Rules of Investment “News”

September 13, 2016

It does not matter if you get your financial news from Barron’s, the Wall Street Journal, Financial Times, CNBC, CNN or God forbid Seeking Alpha, Twitter or StockTwits.  It’s all hyperbole. Every last word from every last source.  Even the great headlines that are derived from the venerable investment banks like Goldman Sachs, Morgan Stanley or Bank of Americal/Merrill Lync are all full of opinions, sometimes errors, and at times outright conflicts. 

First rule of reading or watching Wall Street hyperbole is to test it. Is someone selling you a stock, thesis or idea. If they are selling you ANYTHING them STOP. All you may take from the information are facts you may not have known. You must learn to separate the facts from the opinions. When someone is selling you something they are often intimately intertwined.  Their agenda may be financial or political but regardless the information is intended to help the author or broadcaster.  Not the reader or viewer. 

Second rule is that EVERYONE “talks their book”.  This means they love to disseminate information that will help them make themselves money. Sometimes it’s by pumping a direct investment they own. Other times it’s less conspicuous and involves misdirection that still in someway benefits THEM.  The better the manager the better they are are at selling their book without disclosing their holdings.

Third rule is that the only information you should ever trust is data that you can confirm from original sources. For example, you can read employment headlines from the media, or catch a blurb on the news.  I challenge you to compile 10 angles of the same data point. If you can do that you may begin to understand.  If you hear a sensational headline, say about and economic data point or a corporate announcement, first step is to stay off the blogs and Twitter.  Second step it to read the original source for yourself. There was an employment report over the summer that sent the market tumbling and broadcasters reeling. Upon inspection at the BLS website, the folks who report the data, it was clear that the headlines were spinning one negative angle when the proponderance of the report was average to mildly positive.  A keen trader would have bet against the day’s sentiment. 

Fourth rule is that the venerable investment banks produce research for their Investment Banking clients. Not their wealth management clients.  The difference is time horizon and the inherent conflict often leaves retail investors taking the bad side of a “smart money” “trade”.  Investment bank research should never be confused with “investment research”. As an investor you (like Warren Buffet) are putting money to work for years and years.  The investment bank publishes research with a three month view, if that. 

Fifth rule is investment bank ratings are misleading.  Many firms use Buy/Hold/Sell or Overweight/Equal Weight/Underweight or some form of a “stop light” (green/yellow/red) ratings system.  Most investment banks only provide research on companies that they have taken public or are actively engaged with. Despite Sorbanes Oxley if you think you’re getting conflict free research, you’re fooling yourself.  Yes Chinese walls exist today to limit the most perverse forms of conflict, but there has always been an adage on Wall Street that buy means hold, hold means sell and sell means the company is going out of business. The key is that the banks don’t like to provide sell ratings unless it’s abundantly clear the company is failing in someway. The key point is that failing companies generally don’t make great investment banking prospects.  The others do and a corporate CFO is unlikely to engage the bank that has given it a poor rating or is telling its clients to sell the stock.  

The Sixth rule is that some sources are so consistnatly wrong you can almost bet against them. Start your own experiment. Be sure to track recommendations from the same person not just the same news source. I.e. A specific column in Barons or your favorite stock promoter. Create mock portfolios online each time your source publishes new ideas “buy” them in that date at that current price.  Let it run for a while. The more you track the less you will trust anyone.  I promise.  And if they are telling you to short, well then you can add that to your mock portfolio too.  

Seventh rule is that the less time it took to write or broadcast the comment the less credibility it has. I’m sure they’re could be one needle in every haystack but I would beg you to NOT go looking for him or her. Every person who tweets a stock tip or market tip is not sharing their brilliance but rather instigating you to help their trade. It’s not always clear what they own or which side of the position they are on, but I assure you the brightest minds in investing are not simultaneously sharing their best ideas with you in a public forum. 

Eight rule is a follow up to the seventh rule. When you do find that brilliant investor who is generous enough to share his or her best idea with the world then simply STAY AWAY.  The simple reason is that every other lemming has followed into a trade they don’t understand and now it has become “crowded” with imbeciles.  Ironically the initial movement helps the first investor who announced the “brilliant idea,” but the more people that follow in, the lower the average IQ of each additional investor.  As soon as an adverse headline hits that trade you will see the lemmings fall faster than you can imagine. Only the folks who did the original research will know what to do, but you won’t read about their actions until months after they have taken them. 

Ninth rule is that extremes always end with mean reversion.  The media loves to sell papers, magazines, page views and ad space. The more they can get your attention, the more money THEY make. When moments become scary, the media loves to go to extremes.  The more extreme the story, the better the odds you will read it or tune in. Of course that is also the time of the highest probability of mean reversion.  I remember reading about negative oil prices as a story from Davos last year when oil was bottoming.  Oil rallied about 80% from the time that story was floated earlier this year. 

The tenth and final rule is that no one is better at protecting and MAKING money than YOU!  The best investments you ever make will be the ones you spend the most time researching on your own. Most of your time will be eliminating ideas once you realize the risks in the investment.  Test your beliefs and the beliefs of the source of your idea. If you can beat an idea up on all sides and still feel comfortable with the risk and reward then you will have the most important skill of ALL great investors.  That is STAYING POWER.  This is what separates good and bad investors from great ones. If you know what you own, why your own it and the detail of any catalysts you anticipate, then YOU will make INFORMED decisions that will ALWAYS work out better than actions you take as a result of headlines.  

Standards of the Presidency

September 12, 2016

If we do not hold candidates to higher standards as they campaign for the highest office in the land then we cannot expect them hold them to higher standards once they are in office.

This is not a compromise that should be dictated by either candidate. This is OUR democracy and the standards set are by definition, ours.  If we let them lower the bar for their needs, we will not be able to raise it later for ours.

Trump and Clinton are playing a dangerous game with our democracy. It’s time we raise the bar for both of them.

We must require that they campaign by our rules and not allow them to rewrite them.  Social media has many great values in the transparency it offers. However we are being manipulated by an abundance of ad hoc statements and misdirection.

#takebackthepresidency, #Clinton, #Trump, #makeamericagreatagain, #itsourcountry

Nominal rates don’t matter any more. 

August 14, 2016

We are in a currency war between superpowers.  It’s ironic it’s called a “war” as it’s better orchestrated than Star Wars was.

Life at the zero bound distorts a few things.

1. Risk is unarguably priced as a premium to treasuries (for finance geeks).

2. Risk pricing at the zero bound collapses along a convex curve. Distortions occur because the nominal rate is low punishing savers.  Distortions also occur as credit spreads tighten to new nominal lows, irrespective, of historical ratios. .

3. The demand for yield converges with the demand for risk, something that has not happened in a long time.   Assets become mis priced in both nominal terms and along historical ratios.

4. Looking at nominal differences without noticing historical ratios is like looking through a one mile square of the moon and making grander assumptions about other small areas.

5. Currency operators need to orchestrate a systematic, measured and rotating dance of interest rates in order to give each currency nation a chance to grow – as their local currency declines, and their exports move into favor.

6. If this can he measured it would likely result in a period of global coordinated easing until all currency actors are back on a reasonable secular growth path, ignoring cyclical tendencies.

7. As rates around the world among funding currencies converge, it becomes the real nominal relationship between currencies (ignoring historical tendencies) that stears global tightening or easing.  The wider the spread between two funding currencies then the faster demand should avail itself for the best real return.

8. At the Zero Bound the highest yielding currency will inevitably be teathered to the lowest yielding currency.

9. Global easing and tightening becomes a web of relationships among major funding currencies. The US can no longer “remote control” risk just using Fed Funds. They MUST consider the consequences and risks among all actors.

You’re being duped

August 7, 2016

When did the campaign trail for the WHITE HOUSE become a cascade of misdirection from ALL sources? We were supposed to have been given to credible candidates by both parties for the highest office in the land so that we could spend this crucial time debating issues, policies and solutions. Not being mis-directed into fact checking and he-said, she-said nonsense. We’ve set the stage for both candidates to enter the White House without much direction from the electorate on policy. Regardless of who wins we’ve abandoned our democracy.

Extended Cycle

July 14, 2016

With rates at history-of-mankind lows, coordinated central bank policy, just in time manufacturing, globalized and flexible labor, and on the heels of the worst financial crisis of 100 years what if this is a bull market in slow motion?  What if this bull market becomes a 20 year recovery.  

Here’s a narrative of why markets could continue to rise. 

Pessimism is at all time lows.  Lower than in March 2009. Stock market valuations are above averages but not near historic highs and equities on a relative bases are eons cheaper than bonds which trade at an equivalent price-to-earnings of infinity in Europe and Japan and around 70x in the US.  

The dividend yield on the S&P is about 50% higher than bonds, and equity subsections like emerge and technology are still very cheap on a yield basis in a yield starved world. 

While there are local areas of real estate excess like in NYC the broader main-street recovery is still underway as household formation was delayed a decade by millennials.  This, the “echo-boom” has yet to enter their highest earning (and spending) years.  

My generation, GenX, is a population bottleneck which is set to be digested as the echo-boom takes over. 

No one knew what would happen with Brexit (and no one still does). Likewise, all the whiz-bangs on wal street and On TV may just be missing the forrest through the trees. 

Brexit, Predictions, Polls and Bias

June 16, 2016

Story of the week, and after 6/23 could be the story of the year is the looming referendum in the UK to decide if it will stay in the European Union. 

A surface level understanding of the situation teaches that the UK, after Germany is the largest “net” contributor into the EU financial partnership. The balance of payments to and from the EU systems means that the UK ends up with the second shortest straw as it comes to the measurable financial benefits of the economic union. (

Greece by contrast is one of the biggest beneficiaries receiving nearly four times what I contributes in the balance of payments. 

This single factor is helpful to understand much of the unrest over the last seven years and the pending referendum and ensuing global markets uncertainty for the outcome. 

I’m not intending to discuss the depths of the issues facing the EU, not am I qualified. I have, however, been sucked into watching the daily polling data via a variety of sources including Bloomberg’s Brexit Tracker ( as well as PredictIt’s poll-wagering system. 

For full disclosure I have a modest wager that the vote next week will be for the UK to remain in the EU. This is based on immaterial  facts and more of a social common sense than any good on-the-ground intelligence. The level of change and uncertainty that will result from the UK’s exit from the European block simply seems too palpable and I cannot imaging 51% of the voting population will want to risk damage to the UK economy and ignite conversations that could lead to the unwinding of the economic block. 

What has facinated me is the run up in polls from a probability in the 20% range to nearly 50% range is less than two weeks, based heavily on polling data. 

I have learned that if you had to split the deongraphics, the older generations within the UK would opt to remain in the EU while younger generations would opt to exit. 

There have been some article talking about the polling proces which in this day and age is largely digital. It inflates my curiosity to think that there could be a strong adverse selection bias in the recent polls, particularly as many are driven by technology which is assumed to be far more prolific among younger voters. 

In addition as prediction markets have re-proliferated in recent years, I followed my curiously to track the odds on PredictIt over the last week or so. 

The gambling bug got the best of me, so I signed up and put about $100 bet on a “No” vote for next week. 

After I entered my order to buy about 160 contacts for about $100 a bet that would pay me $160 if I’m right and leave me with 0 if I’m wrong (not great odds, but to me seemingly easy money)  I figured well if I like the long “No” vote, I would probably also like a short “Yes” vote. 

So without proper research I simply attempted to do what I though was sell a “Yes” but the resulting transaction simply sold my “No” contacts for about a $3 loss (the spread at that time).  After a few minutes and not being able to find my two open positions, I realize my follie, and I immediately rebought my “No” votes. All in I probable paid about .60 cents (worth about .53 cents today). 

After a couple of days and seeing the trade go against me, but seemingly more swiftly than even the polls would suggest it occurred to me that in a market where the only option is to buy a No or a Yes that distortions are possible. 

Conceivably the sum of the prices for No+Yes  should equal $1.00.  This is not completely true as Predict it takes about a 3 cent spread on the bid/ask. This is the balancing mechanism in place to ensure all bets between rational actors can settle for $1. If Yes gets bid up the next buy of No should be paying less for it. 

However here is my concern:  Those who are betting on a Yes vote are one part speculator but it’s conceivable (even in this micro-marketplace) that there are some bonafide hedgers. Bonafide hedgers would pay more than the probability  up to an offsetting price against their hedged position.  It is unclear if shorting the GBP or EUR or going long the Yen or USD will truly hedge an adverse outcome from the referendum. Although those are the cheapest ways for large institutions to do it. However, PredictIt provides direct protection which is worth a premium if the trade size and volume is sufficient.  

Also, since registered participants are not allowed to sell-short either the Yes or No bet, there is no true counter-balancing trade and it’s very possible that prediction markets are creating an adverse feedback loop for a “Yes” vote as the insurance becomes over priced to the probability of the outcome. 

That said these are binary trades, and either you will be 100% right or 100% wrong. And in a world bubbling with populism anything is quite possible. 

It’s surprising to me that few pundits are talking about the self fulfilling reinforcement of excess polling and prediction markets.  If so, such big data endeavors me become a form of campaigning that can alter outcomes in our post-modern world. 


June 7, 2016

All this talk of Trump.  All this aggrandized media attention and even the smart people have missed that THEY are feeding the machine.

So many of us are “afraid”, “frustrated”, “surprised”, or “concerned” by the dominance Trump has had in the delegate race.

However it is mostly “us” who actually read and write the news that have fed his insatiable desire to remain in the spotlight. When will we all realize that the best way to squash his power will be to turn the news cycle past him and not let him back in.

When we stop reading about Trump, then we will remove his megaphone.

The power remains squarely in the hands of the press.  If they want this guy as the GOP nominee, then there is nothing we can do but hope that Hillary can beat him in the general election.

When the GOP fails to endorse him, however, it will only further his appeal and power base.