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http://www.macroaxis.com/invest/marketCorrelation/SPY--SPDRs
http://seekingalpha.com/article/343931-5-etfs-to-consider-for-protection-against-inflation
http://seekingalpha.com/article/473601-adding-relative-strength-to-your-bond-etf-portfolio
correlations:
etfscreen.com/corrsym.php?s=SHM
etfdb.com/etfdb-category/inflation-protected-bonds/
http://seekingalpha.com/article/187568-duration-and-tips-the-looming-scandal
AGLS
todo: consider buying wdti and more commodities if the market rebounds
compare wdti to RYMFX after the commodities market gets better
gold seems to be tracking commodities down recently
a mistake of mine: to hold junk bonds when i thought the market would fall
a good analysis of the situation right now in the markets:
http://crackerjackfinance.com/2012/05/deja-deja-vu-%E2%80%93-a-third-summer-of-european-crisis/
basically my previous analysis, namely that U.S. stocks are too high relative to the sluggish growth in Europe, missed out on this important new risk factor -- namely, that Greece may exit the EU -- not that that would shake the markets IN ITSELF, but it would shake the markets because this means that questions would be raised about the rest of the EU, and in particular it might cause a run on the banks as people worry about the Euro losing value. In fact, the banks in Belgium, France, and Italy are having problems too. http://www.reuters.com/article/2012/05/17/us-banks-deposits-idUSBRE84G0MG20120517
The EU has no lender of last resort so we have a problem.
My analysis, which seems to be identical to everyone else's is that the politicals leaders in the EU are by now familiar enough with the situation to take action, so most likely any crises will be contained. But there is substantial tail risk.
The Greek election is on June 17th. Expect volatility to rise until then.
I expect stocks to continue to fall, but i'm not very sure. maybe it's a good time to buy.
http://quantifiableedges.blogspot.com/2012/05/strong-move-to-new-high-in-vix.html
VQT
acwv http://news.morningstar.com/articlenet/article.aspx?id=555214
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http://www.businessinsider.com/japan-is-never-going-to-default-2012-5
publically traded hedge funds:
The Man Group’s problems are a cautionary tale for others in the industry, and other hedge funds have also suffered after going public, including Och-Ziff Capital Management and the Fortress Investment Group. Och-Ziff is currently trading at less than a third of its initial public offering price. Fortress, which was trading in early 2007 at about $31 a share, closed Tuesday at $3.73.
By contrast, Winton Capital Management, another computer-driven trading shop, has flourished. Founded by one of the original scientists behind AHL, David Harding, Winton’s assets have swelled to nearly $30 billion. The firm charges management fees of 1 percent and performance fees of closer to 20 percent.
EMG.L Man Group Plc Unsp A (MNGPY.PK MNGPF.PK lon.emg
" With $59 billion of assets, Man Group is now facing the uncomfortable fact that it could be kicked out of the FTSE 100 index in June, which would lead index funds to dump the stock. The traders at AHL who pursue a managed futures strategy will have to turn performance around quick. They are already 14% below their high water mark. "
Oaktree Capital
http://en.wikipedia.org/wiki/Hedge_fund#Listed_funds
http://www.reuters.com/finance/stocks/overview?symbol=EMG.L
http://uk.reuters.com/article/2012/04/19/uk-mangroup-hedgefund-idUKBRE83I14M20120419
knight capital kcg runs trading algorithms: http://seekingalpha.com/currents/post/455711
scary picture: 
http://www.cnbc.com/id/47515182
OECD growth should be 1.7% barring euro catastrophe
US growth 2.5% but i think this doesn't mean the stocks would want to grow that much, b/c the reason ppl like large cap US stocks is partially that they're international.
So let's say that US stocks "want to" grow 2% this year, plus a little more out of irrational exhuberance (let's say 2% exhuberance).
however this must be balanced against a potentially large decline if this event takes place: http://www.intrade.com/v4/markets/contract/?contractId=713737 . Currently intrade rates that at about 40%
so if X is the magnitude of the decline, the arithmatic expected value of US stock growth is 4% * .6 - X*.4
the breakeven point is then X = 6%. Which doesn't seem impossible if someone leaves the EU.
therefore, it's not unreasonable to bid U.S. stocks at 0% growth over this year, although most likely the EU will be fine and stocks will rise.
the markets recently:
Middle of 2010: Markets: Ok here we are recovering Central banks: here's some MONEY! Markets: yay!
Second half of 2011: US market: yay! US market to Europe: hey why u lagging? Italy: i still have some debts here y'know Markets: i'm scared! Central banks: O Rly? here's some more MONEY! Markets: yay!
beginning of 2012: US market: i'm bored AAPL: Hey guys! US market: Yay!
EU market: Guys? Where'd everybody go?
April 2012: US market: Wow companies make lots of $$$! Imagine how much they'll be making next year! Team America! Yeah! India: I'm tired Spain: I don't feel so great.
Beginning of May 2012: EU market: Guys? I'm getting scared US market: Letsee it's May what's on my calendar for may -- oh everyone sells in May (goes down a little) Alex Tsirpas: Hi guys! Markets: meh.
Spain: ouch. Some ppl: hey US market, why did you, like, go way up if you were scared of Europe? Nothing's changed since last year. Alex Tsirpas: Btw we're like, seriously, NOT leaving the Euro. Markets: (applying postmodern deconstruction; "Derive another reading of the text, one in which it is interpreted as referring to itself. In particular, find a way to read it as a statement which contradicts or undermines either the original reading or the ordering of the hierarchical opposition (which amounts to the same thing).") AAA!
May 21: G-8 meeting: message to world: "We definitely, certainly hope that everything works out ok" Traders, to US market: y'know, you can't just fall forever. US market: oh ok fine, i'll go up today
May 22: Asian market: oh the US went up, they must know something, because that's where all the money is, so i'll go up too EU market: oh the US market went up, they must know something, because that's where all the money is, so i'll go up too US market: oh the EU market went up, they must know something, because that's where the crisis is. i'll go up. Papademos: Hypothetically, if you thought about us leaving the Euro, you see that it would be a terrible idea and we shouldn't do it, and therefore we won't. US market: WHAT THEY THOUGHT THE FORBIDDEN THOUGHT that does it i'm not going up
May 23: Asian market: what, i heard someone in Greece talked about leaving the EU! (goes down) EU market: hot damn, we forgot to go down for the last few days! (goes down extra, making up for lost time) US market: oh no the EU market went down, they must know something, because that's where the crisis is! (goes down)
www.tradestreaming.com/2012/05/23/why-im-a-converted-believer-in-investing-in-p2p-loans/
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http://greenbackd.com/2012/05/23/dividend-yield-doesnt-work-what-does-three-key-conclusions/
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http://www.mebanefaber.com/2012/05/24/global-shiller-capes/
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"You scored 84.27 out of 100"
http://www.mebanefaber.com/2012/05/23/trading-system-backtesters-and-updates/
http://blogs.ft.com/beyond-brics/2012/05/24/em-investing-check-out-the-grid/
Another superb ETP site, ETFreplay.com, recently launched a Volatility Target Backtest tool. What this tool is designed to do is to demonstrate what historical returns would have looked like if one had taken a high volatility ETP such as a leveraged ETP, a VIX-based ETP, etc. and combined with a dynamic cash allocation and historical volatility data to limit exposure to a target volatility ceiling.
An example may make this easier to visualize. Let’s assume that you are bullish on the Russell 2000 index of small capitalization stocks and want to get some long exposure to these stocks with the +2x leveraged ETP, ProShares? Ultra Russell2000 (UWM). Last August, however, the 10-day historical volatility in UWM spiked over 160 and right now it is at 41 – and you decide those levels of volatility are unacceptable, particularly with all the uncertainty in Greece and across the euro zone.
The solution? How about a portfolio that dynamically allocates between UWM and cash, (here using the iShares Barclays 1-3 Year Treasury Bond, SHY), based on 10-day historical volatility data and targets a forward volatility level of 20%.
The graphic below shows the ETFreplay backtest results of such a portfolio, using a monthly rebalancing period and starting in January 2007, when UWM was launched.
http://www.crossingwallstreet.com/archives/2012/05/so-wheres-the-value-premium.html
http://seekingalpha.com/author/imfdirect/articles
http://blogs.worldbank.org/prospects/
i was missing this energy story:
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EIRL
http://seekingalpha.com/article/619351-bonds-do-not-make-stocks-cheap?source=yahoo
this paper suggests that companies that make political donations tend to give lower returns to shareholders:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=972670
load-to-deposit ratios for a number of banks (ldr):
sukuk: http://news.xinhuanet.com/english/business/2012-05/27/c_131612993.htm
http://rfs.oxfordjournals.org/content/22/5/1915.abstract http://seekingalpha.com/article/332262-the-limits-of-quant-models-for-tactical-asset-allocation?source=yahoo
" Robert Martorana picture More articles by Robert Martorana »
When The TIPS Bubble Bursts: A Cautionary Tale From Argentina Mon, Mar 5
Time To Add VIX? A Negative Roll Yield Makes It An Expensive Form Of Insurance Tue, Feb 28
Book Review: Frontiers Of Modern Asset Allocation, Part II Wed, Feb 8 inShare
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PompanoFrog Comments (451)
A "quant" model that trend follows is a "momentum" model. They may use the "quant" name, but they are not. Most hedge funds use true quant models. These use fundamental factors such as money supply, interest rates, valuation factors, etc plus some technical factors.The real benefit of a quant model is not only understanding the ongoing economic relationships, but in being able to invest with some degree of confidence during periods of chaos.
My own research suggests that all of the double digit performance of equities is during periods of chaos in the real economy. During the periods of calm there are little long term profits.
1 Feb, 06:11 PMReply! Report AbuseLike0
Frank123456 Comments (22)
<<I welcome comments from readers to point out the mistakes and limitations of my thinking.>>It sounds like you are glossing over the fact that you can blend human decision-making with quantitative analysis. Indeed, all quantitative work is programmed by humans and assumptions on economic and financial relationships can be viewed to be stable or changing. If its changing -- then the assumption based on historical data is probably false --- and you could consider fading it. If you believe the relationship is stable, then perhaps it's a go-with variable. Or perhaps its just deemed to be a random walk and you can't use it. In any case, you consider it and make a decision on it.
In your moms portfolio, it sounds like you are biased towards dividend stocks and corporate bonds in your allocation. So there is a built-in assumption that you think those will perform reasonably well on a risk-adjusted basis. A quant could take that same idea and choose to tilt 20% towards dividend stocks or corporate bonds based on X, Y or Z. Or could choose to just leave as is.
There is no right answer -- every allocation has assumptions baked into it, whether conscious of these assumptions or not. Saying quants are X and you disagree with X is to attack a straw man.
http://bit.ly/zrR413
1 Feb, 06:47 PMReply! Report AbuseLike0
Robert Martorana Comments (516)
Frank,
I can see how you would think I'm setting up a straw man to win the argument. In a sense, I am debating with a hypothetical quant who is slavishly following a mathematical system.I did this because I did not want to publicly attack a fellow contributor on Seeking Alpha. I have someone in mind, but I don't think it's constructive to call him out. Instead, I will invite him to a debate offline.
For now, I stand by my core thesis: "Using a pure quant system for tactical asset allocation is irresponsible, no matter how popular it becomes."
I appreciate your comments--hope I addressed your point.
Rob
1 Feb, 07:28 PMReply! Report AbuseLike1
candy-ra Comments (32)
The behavioral research suggests the exact opposite. Of course, it's hard to debate humans in general vs models in general. But most people have behavioral biases (hold losses too long, sell winners too soon, overallocate to areas they believe they know better than anyone else etc.) that cause their investment performance to lag. I do believe simple models (the ivy/cambria/jeremy-seigel one - roughly asset-class timing based on a 10-mo/200-day moving average) help humans correct for these biases and reduce risk (improve risk-adjusted return). Yes, that is a momentum model... it helps you remember to sell your losers and move on, which most people don't do. In the end, you need balance. If your black box is telling you something that your brain tells you is stupid, you probably shouldn't do it. But you should think and consider what it's saying - maybe it's your behavioral blinders that are letting you down.
2 Feb, 01:41 PMReply! Report AbuseLike0
Robert Martorana Comments (516)
Pompano:
Thanks. In retrospect, I should have just said a momentum model, though it's not always the same thing.
As you noted, a true quant model allows for fundamental inputs, and for human judgement. Unfortunately, I have seen some quants that slavishly follow whatever the black box tells them. I'm even thinking of challenging one to a debate.
But I digress. As you noted, the profits are in the chaos. I actually did OK during 2008-2009, since there were ample warning signs. I got back in too early, but not much. How about you?
Rob
1 Feb, 06:47 PMReply! Report AbuseLike1
SeekingTruth Comments (832)
In my early 30's,. I devised a layman's file that I called my FIESTA file.
It served me fairly well when I tended it.
My job, family, hobbies, golf, moving around, designing and building houses, etc. did blunt its effectiveness however.FIESTA was an acronym for:
F = Fundamentals
I = Interest rates (all of them), and Insiders.
E = Economy (as much as I could absorb)
S = Sentiment & Seasonalities
T = Technical's (mostly for tie breakers, timing and close calls), also Taxation. Also Treasuries, including Zero coupon bonds.
A = Administrative (Congress, new laws, etc.), and "most trusted" Advisors"
GTAA is Melane Faber's thing! why doesn't it work?
this article basically argues "because trend following is stupid": http://seekingalpha.com/article/332262-the-limits-of-quant-models-for-tactical-asset-allocation?source=yahoo
it makes a lot of good points
http://seekingalpha.com/article/349061-book-review-frontiers-of-modern-asset-allocation-part-i
note: ppl say that mean/variance portfolio optimization would be a good idea in theory, except: (a) due to the nature of exponential growth, small estimation errors in the mean expected return and variance of expected return of various asset classes lead to large mistakes in the outcome (b) since real-world data is scarce, we end up using datasets that probably overweight the last decade or two (since that's all the data we've got). Which means the model will tell us to overweight assets classes which have done well recently, which is the opposite of what we should be doing
http://rfs.oxfordjournals.org/content/22/5/1915.abstract suggests that we'd need 3000 months (250 years) of data before the error bars on this sort of estimation would get reasonably low !
recc'd by Robert Martorana as examples of 'good', human-run trend following: http://portfolios.morningstar.com/fund/holdings?t=WASCX®ion=USA&culture=en-us http://quote.morningstar.com/fund/f.aspx?t=paaix although he may not like human-run trend following in general
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" The Real Markowitz Portfolio: How did Harry Markowitz manage his own money? Did he use a complex algorithm to determine his asset allocation? On page 306 we find that Markowitz told Jason Zweig the answer in 1988: Markowitz had a 50/50 mix of stocks and bonds. Somehow I find it heartening to know that Harry Markowitz used heuristics for his own portfolio. " -- http://seekingalpha.com/article/349081-book-review-frontiers-of-modern-asset-allocation-part-ii
" Reported Volatility Is Too Low: Kaplan showed how the reported volatility is too low for small-cap stocks, real estate, and hedge funds. He offers detailed analysis of each, and proves his case. "
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black turkeys: big downturns happen often but we like to pretend they don't http://www.slideshare.net/morningstarfr/beyond-the-bell-curve
dunno if this is what they mean to recommend but the last slide says:
stocks 66% long term bonds 12% IT bonds 22% cash 0%
http://www.slideshare.net/morningstarfr/beyond-the-bell-curve
in the short term, market returns explain 80% of performance. In the longer term, (static) asset allocation explains 20% and active management explains 20%.
" "What the Active Share research has revealed is that managers relying on market timing are less likely, on average, to add value than managers who engage in stock picking," Prahl said. For those opting for passive portfolios, "stock picking is a lot to give up. That's what the Active Share literature shows," he added. " -- https://www.lordabbett.com/advisor/commentary/investmentperspectives/asset-allocation-setting-record-straight/
http://www.morningstar.co.uk/uk/655/articles/97062/Investing-in-Europe-with-More-Style.aspx
need to look at quadrants large-cap/small-cap, value/growth; two of these quadrants may be favored at a particular time
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has a piechart of total estimated market capitalization of various asset classes:
Asset Allocation in the 21st Century corporate.morningstar.com/.../Ph.D.%20Paul%20Kaplan,..
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over most periods of 60 years and longer, stocks perform better than bonds
but over the past 30 years, bonds have performed better! so stocks can do worse for an extended period of time!
--- http://seekingalpha.com/article/621501-balancing-risk-reits-that-outperform-in-good-times-and-bad
SWPSX uses Schwab equity ratings (but is too high on IT for my liking)
http://seekingalpha.com/article/593741-rising-rates-etf-portfolio
http://aswathdamodaran.blogspot.com/2012/05/how-much-is-growth-worth.html
" But the move into giant funds could result in lower returns. Studying performance for the 15 years ending in 2010, PerTrac? found that young funds delivered the best results. For the period, funds that were less than two years old returned 16.2 percent annually, while funds that were two to four years old returned 12.2 percent, and those with track records of more than four years returned 10.9 percent. The young funds delivered extra returns while recording lower risk as measured by standard deviation. In addition, small funds with less than $100 million in assets outperformed larger funds by a wide margin. "
http://seekingalpha.com/article/626611-global-macro-the-u-s-equity-rundown?source=yahoo
country rotation accu
. The new ETFs, including the Horizons Universa Canadian Black Swan ETF (HUT) and Horizons Universa U.S. Black Swan ETF (HUS) will combine traditional exposure to stock indexes with an actively-managed options strategy.
from lowest risk to highest: COBO QLTA LQD HYG QLTC
http://etfdb.com/2012/which-sector-etfs-are-cheap/
etf news: http://etfdb.com/features/
sustainable investing AdvisorShares? Launches Global Echo ETF (GIVE)
DFJ (japan small cap)
btal (low beta)
position sizing for trading:
i think the thing to do is to make positions just the size so that you care.
if the position is big enough that you care too much, you lose the ability to think rationally about it. this is obvious but i'll give my anecdotal evidence anyhow. right now i have a position that is too big on. it's more than 2% of my money. it's not so much that i'd be in financial trouble if i lost all of it, but it's enough that i'd be happy if it went the right way and unhappy if it went the wrong way. i find that i have trouble sleeping as late as i usually do because i want to get up and check the market. i am constantly questioning if i should close the position. i find myself thinking about this even though i've already worked out my strategy for deciding when to close it and even after i've determined that none of the new information of the day should make me take any action. i find myself wanting to lookup more data on financial blogs to get some clue about what i should do, even though i already know the answer and it's unlikely i will learn anything that will make me change my mind. because of this, i feel like i should reduce the position size, but when i think about this i get clouded by emotion and so i don't want to make any decisions in this state, and so i decide to just follow through on the strategy i thought of before. this is a silly position to be in. i still have the possibility to make money off of the thinking i did when designing the strategy, but i am impaired in my ability to incorporate new information and change my mind -- and competing against other market participants who are not impaired in this way.
the more surprising anecdote, at least for me, is that if the position is too small, you aren't motivated to really think about it. i used to buy very small numbers of shares of stock. sometimes i made money, sometimes i lost it, but the amounts were trivial compared to the amount of money i spent on groceries each week. later, when i started taking larger positions, i found myself actually thinking through what might happen, and learning about all sorts of things i didn't know about before, such as bid-ask spreads.
i don't quite understand this but i think it's important: http://www.pimco.com/EN/Insights/Pages/Wall-Street-Food-Chain.aspx
an argument for decoupling:
http://wallstreetexaminer.com/2012/05/30/safe-haven-could-u-s-markets-rally-in-a-global-decoupling/
http://www.irishtimes.com/newspaper/finance/2012/0601/1224317056033.html
the social utility of finance:
An example in which you can see all of these is: funding tech startups.
http://www.forbes.com/sites/tomaspray/2012/05/23/global-etfs-warned-of-us-weakness/?partner=yahootix
the current U.S. national debt per taxpayer is about $138558 ( http://www.usdebtclock.org/ ). maybe a good rule of thumb would be for each taxpayer to keep at least that much in relatively liquid assets?
note that total debt per FAMILY is higher (693561)
http://seekingalpha.com/article/632591-aim-for-the-middle?source=yahoo
VQT vs splv vs vspy: http://vixandmore.blogspot.com/2012/01/comparing-splv-and-vqt.html
http://vixandmore.blogspot.com/2012/01/three-new-risk-control-etfs-from.html VSPY? VSPR? VLAT? not recommended (b/c actually you should be OVERWEIGHT during exceptionally high volatility, see below)
INSD, KNOW
" One of the interesting aspects of the approach taken by VSPY, VSPR and VLAT is that these products will tend to have minimum exposure when the VIX is at its highest – and as anyone who has ever looked a chart of the VIX and SPX/SPY knows, this is typically when stocks bottom and begin a sharp bullish move.
With impeccable timing, EconomPic? Data just happened to publish a study yesterday, VIX as a Predictor of Equity Returns, which concluded that for the most part, SPY daily returns were much higher with an elevated VIX than with a historically low VIX. "
http://sixfigureinvesting.com/2012/05/why-18-5-is-the-right-pe-ratio-for-the-sp-500/ argues that you can invest in the S&P 500 whenever this number is less than 18.5 (or rather, he says that you should NOT invest when it is higher)
http://stocktwits.com/symbol/VQT
http://marketsci.wordpress.com/2012/05/31/taa-model-for-june-2012/
when it is high, sell puts instead of buying stocks: when volatility is ridiculously low, buy calls instead of stocks;
http://econompicdata.blogspot.com/2012/05/put-selling-as-replacement-for-stocks.html
" Q: Is there a strategy or style which is most effective at generating return?
[Jack Schwager] The diversity of strategies people use is truly remarkable, I saw people using completely different strategies to the degree that if I had set out to invent 15 different strategies for a fictional work…. I couldn’t have made the strategies more different to the ones I saw in real life! This illustrates a point I have made in all my works insofar as there really is no ‘holy grail‘ or single style that is most effective. Those people looking for a single unified strategy are not asking the right question.
...
It’s important to also look at the importance of doing nothing. The inspiration for this comes from something Debussy once said, “…music is the space between the notes.”
This is a great analogy as the key to successful trading really is the space between trades! It’s not just a matter of making the right trades… but also not doing anything when things aren’t right. I use one specific example in my book which I think highlights this really well, and that is a fellow called Kevin Daley (manager of the Five Corners Fund). Kevin has a hedge fund, but not in the conventional sense… It’s an account he runs from his home. If anyone wants to invest that’s fine, but fundamentally it’s a one man operation that he has never really looked to expand. He’s essentially different from many other traders by being someone who is very close to only trading long equity positions. He does go short on occasion, but these positions are contained to well under 10%. What I found particularly interesting about his track record is that over 12 years, he has a cumulative return in excess of 800%. The really interesting point is that over the same period the S&P had a return of 0%! How did he make over 800% as a near long-only when the index is flat? There are two elements… Firstly, he is a very good stock picker. The more important reason is that during the big bear markets like 2000-2 and 2008… while he may be down, he’s only down single digits. When opportunities are not good, he simply does not invest! or does so very lightly. Instead of losing money, he treads water. "
" Q: What are the distinctions between trades that are “Winning or Losing” vs. “Good or Bad?”
[Jack Schwager] If you asked most people to categorize good trades and bad trades, you would find the answers to be quite simple… If it makes money it’s a good trade, and if it loses money, it’s a bad trade. That’s not true at all… "
" Q: Do successful traders share any behavioral or personality characteristics?
[Jack Schwager] I can assure you that the personalities of traders are extraordinarily diverse. You meet people who are painfully shy, overly extroverted, egocentric, academic, athletic and more. If you put the most successful traders up together, you wouldn’t find any common personality denominators.
There are however, some successful traits. People who are successful traders will have the ability to quickly admit that they’re wrong. Regardless of their personality, they will have flexibility. The worst traders in the world are those who are politically committed one way or another and don’t listen to anything else. This is really critical to trading success and a trait which has been shared by virtually every trader I’ve met.
Discipline is also important. People who are successful will do things because they have to be done. If they go on vacation, they will probably check-in… getting up in the middle of the night often. They will do things which may be uncomfortable and contrary to living a ‘happy‘ or ‘good‘ life. "
" Q: Have success methodologies changed much in the last 25 years?
[Jack Schwager] I once asked Ed Seykota if markets were different ‘back then‘ looking at the world 20 years ago. He told me markets are the same now as they were, they’re always changing. Markets are always different and part of the process is adapting and maintaining traits that allow you to win in any environment.
The past 25 years have seen an increase in the diversity of strategies. Going back to the beginning of this period, a lot of complex strategies we use now simply didn’t exist. There wasn’t credit arbitrage, structured products and more. Alongside this, computers have become more important meaning that simple algorithmic strategies such as trend-following don’t work as well now. As the market moved from having very few managers of scale to having a lot of single managers running $10-20 billion, you saw an environment that changed from having a few big fish and a lot of small ones to having a huge amount of big fish in the pond. "
advocates owning Swedish krona: http://www.ft.com/intl/cms/s/0/45b0ca1a-a42a-11e1-84b1-00144feabdc0.html#axzz1xS9ANe4S
advocates owning canadian, norwegian, swedish, and singaporean currency, as well as swiss, dollar, and japanese
Currencies from fiscally healthier nations (Canada, Norway, Sweden, Singapore) Traditional safe havens: CHF, USD, JPY. Note: If the EZ continues to deteriorate the odds rise that safety demand for the CHF overwhelms the SNB, it abandons or lowers its peg to the EUR ,and the CHF soars. Also, despite their deep fundamental weaknesses, the USD and JPY continue to perform well in times of fear.
alternatives:
http://seekingalpha.com/article/641041-getting-whipsawed-only-in-hindsight?source=yahoo
faber on what happens when things are below 200 MA: http://www.mebanefaber.com/2009/04/03/where-the-black-swans-lie/
europe ETFs:
http://seekingalpha.com/article/651301-top-10-european-regional-etfs
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indicators that Chris Ciovacco looks at: S&P 500 Dow Copper VIX commodities treasuries (both US and foreign) semiconductors global stocks nasdaq european banks foreign stocks S&P 500 equal weight
The “Predicted Surprise” – for earnings – the percentage difference between StarMine’s? SmartEstimate?, which puts more weight on recent forecasts and top-ranked analysts, and the mean estimate of all analysts
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http://www.optionpit.com/blog/vxapl-aapl-iv-index-near-jan-lows
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dividend screens:
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http://www.ritholtz.com/blog/2012/01/revisiting-quant-approach-to-tactical-asset-allocation/
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"
Scott Teresi Says: January 15th, 2012 at 5:17 pm
I think GTAA is underperforming because the market is rising while bouncing around the 200-day SMA (similar to 10-month SMA). GTAA went risk-averse just after SPY plunged 15-20% in August. Then as SPY recovered, GTAA was still in risk-averse assets and has fallen behind. If the market plunges again soon, GTAA will look very smart. Otherwise, its market call based on the moving averages had a cost in lost opportunity.
With not much data on GTAA over very many market conditions, it’s hard to see if this will be typical of the algorithm or just the occasional price of using a risk-managed asset allocation fund.
Maybe so many advisors are now using trading strategies similar to GTAA that the fund will become a contrarian indicator. (Hope not, since I have some money on it, believing in the strength of Mebane Faber’s long-term tests in his 2007 paper!) "
http://online.barrons.com/article/SB50001424053111904582604576432140042746566.html
http://www.thedigeratilife.com/blog/momentum-investing-chasing-performance-following-trends/
http://www.advisorperspectives.com/dshort/updates/Monthly-Moving-Averages.php
http://www.bogleheads.org/forum/viewtopic.php?f=1&t=92413
prosper
lending club
--- GURU ALFA (long-short although the chart doesn't show this!)
oh here's why "Dynamic Hedging. to manage systemic market risk, the index utilizes AlphaClone's dynamic hedge mechanism which can vary the index between being long only and 50% long/50% short a broad US market index depending on certain market price targets. The mechanism seeks for the index be long only during protracted market run ups and well hedged during multi-month bear markets."
http://www.forbes.com/sites/abrambrown/2012/06/10/a-new-etf-built-on-stocks-from-top-hedge-funds/
mb should construct a hedged version of these..
FNSAX
" Todd Sullivan (Value Plays): Rail traffic/Temp employment. If you had cut off all communication with the outside world & only looked at those two indicators over the last 4 years, you would have known both the timing of the economic recovery and you would have known a “double dip” was simply not going to happen. Yet, every day we sees more second and third tier metrics being used because they back to bias of the person using them….. It is simply, rails & temp employment ….if you want to get fancy, add car sales housing starts. "
http://dynamichedge.com/2011/11/18/how-to-identify-program-trading/
http://falkenblog.blogspot.com/2010/07/batesian-mimicry-explanation-of.html
ed thorp (not to be confused with Mackenzie Thorpe) on his trend following strategy: http://abnormalreturns.com/ed-thorp-on-trend-following-an-excerpt-from-hedge-fund-market-wizards/
http://www.reuters.com/article/2012/06/15/japan-economy-boj-idUSL3E8HF0J420120615
" Income-seeking investors should certainly look at British companies. That's because British shares generally pay higher dividends, mostly because our government doesn't tax dividends twice. A fair number of British companies are already listed on the New York Stock Exchange, so you don't need to worry about foreign-exchange costs, and these companies pay their dividends to American shareholders in dollars. "
" Cheaper shares If you take two companies that are identical in every respect, except that one is based in America while the other is located in Britain, then the British company's shares would probably trade at a lower price-to-earnings ratio.
One reason for the discrepancy is that it's easier to do business in America, mostly because British society is still influenced by the lingering remains of a mixture of socialism and the medieval feudal system that America rejected in the Constitution. So some Britons still consider trade and commerce to be "vulgar" and beneath them, longing for the days depicted in television's Downton Abbey, while others (far fewer than there used to be) still believe that every problem can be solved by more government.
But in several industries, Britain leads the world, and when you buy shares in some "British" companies, what you're really obtaining is an investment in a global company that just happens to be listed on the London Stock Exchange. We're the nation that invented international capitalism, along with the Dutch, and we're still pretty good at it! "
---
http://money.cnn.com/2011/02/10/markets/dollar/index.htm
http://en.wikipedia.org/wiki/Special_drawing_rights
dollar euro yen pound2011–2015[47][note 2] 0.6600 (41.9%) 0.4230 (37.4%) 12.1000 (9.4%) 0.1110 (11.3%)
$NYA200R
Greek VC fund:
http://theopenfund.com/Investors/Apply
the minimum investment is too high for me (30,000 Euros) but i think this could be an excellent investment. I'd invest in it if i had more money.
TaxiBeat? sounds particularly interesting
ideas for safeguarding your money in the event of major trouble:
http://www.businessinsider.com/it-starts-the-governments-plan-to-steal-your-money-2012-6
zerohedge guest post has some simple steps too: "
Maintain significant bank and brokerage accounts outside your home country. Consider setting up an offshore asset protection trust. These things aren't as easy to do as they used to be. But they'll likely be much less easy in the future.
Make sure you have a significant portion of your wealth in precious metals and a significant part of that offshore.
Buy some nice foreign real estate, ideally in a place where you wouldn't mind spending some time.
Work on getting official residency in another country, as well as a second citizenship/passport. There's every advantage to doing so, and no disadvantages. That's true of all these things." -- http://www.zerohedge.com/news/guest-post-how-save-your-money-and-your-life
quantitative metrics to evaluate strategies:
http://onlinelibrary.wiley.com/doi/10.1002/9781118267684.app4/pdf
High-Performance Managed Futures: The New Way to Diversify Your PortfolioPublished? Online: 2010 by Mark H. Melin Appendix D: Identifying True Risk and Utilizing the Best Managed Futures Performance Measure
i like this guy's weekly summaries. mb someday i should invest in his Strategic Growth HSGFX or Strategic International HSIEX fund
http://www.hussmanfunds.com/theFunds.html
i think this is right on target, i was going to write about some of these mystelf:
" Four Real-World Investing Rules That Should Be Taught in Schools By Michael Comeau Jun 20, 2012 12:00 pm When investing in the real world, textbooks and theory aren't much help.
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MINYANVILLE ORIGINAL The idea that I've been on Planet Earth long enough to have actually learned meaningful life lessons from my own mistakes kind of makes me sick.
That applies across the board to family situations, career choices, my love life, and the topic of today's discussion: investing.
After over a dozen years of looking at the market on a more-or-less daily basis, and throwing a decent amount of money down the drain on idiotic trades, I've grasped some key realities about how money moves in the real world, far away from the textbooks and theory pushed at your average business school.
With that in mind, I'd like to present four investing rules I wish they had taught me back in school.
1. What You Know, Everyone Else Probably Knows, Too.
Investors have a tendency to overestimate the uniqueness of their ideas, even though they are usually inspired by widely-disseminated news and financial reports. Furthermore, the presence of social media outlets like Twitter and Facebook (FB) have drastically accelerated the speed at which investable information is distributed. That means that with few exceptions, everything gets priced into the market pronto.
So if you’re thinking of running out to buy Amazon (AMZN) because it’s eating Best Buy’s (BBY) lunch, or shorting Facebook because of slowing revenue growth, slow down and take a deep breath.
It’s important to understand the past and present. But to a certain extent, to be a successful investor, you’ll have to predict the future -- a far bigger challenge than skimming through 10-Ks and listening to earnings calls. In other words, focus on examining not where fundamentals are, but where they may be going.
Remember, when a guy on TV tells you a stock is good because it’s trading at X times earnings and has Y in cash on its balance sheet, he’s simply repeating the bare minimum of what the market knows.
As wise men have said, “What the market knows is not worth knowing.”
2. Timing Is Everything.
At Minyanville, when looking at the market, we believe it’s important to understand not only "the what," but "the why."
However, the more I think about it, the more I’d argue that "the when" trumps both those considerations.
Let me tell you a story.
I once interviewed at a hedge fund that was making a major bet on its prediction that the housing bubble would implode.
Smart money, right?
However, that interview took place in early 2003, right before the Housing Index (^HGX) doubled.
Likewise, a lot of folks were short Netflix (NFLX) last year as it crashed and burned from that $304.79 high hit on July 13, 2011.
However, many a bear's butt was fried on the 73% rally the stock staged before it finally died out.
So when you have an investment thesis in your mind, ask yourself, “What makes now the right time to bet on this?”
Furthermore, if the S&P 500 (^GSPC) is skyrocketing, it is entirely likely that junky companies rally big-time.
Likewise, if the market’s in meltdown mode, even the best of the best can get smashed.
Apple (AAPL) closed out 2007 at $198.08. But in 2008, even in the face of enormous earnings beats and the halo of the iPhone’s unprecedented success, Apple finished the year at $85.35 -- a drop of 57%!
You may be smart, but remember: Sometimes Mr. Market just does not give a damn about what you think.
3. You May Be Suffering From Confirmation Bias.
The Oxford Dictionaries defines confirmation bias as “the tendency to interpret new evidence as confirmation of one’s existing beliefs or theories.”
Translated into financial terms, it means that if you’re bullish on gold (GLD), you interpret everything you see as bullish for gold. In fact, you’ll hunt around for more reasons to be bullish for gold.
I know the power of confirmation bias from a horrible experience with a former tech highflier called Rackable Systems, which changed its name to SGI (SGI) after it acquired Silicon Graphics in 2009.
Rackable Systems was essentially the Fusion-IO (FIO) of 2006. It was pulling in boatloads of money selling energy-efficient servers to major data-center operators like Microsoft (MSFT), Amazon, and Yahoo (YHOO).
And then -- let me point out that I had complete knowledge of this -- competitors like Hewlett-Packard (HPQ) decided they wanted to get a whole lot more of those data-center dollars.
Maybe I should have imagined what would happen if Rackable lost Microsoft (34% of revenues) or Yahoo (26% of revenues) as a customer, or at the very least, the margin pressures that could be introduced in a more competitive server environment.
However, I viewed the new competition as nothing less but a complete confirmation that Rackable was on the right track -- a massive barrel of stupidity that resulted in me watching Rackable crash from $56 to under $10.
It is impossible to stay perfectly objective when performing research.
However, you can stay one step ahead of your own bias by regularly asking the question, “Am I just telling myself what I want to hear?”
4. In Isolation, Valuation Ratios Are Useless.
Far too often, investors take an incredibly simplistic view of valuation ratios, automatically assuming that if something is "cheap," it’s good, and if it’s "expensive," it’s bad.
However, oftentimes you’ll see the cheap get cheaper and the expensive get more expensive.
For example, over the past few years, how many times have you heard that Research In Motion (RIMM) was cheap based upon a P/E ratio? And yet due to declining market share and earnings power, it’s down 93% from its 2008 high, and down 26% this year alone.
On the other side of the equation, Salesforce.com (CRM), the poster boy for supposedly "overvalued" stocks with its 100+ P/E, is up 37% in 2012.
A P/E ratio, like every other valuation ratio, is 100% meaningless in isolation.
Rather, it is far more important to examine how the "E" part of the equation is changing. (Or sales for EV/S ratios or EBITDA for EV/EBITDA ratios, etc.)
A company trading at five times earnings can look awfully expensive following a bad quarter that destroys future earnings expectations. That’s how a stock like Nokia (NOK) can go from $10 to $5 to $2.50 in the blink of an eye.
It also works the other way around -- a high-priced momentum stock can suddenly look cheap if earnings come in ahead of expectations and forward estimates rise.
However, investors should note that the expensive momentum names that rally strongly when the market is up also tend to get hit hard when things go south.
Twitter: @MichaelComeau?" -- http://www.minyanville.com/business-news/editors-pick/articles/AMZN-AAPL-FB-NFLX-investing-lessions/6/20/2012/id/41862
not sure i agree with this:
mortgage reits: http://seekingalpha.com/article/683451-some-fallacies-about-mortgage-reits-and-why-they-re-ideal-for-income-investors
http://alletf.com/content/a-practical-market-seasonality-portfolio
"mutual fund managers are better than controlled money burning by the thinnest of margins:
The average manager adds an economically signi ficant $140,000 per month (in Y2000 dollars). The standard error of this average is just $30,000, implying at t-statistic of 4.57. There is also large variation across funds. The least skilled manager amongst the top 1% of managers generated $7.82 million per month. Even the least skilled manager amongst the top 10% of managers generated $750,000 a month on average. The median manager lost an average of $20,000/month and only 43% of managers had positive estimated value added. In summary, most funds destroyed value but because most of the capital is controlled by skilled managers, on average, active mutual funds added value." -- http://dealbreaker.com/2012/06/mutual-fund-managers-have-the-wrong-skills/
http://news.morningstar.com/articlenet/article.aspx?id=557930
" Have a hankering to play the Obamacare ruling? It's risky, but if you must, here are a couple non-levered long-only ETF's ideas that traders are currently focused on: The Health Care Select Sector SPDR (XLV +1.1%) and the iShares Dow Jones U.S. Medical Devices Index Fund (IHI +1.6%). "
" Morgan Stanley listed sixteen stocks who have a consensus 2012 dividend yield above its median bond yield on the respective company's outstanding debt issues, and where Morgan Stanley has a overweight rating on the stock. Low bond yields signal that the credit markets believe that the company can continue to internally finance their operations, or that bond investors will lend the company incremental money at low nominal rates, lessening the company's need to reduce its dividend. The sixteen companies listed below are in descending order by the difference between dividend yields and bond yields.
http://seekingalpha.com/article/686881-a-dividend-investing-history-and-tips-for-today-s-market
The sixteen names above actually form a widely diversified portfolio with exposures in energy, (DO, CVX) information technology , consumer staples (GIS, PEP, PM), healthcare (PFE, SJM), materials (NUE, FCX), telecommunications , industrials (EMR, GE), and financials . Twelve of the sixteen names are in the Dividend Sweet Spot of between 3% - 6%, which has produced higher total returns on average over time. Only Centurylink, the wireline telecommunications company, has a dividend yield of above six percent, and it is also singularly the only below investment grade rated company listed given its challenging and secularly declining business model. "
"
On a second screen, Morgan Stanley listed stocks with attractive and sustainable dividends and an overweight rating by MS analysts. The screen included companies with a market capitalization of greater than $2 billion, a dividend yield of between 2.25% and 6%, and analysts estimates of growing dividends, a dividend payout ratio of less than 75%, a net debt/cap less than 15%, and a free cash flow yield of greater than 5%. GE, PFE, PM, CL, EMR, NUE are again included on this second screen, which also includes Honeywell with a 2.8% dividend yield (HON), Accenture 2.8% (ACN), Las Vegas Sands 2.3% (LVS), Baxter 2.7% (BAX), ACE Limited 2.7% (ACE), LyondellBasell? Industries 3% (LYB), Archer Daniels Midland 2.3% (ADM), Marsh & McLennan? 3% (MMC), Cardinal Health 2.4% (CAH), Marathon Petroleum 2.5% (MPC), Western Union 2.4% (WU), Invesco 3.2% (IVZ), Interpublic Group of Companies 2.3% (IPG), and Lear 2.9% (LEA).
The aforementioned ADM, CL, EMR, NUE, and PEP are all also members of the Dividend Aristocrats, companies that have paid increasing dividends for at least twenty-five years. The Dividend Aristocrat investing style can be approximated through SPDR S&P Dividend ETF (SDY). My earlier analysis demonstrated that companies with this dividend payout profile have produced higher average returns with less volatility of returns over a long time period. "
-- http://seekingalpha.com/article/686881-a-dividend-investing-history-and-tips-for-today-s-market
"
The Seasonality of Gold - The Autumn Effect
Dirk G. Baur
University of Technology, Sydney (UTS) - School of Finance and Economics
May 13, 2012
Abstract: This paper studies recurring annual events potentially introducing seasonality into gold prices. We analyze gold returns for each month from 1980 to 2010 and find that September and November are the only months with positive and statistically significant gold price changes. This “autumn effect” holds unconditionally and conditional on several risk factors. We argue that the anomaly can be explained with hedging demand by investors in anticipation of the “Halloween effect” in the stock market, wedding season gold jewelery demand in India and negative investor sentiment due to shorter daylight time. The autumn effect can also be characterized by a higher unconditional and conditional volatility than in other seasons. " -- http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1989593
thesis that a run on money-market funds was the real fulcrum of th 2008 financial crises (maybe not the underlying cause, but the amplifier): http://brooklyninvestor.blogspot.com/2012/06/real-cause-of-financial-crisis-money.html
here's a good idea: a modular plug-in pipeline for retail investors to decide how to invest: http://www.alexhfrey.com/?p=31
"Emerging Hedge Funds, defined here as those funds with less than 36 months of history and whose AUM < $300m, have generated excess compound average annual returns of +3.66% per annum over and above the return of their older ( > 36 month ), typically larger, brethren. " http://allaboutalpha.com/blog/2012/06/21/emerging-managers-have-delivered-twice-the-returns-of-established-managers/
bank loans vs. high yield bonds: http://www.learnbonds.com/bank-loan-mutual-funds/
" What’s the Bottom Line?
If the US is entering a multi-year period of rising interest rates, Bank Loans Mutual Funds should outperform High-Yield Bond funds while providing a similar level of yield. "
SPDR Blackstone/GSO Senior Loan ETF
distressed debt funds?
"
Lazard Emerging Markets Equity has returned an average of 15.5% a year over the past decade, ranking among the top 10% of peers, according to Morningstar (MORN: 57.97, 1.43, 2.53%) . It recently had less exposure than the MSCI benchmark to China but more to Brazil. There is no upfront sales charge and yearly expenses are 1.42% of assets."
" Over the past two years Herro has amassed huge stakes in banks like France's BNP Paribas, the Bank of Ireland (IRE), and Spain's Banco Santander (SAN). He is the biggest U.S. shareholder of Italy's Intesa Sanpaolo. "
The strategy has prevailed over the long term -- Herro's $7.7 billion fund, Oakmark International (OAKIX), has returned 9.2% a year since 1992, while the MSCI EAFE index, which tracks developed markets outside North America, has returned just 4.9%.
OAKIX
" But he has fine-tuned his approach. He now thinks the price/earnings ratio, perhaps the most widely used metric in investing, is a "useless measure"; he cares about free cash, not earnings. "
" For those who aren’t aware, Buffett is quoted saying that the total market cap vs GNP is one of his preferred valuation metrics. The current reading of 89% is still above his preferred buying range (70-80%), but well off the highs we’ve seen in the last 15 years. Buffett has previously explained his thinking behind the indicator:
“For me, the message of that chart is this: If the percentage relationship falls to the 70% or 80% area, buying stocks is likely to work very well for you. If the ratio approaches 200%–as it did in 1999 and a part of 2000– you are playing with fire.”"
most important macro indicators are jobs, Building Permits, S&P Case-Shiller Home Price Inde, University of Michigan: Consumer Sentiment, http://dynamichedge.com/2012/06/20/fundamental-top-down-macro-for-the-brain-damaged/
what does a price chart look like when a trend ends: http://ivanhoff.com/2012/06/21/this-is-how-upside-momentum-often-ends/
" You would lose about 10% a year if you bought the same stocks that mutual funds and hedge funds did as soon as they disclosed their holdings, according to Thomson Reuters research. "
http://finance.yahoo.com/news/5-favorite-etfs-launched-past-110000055.html BOND, ILB, FLOT, (DXJ
| NKY | EWJ) |
WETF
vix seasonality: http://vixandmore.blogspot.com/2009/06/vix-at-seasonal-cycle-low.html
http://community.nasdaq.com/News/2012-07/fxis-not-the-best-china-etf.aspx?storyid=153147
private equity from earliest IPO to latest, with cumulative price change since ipo on the right:
fig -89% bx -64% ozm -74% kkr +26% apo -33% oak -6%
richard ferri's "economic tilt portfolio to mimic PE:
GBI physical gold
folio investing
motif investing
bond funds
summary: PIMCO is global macro, Fidelity is bottom-up quantitative, T. Rowe Price is consensus-building and conservative.
dividend stock selection:
--
Market Vectors Preferred Securities ex-Financials ETF (NYSEArca: PFXF) started trading Tuesday.
--
1:05 PM Stable or shrinking yield premiums to Treasurys suggest some emerging market sovereign debt is emerging as a safe-haven play. Of note are Mexico, Brazil, and Colombia, but the Philippines and Indonesia are also on the list of those not necessarily selling off every time markets go into "risk off" mode. [Global & FX] Comment!
" These bonds' recent correlation with U.S. Treasurys won't protect them from selloffs if global markets undergo a severe downturn, analysts warn. As such, their haven status is largely confined to one within emerging markets. "
" Such debt has also seen its typical relationship with global risk markets gradually break down, showing its shift into a relatively safer asset class compared with global and emerging-market equities. For instance, the correlation of Brazilian external debt with world equity markets now stands roughly at zero, after seeing high positive correlations less than a decade ago, according to Barclays. "
" For instance, the 30-day correlation between Mexico's 10-year sovereign bond and U.S. 10-year notes is about 0.89, according to CQG. A correlation of one means that the two assets show no variance between each other. Meanwhile, Colombian sovereign debt's risk premium has shrunk to just 163 basis points over U.S. Treasurys from around 191 basis points at the start of the year, according to the J.P. Morgan Emerging Market Bond Index Global, or Embig. " -- http://online.wsj.com/article/BT-CO-20120725-713670.html
"
Asia (Developed and Emerging)
The WisdomTree? Asia Local Debt Fund (ALD) offers access to a dozen Asian economies including both developed and emerging markets: South Korea, Malaysia, Indonesia, Philippines, Thailand, India, China, Hong Kong, Singapore, Taiwan, Australia and New Zealand. The debt held by ALD is denominated in the local currencies of the constituent countries [see also Asia-Centric ETFdb Portfolio ETFdb Pro Members Only]. "
" JPMorgan Emerging Markets Bond Fund (EMB): This ETF holds dollar denominated debt from issuers in a number of emerging markets, including Mexico, Brazil, Russia, Turkey, and the Philippines. "
" Asia (Developed and Emerging)
The WisdomTree? Asia Local Debt Fund (ALD) offers access to a dozen Asian economies including both developed and emerging markets: South Korea, Malaysia, Indonesia, Philippines, Thailand, India, China, Hong Kong, Singapore, Taiwan, Australia and New Zealand. The debt held by ALD is denominated in the local currencies of the constituent countries [see also Asia-Centric ETFdb Portfolio ETFdb Pro Members Only]. "
"
Market Vectors Emerging Markets Local Currency Bond ETF (EMLC): This ETF also offers exposure to local currency debt; EMLC’s largest holdings are to Malaysia, Brazil, Poland, South Africa, and Mexico (each account for 10% of the index).
"
Emerging Markets Local Currency Bond Fund (LEMB): The largest country weightings in this local currency ETF are to South Korea (about 20%), Brazil (15%), and Mexico (7%)."
"
SPDR Barclays Capital Emerging Markets Local Bond ETF (EBND): This ETF has the heaviest weightings in Brazil, Korea, and Mexico."
" For exposure to Latin American bonds, the Market Vectors LatAm? Aggregate Bond ETF (BONO) is the only option out there. BONO’s portfolio consists primarily of Brazilian and Mexican debt, but this ETF also includes debt of issuers in Colombia, Venezuela, Argentina, Chile, Peru, Panama, and even Jamaica. "
also BOND
--- yes there is an illiquidity premium:
http://venturepopulist.com/tag/asymmetric-outcomes/ --
" Modeling: A Superficial Industry Still, he acknowledges the financial world s quest to quantify alpha and separate it from beta and he shares his thoughts on factor modeling: The idea of factor modeling is essentially to play around with the data long enough until one finds empirical evidence to prove one s preconception, that is, curve fitting, then go on and pretend one has found something meaningful such as cause and effect. Again, Ineichen uses an example to prove his point. He shows the results of a regression analysis using Fama & French s three factors (the index, value/growth & market cap). He acknowledges that these three factors explain a significant portion of the volatility of the HFRI Equity Hedge Index between April 1997 and March 2003. But he goes on to say that this 1997 to 2003 time period can be divided into two regimes - a bull and a bear market. So he runs the same regression on each period individually. His results: the correlations to each of the three factors changed dramatically between the two regimes. In other words, equity hedge fund managers adapted to the new regime by jumping to another horse mid- period. Says Ineichen:
The more important metrics, from Ineichen s viewpoint, are the ratio of the size of monthly gains to monthly losses ( the ratio of magnitude ) and the ratio of the frequency of gains to losses ( the ratio of frequency ). Thus, he spends considerable time working through each of the primary hedge fund strategies, comparing them to passive strategies geared to match their volatilities. As you might expect, the hedge funds come out on top in nearly all cases.
Alpha and the Renaissance Man Asymmetric Returns is chalked full of colourful analogies (giving Lars Jaeger and others a run for their money). But perhaps the most useful and insightful analogy in the book is one that we have heard applied to other disciplines, but not yet to the hunt for alpha:
"investors who are capable of introducing a bias toward the current regime are producing alpha even though factor modeling tells us that, looking back, it was actually beta."
"
" Throughout the book, Ineichen also questions the use of kurtosis as a risk parameter. He argues that standard deviation is far more important than its 4th (moment) cousin by actually analyzing the tails in the distribution of (fat-tailed) hedge funds and (thin-tailed, but higher volatility) market indices. In case after case, he shows that the low standard deviation of most hedge fund indices makes up for the relatively fatter tails of these returns streams.
The more important metrics, from Ineichen s viewpoint, are the ratio of the size of monthly gains to monthly losses ( the ratio of magnitude ) and the ratio of the frequency of gains to losses ( the ratio of frequency ). Thus, he spends considerable time working through each of the primary hedge fund strategies, comparing them to passive strategies geared to match their volatilities. As you might expect, the hedge funds come out on top in nearly all cases.
"
" In the concluding pages of Asymmetric Returns Alexander Ineichen returns to his central thesis - that the future is all about risk management, not returns management: The asset management industry is at a crossroad. In our view, the belief that returns are manageable must be relaxed. Risk is manageable, but not returns. "
---
http://stream.marketwatch.com/story/markets/SS-4-4/SS-4-8035/
--- To represent the asset class of non-european, international developed countries (which are mainly Asian markets), the Vanguard MSCI Pacific ETF, VPL, is a preferred choice with limited competition in the ETF space. Over the last 10 years, according to Morningstar, VPL has had a 70% correlation to the S&P 500, though it is mainly caused by its 60% holding in Japanese companies (Japan has its own economic concerns and major national debt issues). Over the last 3 years, currency has given this fund a 10% annualized boost for US investors against local currency investors. Yields are around 3% according to Morningstar.
---
knight capital lost a bunch of money via an autotrading bug yesterday, here ar similar companies:
KCG Knight Capital Gr... 3.44 -3.50 -50.43% 337.85M ITG Investment Tech. ... 7.87 -0.16 -1.99% 305.43M GFIG GFI Group Inc. 3.06 -0.01 -0.33% 367.12M PLCC Paulson Capital C... 1.03 0.00 0.00% 5.94M PNSN Penson Worldwide,... 0.110 0.000 0.00% 3.08M BGCP BGC Partners, Inc. 4.87 +0.05 1.04% 680.52M MS Morgan Stanley 13.11 -0.40 -2.96% 25.92B SCHW Charles Schwab Corp 12.11 -0.34 -2.73% 15.42B FXCM FXCM Inc 10.47 -0.01 -0.10% 246.70M IBKR Interactive Broke... 13.37 -0.32 -2.34% 609.40M GLCH Gleacher & Compan... 0.700 0.000 0.00% 89.03M
--
--
next 11: ts in the Goldman Sachs N-11 Equity Fund. (GSYAX) O
The so-called MIST nations -- Mexico, Indonesia, South Korea and Turkey -- are the four biggest markets in the Goldman Sachs N-11 Equity Fund. (GSYAX)
---
i dont understand this but it seems important:
http://www.bloomberg.com/news/articles/2016-04-14/say-goodbye-to-the-fed-you-once-knew
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"betting markets, and speculative markets more generally, seem to do very well at aggregating information. To have a say in a speculative market, you have to "put your money where your mouth is." Those who know they are not relevant experts shut up, and those who do not know this eventually lose their money, and then shut up. Speculative markets in essence offer to pay anyone who sees a bias in current market prices to come and correct that bias...such markets seem to do very well when compared to other institutions. For example, racetrack market odds improve on the predictions of racetrack experts, Florida orange juice commodity futures improve on government weather forecasts, betting markets beat opinion polls at predicting U.S. election results, and betting markets consistently beat Hewlett Packard official forecasts at predicting Hewlett Packard printer sales. In general, it is hard to find information that is not embodied in market prices. " -- http://mason.gmu.edu/~rhanson/futarchy.html
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this study says that selling when volatility rises and buying when it falls can make money: http://som.yale.edu/news/2016/03/re-assessing-classic-risk-return-trade
but i thought the vixandmore guy had computed that it's better to be in the market when volatility is up?
and what about those studies that say that almost all the gains are on the day of fed meeting decisions?
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" “Risk Neglect in Equity Markets” by Malcolm Baker of the Harvard Business School—looks at an obvious flaw in the CAPM. The model suggests that stocks which are more volatile than the overall market (high beta in the jargon) should display higher returns while stocks that are more stable (low beta) should deliver lower returns. More risk means more reward.
But that is not what has happened. Mr Baker assembles two portfolios from 1967; one consists of the 30% of US stocks with the lowest beta; another of the 30% with the highest beta (the portfolios are adjusted as betas change). By the end of the period, $1 in the low-beta portfolio had grown to $190, while the high-beta portfolio rose to just $18. The difference in compound returns is huge—5.5% a year. The low-beta portfolio is a lot less volatile and the maximum drawdown (peak-to-trough loss) is 35% compared with 75% for the high-beta portfolio.
Think about that; low risk meant higher reward. It was the equivalent of finding $20 notes lying on the street.
When you move to the world of asset classes, however, the traditional rule held; over the entire period, equities returned 10.9% a year while safe Treasury bills paid just 5%. Investors did get paid for owning risk.
Was this a fluke? Mr Baker is not the first to notice the anomaly. One of finance’s best-known academics, Fisher Black, wrote up the low-beta anomaly in 1993. That means the period since his paper was published is “out of sample” and thus a good test of the hypothesis. Sure enough, low-beta stocks have outperformed since then, despite a period in the late 1990s when, thanks to the dotcom bubble, high-beta stocks were all the rage.
Why might this be? Veteran readers might recall a column from 2012 which explained the outperformance in terms of low beta. AQR, a fund management group, explained the low-beta effect in terms of institutional constraints. Fund managers want to beat the market and deliver higher than average returns; so they buy high-beta stocks, as academic theory suggests. This makes high-beta stocks too pricey and drives down their returns. The answer should be to buy low-beta stocks and combine them with leverage. But investors are generally constrained from using borrowed money. So the anomaly persists.
Mr Baker thinks part of the reason that private equity has been successful is down to this strategy; the likes of Blackstone and KKR are buying less volatile (cash-generating) businesses with borrowed money. "
i'm guess Taleb might say that both high- and low- beta stocks are in the same broad risk bucket (equities), and that what you should really do is assume that the actual risk profile of assets in this class is unknowable due to fat tails. He may advocate a barbell strategy where you look for extremely high risk, high reward opportunities and then balance this with extremely low risk stuff like cash and possibly bonds; the low beta equities would be too risky for the safe part of the barbell and the high risk equity indices would probably be not risky enough for the high risk part of the barbell.
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http://seekingalpha.com/article/817621-combining-the-volatility-and-value-anomalies?source=yahoo
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http://seekingalpha.com/article/850221-the-38-million-dollar-levered-etf-share
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Noting Chinese indices are loaded far too much with financial stocks, WisdomTree launches its ex-financials China Dividend ETF (CHFX)
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http://www.ritholtz.com/blog/2012/11/everything-you-know-about-investing-is-wrong/
quant firms:
Quantitative Investment Management
DE Shaw
quant contests:
" There are a number of programming contests out there for quants and traders. I’m usually not interested in them because they are usually thinly disguised marketing schemes meant to drive people to a particular platform (e.g., MATLAB, MetaStock?).
read related articles
The Good
There’s a new one out there being organized by Max Dama. Details are available at http://www.quantcup.org/. What I like about this one is that it uses an open language standard (C/C++) and has a well defined API to which the competitors should write their code. " -- http://augmentedtrader.wordpress.com/2011/03/07/quant-trading-contests/
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http://www.businessweek.com/articles/2012-10-25/u-dot-s-dot-stocks-are-winning-the-asset-race
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http://www.zerohedge.com/news/2013-02-03/best-and-worst-emerging-markets
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note: the markets seem to me to more often than not react the expected way to news, but their timing is off; they sometimes react a few days after, or sometimes a few days before (!) the news.
i hypothesize this is due to the need for the markets to remain unpredictable.
it is unclear to me how forward-looking the markets are. it seems to me that i've seen instances where 'everyone' including me knew something was coming eventually, and yet the markets didnt appear to take it into account until a few weeks before the event. my going hypothesis is that this is some sort of illusion and that, on average, the markets do indeed price everything in far in advance.
i've seen a few examples of 'buy the rumor, sell the news', where the market overshot a few days before an event, and then retraced after the expected outcome (e.g. when Spain got money in June 2012 from the EU to bail out banks; the market went up in expectation of that, and then when it was announced it went a bit down again) . But i've also seen cases of event-caused momentum (e.g. after the Sep 6 ECB meeting when Draghi announced that he had gotten support for his bond-buying backstop plan; the market climbed and kept on climbing for, well, months). If these two can't be distinguished, are equally likely, and equally as intense, then there's no way to show that events affect markets. However, as noted above, it seems to me that the 'expected' direction happens more often than not. Also, speculative position sizes, e.g. 'the crowd' may have something to do with it; 'the crowd' was betting against the EU before the Sep 6 meeting.
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http://www.forbes.com/sites/ariweinberg/2012/12/12/income-funds-for-worrywarts/
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http://www.zerohedge.com/news/2013-04-22/only-chart-required-price-us-stocks
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remember to calculate total return
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--- http://www.forbes.com/sites/schifrin/2013/06/05/ben-stein-staying-out-of-bad-money-neighborhoods/
don't have a meaningful amount of unsecured debt, it's poison start young buy stock index funds in the form of ETFs, reinvest the dividends variable annuities are ok if low cost
btw his book:
http://finance.yahoo.com/blogs/breakout/top-3-ways-ruin-financial-life-ben-stein-130411483.html
(top ways to LOSE money): 1) Trade Frequently 2) Trade Foreign Currencies 3) Go With Your Gut and Pick Stocks
http://www.forbes.com/sites/schifrin/2013/06/05/two-book-chapters-that-changed-warren-buffetts-life/
read chapters 8 and 20 of The Intelligent Investor, by Benjamin Graham (1949). summary of those chapters:
" Don’t let the mood swings of Mr. Market coax you into speculating, selling in panic or trying to time the market.
Only after careful analysis of a company’s ongoing business and its prospects for future earnings should you consider buying it and then only if its current price incorporates a significant “margin of safety.”
It boils down to avoiding losses by owning only stocks selling well below your calculation of their fair or intrinsic value. After that, the key is to keep your emotions in check and be patient. "
http://www.forbes.com/sites/schifrin/2013/06/05/ramit-sethi-how-to-force-yourself-to-go-to-the-gym/
"Willpower is a depleting resource. We should focus on setting up systems, automating behaviors we want to happen.”"
" put as much of their financial life on autopilot as possible, setting up automatic deductions for 401(k) plans, student-loan repayments, credit card bills. He even came up with a way to force himself to go to the gym.
“I realized I needed to put my gym clothes right near the floor with the shoes right there, so when I got out of bed my feet hit the shoes. Once I did that, my gym attendance went up.”
If you want to get rich, don’t focus on the minutiae. “Instead get five or ten big wins right, and you won’t have to worry about lattes.” Here are three: Invest early, get your asset allocation right and, above all, negotiate your salary. "
http://www.forbes.com/sites/schifrin/2013/06/05/leon-black-seek-action-and-smart-people/
" Just before he graduated from Harvard Business School in 1975, private equity titan Leon Black’s father passed away, and he inherited $75,000 in life insurance money. Get 2 Free Issues of Forbes Current Issue
Inside the Magazine
Get 2 Free Issues of ForbesThe Forbes 2013 Investment Guide Janet Novack Janet Novack Forbes Staff Meredith Whitney: Is Muni-Bond Interest Moral? Matt Schifrin Matt Schifrin Forbes Staff Bogle: High Investment Costs Destroy `Magic Of Compounding Returns' Janet Novack Janet Novack Forbes Staff
“I got involved trading commodities. I went into copper. I went into cattle, sugar, soybeans,” says Black, 61. “I’d never made this much money so quickly. At one point I was up $600,000 to $700,000. I said ‘Boy, isn’t this a fabulous thing? This is fun, and this is easy!’”
Then prices plummeted, and for three days he was unable to sell. He lost all but $25,000 of his original capital. “There I was, a Harvard Business School graduate, and I lost two-thirds of my inheritance,” says Black. The money lessons were abundant. “Know what you are doing, avoid get-rich-quick schemes, do your homework, don’t bet the ranch,” says Black, now worth $4.3 billion. “I felt pretty silly.”
It’s impossible to overemphasize the importance of starting on the right track—Black worked early at Drexel Burnham Lambert with junk bond wizard Michael Milken. “Start your career in a place where there is a lot of action, a lot of smart people who understand risk and reward, and work hard. Learn to be patient, and learn to be opportunistic.” "
http://www.forbes.com/sites/schifrin/2013/06/05/burton-malkiels-lucky-stock-pick/
index funds diversify
--- " Disclaimer
David Merkel is an investment professional, and like every investment professional, he makes mistakes. David encourages you to do your own independent "due diligence" on any idea that he talks about, because he could be wrong. Nothing written here, at RealMoney?, Wall Street All-Stars, or anywhere else David may write is an invitation to buy or sell any particular security; at most, David is handing out educated guesses as to what the markets may do. David is fond of saying, "The markets always find a new way to make a fool out of you," and so he encourages caution in investing. Risk control wins the game in the long run, not bold moves. Even the best strategies of the past fail, sometimes spectacularly, when you least expect it. David is not immune to that, so please understand that any past success of his will be probably be followed by failures.
Also, though David runs Aleph Investments, LLC, this blog is not a part of that business. This blog exists to educate investors, and give something back. It is not intended as advertisement for Aleph Investments; David is not soliciting business through it. When David, or a client of David's has an interest in a security mentioned, full disclosure will be given, as has been past practice for all that David does on the web. Disclosure is the breakfast of champions.
Additionally, David may occasionally write about accounting, actuarial, insurance, and tax topics, but nothing written here, at RealMoney?, or anywhere else is meant to be formal "advice" in those areas. Consult a reputable professional in those areas to get personal, tailored advice that meets the specialized needs that David can have no knowledge of. "
-- http://alephblog.com/2012/10/13/book-review-how-to-really-ruin-your-financial-life-and-portfolio/
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toread for me:
http://alephblog.com/major-article-list/
http://alephblog.com/what-could-a-david-merkel-newsletter-look-like/
todo: ask what this guy's favorite books are: http://alephblog.com/category/book-reviews/
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" Chapter 1: Trade Frequently
Chapter 2: Trade Foreign Exchange
Chapter 3: Believe in Your Heart That You Can Pick Stocks
Chapter 4: Assume That Recent Trends Will Continue Indefinitely
Chapter 5: Pour Continuer . . . Sell When Things Look Bleak . . . and Stay the Heck Out of the Market
Chapter 6: Know in Your Heart That This Time It’s Different . . . and Act on It
Chapter 7: Dividends Are for Spending—Not? Investing—Just? Ignore Them or Use Them to Buy Baubles
Chapter 8: Cash Is Garbage—Except? When It’s Not
Chapter 9: Put Your Money into a Hedge Fund
Chapter 10: Try Strategies That No One Else Has Ever Thought of . . . You Can Out-Think the Market
Chapter 11: Use the Strategies That University Endowments and the Giant Players Use
Chapter 12: Commodities Are Calling . . . Will You Answer the Phone?: Everything That Happens in Your Life Involves Commodities
Chapter 13: Go on Margin for Everything
Chapter 14: Sell Short
Chapter 15: Do Not Have a Plan for Your Investing or for Your Financial Life Generally
Chapter 16: Do It All Yourself
Chapter 17: Pay No Attention at All to Taxes
Chapter 18: Believe That Those People You See on TV Can Actually Tell the Future
Chapter 19: Do Not Start Even Thinking about Any of This until the Absolutely Last Moment
Chapter 20: Don’t Believe That Any of This Matters Very Much, This Money Stuff Chapters 21–49: How to Ruin Your Greatest Asset—You?
Choose a Career with No Possibility of Advancement
Choose a Career with Little Chance for a Good Income
Choose Lots of Education over Lots of Pay
Show No Respect for Your Boss or Fellow Workers
Don’t Learn Much about Your Job, Industry, or Employers . . . Just Wing It
Do the Minimum Just to Get By
Show Up in Torn Jeans, Unshaven, Unwashed, Any Old Way You Feel Like Showing Up
Show No Regard for the Truth
Display Open Contempt for Your Job, Your Fellow Workers, Your Boss, and Your Clients/Customers
Act Like You Are Morally Superior to Your Job and Your Colleagues
Do Not Be Punctual
Don’t Hesitate to Have a Cocktail or Two at Lunch
Gossip and Sow Divisiveness at Work
Second-Guess Everyone around You at Work, Especially Your Boss
Threaten Your Boss and Employer with Litigation
Look for Grievances at Work
Make Sexual Advances to Anyone You Find Attractive
Make Excessive Phone Calls, Texts, and E-Mails on Company Time
Play Video Games at Work and Make Loud Noises as You Do
Make and Keep Lots of Personal Appointments on Company Time
Listen to Your Colleagues’ Conversations and Snoop on Their E-Mails
Talk about How Much Better Earlier Employers Were Than Your Current Employer
Brag about Your Great Family Connections
Pad Your Expense Account
Borrow Money from Your Fellow Employees and Don’t Pay It Back
Question, Mock, and Belittle Your Tasks
Flirt with Your Colleagues’ Significant Others
Proselytize at Work and Belittle Anyone Who Doesn’t Share Your Political or Religious Beliefs
Say Anything You Want That Comes into Your Head " -- http://my.safaribooksonline.com/book/personal-investing/9781118461464
" How To Ruin Your Life
How to Ruin Your Life (Ben Stein) Here is a summary of the chapter headings: 1. Don’t Learn Any Useful Skills
2. Don’t Learn Any Self-Disclipline
3. Convince Yourself You’re the Center of the Universe
4. Never Accept Any Responsibility for Anything That Goes Wrong
5. Criticize Early and Often
6. Never Be Grateful
7. Know That You’re the Source of All Wisdom
8. Envy Everything; Appreciate Nothing
9. Be a Perfectionist
10. Think Too Big
11. Don’t Enjoy the Simple Things in Life
12. Fix Anyone and Everyone at Any Time
13. Treat the People Who Are Good to You Badly
14. Treat the People Who Are Bad to You Well
15. Hang Out with the Wrong Crowd
16. Make the People Around You Feel Small
17. Keep Score
18. Use Drugs and Alcohol Freely
19. Don’t Save Any Money
20. Ignore Your Family
21. Know That the Rules of Reasonable, Decent Conduct Don’t Apply to You
22. Life as if Truth is Relative — A Distant Relative
23. Remember That No One Else Counts
24. Know That You Don’t Owe Anyone a Thing
25. Gamble With Money
26. Make it Clear: Pets are for Losers
27. Don’t Clean Up After Yourself
28. Have No Respect for Age or Experience
29. Show Everyone Around You That You’re Holier Than Thou
30. Fight the Good Fight….Over Everything
31. Do It Your Way
32. Think the Worst of Everyone
33. Live Above Your Means
34. Be a Smart-Ass
35. Whenever Possible, Say “I Told You So.”
Link: http://www.amazon.com/How-Ruin-Your-Life-Stein/dp/1561709743 "
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http://edmarkovich.blogspot.com/2013/12/why-i-dont-trade-stocks-and-probably.html
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no return without risk, but does this mean that it is optimal to put your entire portfolio into high risk, high return investments (e.g. investments with a high expected return but high standard deviation of returns), if you can stand the stress?
no! first off all, you want to make money, but you also want to (financially) survive. So you shouldn't bet more than you can 'afford to' lose on risky things. For example, if you ever bet 100% of your portfolio on one asset, then if that asset suddenly jumps to zero, you will (financially) die.
But it is more than that. Assume that you can access investments with an arbitrarily high trade expected return, but a proportionally high standard deviation too. If you follow a policy of betting too much of your portfolio on investments from this spectrum that are too risky, then over time your net worth will tend to decrease, even though the investments have a positive expected return. For mathematical details, look into the http://en.wikipedia.org/wiki/Kelly_criterion , which provides a formula for how much you should bet in certain situations, and and into this chart for expected returns from fractional Kelly betting:
My current understanding is that the fundamental reason not to take risk is that if you lose a large bet today then you have less to bet with tomorrow (formally speaking, the reason is that since you are multiplying returns together, the cumulative return is bigger if the numbers you are multiplying are similar in magnitude rather than uneven).
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http://www.efficientfrontier.com/aa/index.shtml
http://www.efficientfrontier.com/reading.htm
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idea: instead of maximizing long-term returns (geometric portfolio optimization/Kelly portfolio optimization), maximize lifetime (in the absence of any safe asset).. does this turn out to be the same?
but maybe the risk measure used in the Kelly world, probability of doubling before halving, is better here
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http://www.aarp.org/work/retirement-planning/retirement_calculator.html
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http://paulgraham.com/prcmc.html
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target nest egg if you make $65k today: 1643k
you should spend your paycheck on:
50% essentials 30% rent 10% groceries 10% others 20% savings 30% discretionary spending
-- http://www.businessweek.com/articles/2013-12-19/young-womens-financial-planning-alexa-von-tobels-advice and http://content.randomhouse.com/assets/9780385347624/pdfs/financially%20fearless_booklet_r3.pdf
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understanding order books
When there is at order in the order book at a certain price, say a buy order for 2 for $10, all it means is that someone is willing to pay $10 for up to 2 of these at this moment. It is important to keep in mind that other inferences are just speculative and may be incorrect. For example, sometimes people put a large order on the order book and then take it off a few moments later. Other times people put on an order and then just leave it there for weeks until it executes or until they get around to changing it. Sometimes people move their order farther away, or cancel them, as the price gets closer. Other times people just leave them there or even move them closer to the edge as the price nears them.
For example, if you look at a graph of the cumulative order book, with the horizontal axis price and the vertical axis quantity, you will usually see a mountain on both the left and the right and a valley in the middle, but you may see an assymetry; perhaps there is a tall mountain on the right but a small mountain on the left. Does this mean that the price is about to go down? Not necessarily.
In fact, sometimes this picture occurs when something happened to make the price go up rapidly; the price goes up as buyers 'eat' the mountainous wall of old sell orders on the right; the people who made those orders haven't gotten wind of the new event yet and so didn't change their orders; the mountain on the right consists of old, now-mispriced orders, while there is not yet a tall mountain on the left because the price movement is recent and many traders are simply filling up their inventory at market price rather than letting their buy order sit on the books far away from the market price.
Sometimes there are even more asymmetrical pictures. Let's say that the price of something went up, then went down again, and then slowly went up a little bit but not as far as last time. You might see a mountain on the left, and on the right, a low plain for awhile that suddenly hits a tall 'cliff', which marks the beginning of a mountain taller than the one on the left. This is because when the price went up before, it went right up to the cliff, eating up a bunch of old orders. Then it stopped and went back down, leaving the cliff intact. Some folks put in sell orders as it was going down and didn't cancel them, and some market-makers put some standing sell orders in too, leaving the plain on the right after the cliff. And then for whatever reason even more folks put in buy orders during the slow rise, leaving a mountain on the left that is taller than the plain, yet still shorter than the cliff.
Another possibility is that someone may place a limit order that they hope will not execute, merely to change the way the order book looks in order to cause other traders to alter their behavior. For example, a trader hoping to sell a small quantity might place a large buy limit order, hoping that this will cause others to adjust their opinion of the value of the commodity and thereby driving up the price, allowing them to sell their small quantity at a higher price and then cancel their buy limit order. I would never do this myself; my goal is to predict the market price, not to alter it; but just because you don't engage in this sort of behavior does not mean that you can assume that no one else does. So just remember that if you see e.g. a large buy order appear in the order book, this does not necessarily mean that someone is in the market to buy a large quantity (although it often does, especially if the order is so close to the market price that it could plausibly be executed at any moment), or that you should raise your opinion of the true value of the commodity; in some cases it could mean the opposite.
Incidentally this sort of thing also provides another reason why people who write algorithms to trade don't disclose their algorithm, besides just wanting to keep the profits to themselves. If a counterparty knew the exact conditions that would cause someone else's algorithm to place orders, they could sometimes artificially create these conditions in a way that would cause the algorithm to place money-losing trades that the counterparty could take the other side of.
One pattern that is pretty reliable is that if you put in a limit order that does not immediately execute, and is a little far from the market price but not miles away, and your order is much larger than the other quotes which are closer to the market price than yours, then most likely someone (most likely a bot) will 'step in front of you', quoting a smaller quantity than you at a price that is just a tiny bit closer to the market price than you. This is a market-making strategy; the interloper hopes to profit off the spread when other people execute a market order against their standing order. By placing the order that you placed, you are providing the interloper 'cover' because if their order filled and then they decided that it filled because the true value of the commodity suddenly jumped (so the person on the other side of the market order placed that order because the underlying value suddenly changed, not because they just wanted their order to execute with high probability and were willing to pay the spread); in this case the interloper perceives themselves to have lost money on that order; but if your order is still standing, that is, if you were as slow to find out about the change in underlying value as the interloper was, then the interloper will turn around and issue a market order against your order, only losing the tiny difference in price between them and you, plus the commission. If you had not been there they could lose a lot more.
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Should you place a limit order or market?
If you place a market order, you'll have to pay the spread (todo: explain). So you may think, okay, i'll only place limit orders, i'll be clever and never pay the spread. There is some sense to this, because in a sense the spread is a fee for impatience and for certainty of fast execution. If you are e.g. buying and there is no 'real seller' available right now on the other side of your transaction, market makers will often step in and take the other side (sell to you), and then when a real seller comes along they'll buy from them, saving you the trouble of waiting around for that real buyer. If you don't require speed, why pay that fee?
But if you place a limit order, you risk the price moving away from you before your order executes (e.g. you place a buy order, but then the market price goes way up and your order never executes and you think, darn, i would have made more money on that price move than i would have lost paying the spread). In a perfectly efficient market i think the expected value of the cost of this happening would (almost?) exactly match the expected value of the money that you would save on the spread the other times.
