Tag Archives: trading

Robert Schiller: A Lot of What Happens in Markets is Driven by Pure Stupidity

21 Jul

Probably the best quote I’ve read in recent memory, via TheAnalyst_HK, from Yale Economics professor Robert Schiller (emphasis mine):

Economists who adhere to rational-expectations models of the world will never admit it, but a lot of what happens in markets is driven by pure stupidityor, rather, inattention, misinformation about fundamentals, and an exaggerated focus on currently circulating stories.

I think the entire quote is nearly flawless, but the part I’ve highlighted, primarily the latter two issues, strikes me as effectively epitomizing the behavior I see day in and day out, whether in the financial media, my twitter/stocktwits stream, or in closer knit financial/economic circles.*  In a world of momentum and technical trading, these missteps are so widely prevalent and painfully apparent I often find myself close to banging my head on my desk.  I regularly see stocks return 5% or even 10% DAILY, on no real material news, let alone news that suggests a firm is instantaneously worth 10% more.

Efficient markets my ass.

When you treat stock prices as if they’re some ephemeral, transitory dot on a chart that moves based of supply and demand & trade accordingly, you ignore a great deal of information and, while you may make money in the short term (and good for you if you do), you’re taking on an enormous amount of unaccounted for risk in so doing.   Look at a firm I’ve briefly discussed here, ZAGG.  It’s up  ~80% in the past 2 months, and up over 100% year to date, showing no signs of going down anytime soon.  Has business improved so much, in less than a quarter, to rationalize such a run in the stock and current valuation?  I’d like to remind you of a quote from casino magnate Steve Wynn I’ve used here at least a handful of times before, via Long or Short Capital:

[Responding to a question as to why Wynn issued equity at $154 at the end of September and then paid a dividend of $6/share on December 10th. Note that Wynn shares had traded in the $80s in June of last year and at $120 yesterday.]

It is the job, and you can take this as a final statement on the subject going forward. It is the job of board of directors and especially of the CEO to take advantage of the market when that market movement is extreme. When a company increases its value by 100% in 60 days, that’s an unnatural movement of value and the market also goes the other way sometimes. These unnatural movements in value, no company gets to be worth twice as much in 60 days as it was before to any intelligent person, so when that happens, we take advantage of it.

New distribution deals are great, as are new product launches, but more often than not when you read beyond the headline, they’re little if anything to write home about, let alone send the stock price soaring.  In this case, the great new distribution deal is only for one freaking product for one phone on one cell network that combined will likely add maybe a few hundred thousand dollars in sales to a firm doing over a hundred million annually.  New products are great, but there’s probably not nearly as many people lining up to buy $100 iPad case/keyboards as there are iPads.  Not that ZAGG needs to sell the keyboard/case to everyone who buys an iPad, hell I’m sure they’d be ecstatic to sell to 1 out of every 100 of the 9.25 million iPad buyers last quarter.  Unfortunately, 1. they aren’t that popular (and likely won’t ever be) and 2. these announcements and the stock price moves they seem to instigate seem to be completely disconnected from the extremely long list of orange and red flags in the firm’s SEC filings.

I do not have, nor have I ever had a position in ZAGG.  Would I have liked to make money as the stock marched upwards?  You bet your ass!  Did I see it coming, even with strong momentum?  Nope.  Do I think it’s topped out?  Probably not, especially with the large short interest, although I’m not going to lie, if I can get my hands on some Aug or Sept $16 puts for under $2, I very well may pull the trigger.

Just to be clear, I don’t mean to attack momentum/technical/swing traders, not even by accident, as I have learned alot from them and I count many among my friends.  However I am absolutely attacking blind adherence to the strategy (or any strategy!) without paying attention to other factors.

As a fundamental guy, I’ve learned that I have to check out the technicals on a stock before I get in/out of a trade and set stops, lest I decide to say, bet against the market and get steamrolled ala Whitney Tilson and Netflix.  Similarly, technical traders would be well served, at the very least from a risk management perspective, to learn a little more about the fundamentals of firms they trade and monitor their own confirmation bias, especially when a lot of the time, all it takes is look at Stocktwits and a few financial sites!  I think just as fundamental investors can utilize technical/momentum information, tech/momo traders can use fundamental information to help them.  As lame as it sounds, I think we can all help each other, so long as we’re open minded to other perspectives.

Short term profits are absolutely awesome, until they suddenly go *poof* when the market capitulates or changes its mind.  Better to use all available information to see it coming and get out before hand (or avoid putting capital at risk in the first place).


*No doubt I, myself, am sometimes guilty of these very things, but I try quite hard to be acutely self-aware, however good I am at it is another conversation for another time.


Financial Voyeurism – 13F Chasers: why you can’t beat fast money

21 Feb

45 days after the end of any given quarter financial television programs and bloggers race to be the first to report the holdings of – insert name of big hedge fund here. They analyze the report to see what the hedge fund managers are buying and selling. However, the question remains – is there any real value in these filings for investors on the outside looking in? Continue reading

Guest Post: Managing the War Between Hedgers and Liquidity Providers, by @eradke

2 Nov

The following is from the perspective of a futures trader but can be applied to all markets.  Being a trader in 2008 was great; being an investor was not so great.  Today it is not that forgiving for either side.  I was naïve to think that 2008 was not going to last forever.   I knew where the money was coming from, the retirement accounts of my fellow citizens of the World.  You can make a moral judgment if you want, but it was my job to provide liquidity.  I could have lost it just as easy.

In early 2009 I saw the markets changing.  It blew out a lot of people.  I walked away for six months.  It was depressing, people I saw every day just disappeared.  The biggest problem with trading is that you can never really spend the money.  For an independent trader, you are the business.  What the average person sees as cost of living, it is our overhead.  Despite working with money every day most traders are not that good at managing it.  They look at as an income, something constant, when it is really is just a bonus check.  When the market changes, there is natural attrition.

The top of the food chain in markets are institutions, followed by professional traders, and lastly retail.  The first people to leave are the retail.  Retail does not like to lose money; they do not have the wherewithal to figure out why.  When retail goes away professional and institutional traders pick on the weakest traders.  Eliminating another class of market participant.  As the range becomes tighter and volatility slows the top professional traders leave.  How motivated would you be if you had to go to work making 5% of your normal pay and it cost you the same amount to get to work?

When everyone is making money there are no problems.  But when the pie gets smaller, participants fight for their survival.  They become animals fighting for what seems like their last meal.  They run out of money, they feel the game is rigged, or they feel there is no upside in taking the necessary risks.  If participants stay away for an extended period of time the mechanics of the market change.  When this happens, the market cannot perform its function.  Price discovery, raising capital and hedging.

The easiest way to get people back in the market is for the markets to rally.  That is why none of the underlying fundamentals matter, at least right now.  Rallying is the only way for the market to repair itself.  The problem is when it does rally those that were long will use the new money to get out.  If there is not more new money we will break again.  A market is as proportionately functional as the willingness and amount of participants in said market.  The most efficient way to get participants back is a feeling they are missing out, ie rallying.  This is also expensive.

The other way and most destructive way to keep liquidity providers in the markets is by “volatility jumping”.  As we saw with the equity index markets this is destructive and it is the largest market.  It causes the price of commodities to rise, oil, corn, meats, etc.  It can be done with less money because there are less people trying to make it efficient.   Instead of taking money from retirements they take it from the businesses providing goods.  In most cases it is passed on to consumers in the form of higher prices.  That will end badly.

The CME Group, NYSE, etc are making dangerous assumptions.   Much like the market assumed housing prices would continue to rise forever; we are assuming the market is going to continue to have liquidity providers and hedgers. People like me, take advantage of inefficiencies.  We make the market efficient, when the risks are close to the rewards.  We watch otherwise.

The biggest change from the past is that the major American exchanges are now corporations.  Their motivation is to profit, they do this by increasing volume.  It is their fiduciary responsibility.  There has been a shift of advantages, in terms of commission breaks, to retail investors.  They are sacrificing quantity for quality.  A constant stream of one night stands and sport fucking.  As I mentioned before retail leaves first.   A problem for efficient markets.

I recently attended the World of Opportunity Event at the CME Group.  The panel consisted of Scot Warren, Managing Director, Equity Index Products & Services — CME Group, Tim Gits, Senior Vice President and Head of Sell Side Relations — Eurex, Raj Chopra, Director, Corporate Development — ICE and Marco Bianchi, Senior Vice President & Head of Business Development — NYSE Liffe.  I was curious to see where they thought the new opportunities were/are.

All four panelist were really good, Scot Warren was an exceptionally great communicator.  One of the topics they failed to talk about is hedger and liquidity provider relations.  This is a real problem.  I am sure they are addressing the problem but to my knowledge not publically.

I am always considering who is on the other side of my trade.  What time frame are they using?  Are they retail, another professional, or an institution?  Are they accumulating a position or are they scalping?  I am beginning to wonder if there will always be someone.

By Eli Radke



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