information Point, is the condition of nothing in CM upon which to base a judgment - including, say, even the very judgment that judgment itself is good or bad.

It is dancing joyously, with abandon. It is splashing your hand in a mud puddle and just being there with the experience. It is putting on a trade and succumbing to the enchantment of the whole process including the market, yourself, the prices, the pluses and minuses and the pretty colors on the monitor screen.

It is being able to read the markets directly and having no attachment to the ability to do so.

It is the sourcing condition for creativity. It is the feeling of feelings passing through, leaving no trace. It is beyond description in words and yet it somehow rides along from one person to another when Freds communicate without words.

When you have zero information, and do not even know that, then there is nothing you do not know."

QOTD

"No great performance ever came from holding back."

-- Don Greene, motivational coach, former Green Beret

Open Positions (07-27-2017)

Why Negative Trump News is Good News

It's been seven consecutive months of anti-Prez accusations and seven months of higher prices. Should the accusations stop, I'll be bearish.

If the underlying fundamentals of the economy were deteriorating, then dems would simply sit back and wait til next election and campaign on Trump/GOP incompetence. Since that's not the case, dems are attempting via any possible means to discredit the Prez until any sign of economic weakness appears in the data. Given that, and the fact that 80% of journalists in US are democrats, any non-economic-related negative news regarding the Prez should be interpreted as proof of underlying strength in the economy - a positive sign for wage growth, employment, capacity utilization and the stock market.

Open positions (7-16-17)