With the R-word everywhere these days, I thought I’d remind readers of this quote from Ahead of the Curve:

Perhaps the single most important insight in economically getting ?Ahead of the Curve? is that of recognizing the lagging characteristic, even deceptiveness, of ?recession? as a measure of economic downturn. Businesses suffer loss of sales, inventory buildup, and slowing-to-declining corporate profits when the rate of growth in economic activity (real GDP, measured here on a year-over-year percent change basis to provide clarity) begins to slow from its peak. (more…)

Rumors of my demise have been greatly exaggerated. But I can say that starting a hedge fund from scratch is a petit morte of sorts. And dead mean tell no tales, right?

Well, I’m not even sure if I should be speaking about this as the powers that be declared on high that a hedge fund can only be marketed by word-of-mouth and, even then, to “qualified investors” only. But what constitutes word-of-mouth is fuzzy. Let’s all agree that a blog is wordy and mouthy enough.

Besides, all I’m really saying is that Lunaria Capital Management exists. And that the web site is here. (more…)

Over on CXO Advisory, they talk about a recent study of hedge funds and what characteristics mark the good ones. The conclusion was:

In summary, hedge funds that conservatively smooth out market bumps with minimal net exposure to equities and mid-range returns tend to be the most reliable outperformers.

Translation: The hedge funds that actually hedge perform best. The modern hedge fund has become a catch-all for any type of investing, including all out Wild West directional plays. But those that actually attempt to have neutral market exposure plus some alpha rule the day. Brilliant!

Here are some books that I consider pivotal in my financial education:

  • Fooled by Randomness by Nassim Nicholas Taleb – I’m also currently reading his new book, The Black Swan, that is somewhat a sequal to FbR and promises to be just as good.
  • Education of?A Speculator & Practical Speculation by Victor?Niederhoffer -?Not all teachers need to be successes.
  • Option Volatility & Pricing?by Sheldon Natenburg – The ultimate reference for options. It saddens me that his recent release is such crap fluff.
  • The Trading Game by Ryan Jones – While I finally concluded that the exact method of?position sizing?taught in this book is often not the best, it brought my attention to the importance and?complexities of position?sizing.?
  • The?Options Edge?by William Gallacher?- Forever changed the way I thought about options and helped me to think outside the box. Sends all the “greeks” home on the slow boat to Greece.
  • Evidence-Based Technical Analysis by David R. Aronson – A cold, slap in the face. Teaches you to apply the scientific method to any trading ideas you may have.
  • Running Money by Andrew Kessler – Reads like a novel and opens the mind. Worth it just for the thesis on the modern economy alone.
  • When Genius Failed by Roger Lowenstein – I can only hope and try not to repeat these mistakes. Are we doomed to?
  • All Your Worth by Elizabeth Warren & Amelia Warren Tyagi – You can’t forget personal finance. This is the clearest, most original & effective approach to personal finance and budgeting that I’ve come across. It does away with line-item budgets and instead focuses you on balancing your money. This way you always live well and live well within your means.
  • The 4-Hour Workweek by Timothy Ferriss – Work less, earn more and live anywhere. Yeah right! Live it, if you dare.
  • The rest of my influence comes from the world of academic journals. There are too many to mention but I generally recommend that you make a regular habit of scooping as many free research articles about finance off the web as you can.

From this list, you might think I’m an options trader but I’m not really. It just seems that some of the strongest writing and thinking about markets has come from options traders. And I know it’s a short list, but there is so much trash in financial writing that it makes sense to me that, at the end of the day, only a few gems would shine.

You can’t click on a link on the net today, it seems, without coming across someone talking about the unraveling of the carry trade. Will the Japanese raise rates and end the party? Everyone knows that the ZIRP (zero-interest rate policy) of Japan is a major spark for carry trades since to have a carry you need one higher interest rate and one lower one to make it work. And zero is pretty low.

Everytime I hear?about it, I want to throw something. First of all, it’s a matter of principle. (more…)

Given that the big news is the big market down day (and, as I write, the aftershock), I figured it was the perfect time to try some of the concepts I learned in Why?Stock Markets Crash. Sornette provides a non-linear model formula that he attempts to fit to markets and notes that when this model finds a good fit, it often does so right before major crashes. This concept relates directly to talks of singularities. Basically, exponential growth, peppered with log-periodic (equally spaced on a log chart but closer and closer together on a standard chart)?waves, results in a singularity or critical time where a crash is highly likely.

There are several parameters that need to be optimized and, since it’s non-linear, it requires some major computation power. All those parameters make it more difficult because, during fitting, you happen upon local minima that?aren’t the real best minimum. So you have to run the optimization several times with different starting seed values and hopefully converge on the answer.

So enter Java. I wrote a program that would read in market data (S&P 500 since the ’03 bottom) and try to perform a fit to the model. (more…)

I just finished reading Why Stock Markets Crash, a book that has been on my radar a while and I finally found it at the library of all places. Have you ever heard of this place? They have tons of books you can read for free! Anyway, the basic thesis of the book says that markets, while normally holding to effcient market theory, become highly predictable when herding behavior creates bubbles. These bubbles often take a shape that can be fit to a non-linear model of log-periodic oscillations that results in a critcal point in time or singularity. Ah, there’s that crazy, kooky word again!

Ever since I was?at university (that’s?Euro-trash for “in college”), I’ve been reading and pondering this concept of the singularity. I first heard of the idea in The Physics Of Immortality and later in The Singularity Is Near. If you’ve read any of these books, then you know what I mean by the Singularity and, if not, then basically it is a point at which greater-than-exponential growth leads to nearly vertical growth and a paradigm shift occurs that alters the system beyond recognition. (more…)

I’ve read plenty of vitrol about the Sharpe Ratio (return divided by volatility) and how dangerous is can be and how insufficient it is as a measure of risk, but I’ve never been one to go all black & white about any piece of information. I find it hard to believe that something valuable can’t be gleaned from what it is saying to an investor, at least on a relative scale. My current experience with UP (Uberman’s Portfolio)?has brought it to my attention just how much of an uphill battle we often create for ourselves when we invest. Part of why UP has done well in recent times is that it’s a rare blend of high yields on reasonable volatility with very dynamic risk control capabilities such as low costs and small incremental lot size. In other words, the Sharpe Ratios in the forex world are historically high. The volatility of the markets, especially when diversified, is not a large multiple of the yields. (more…)

What the hell is my problem?

I can’t find time to write a simple entry in this blog for 8 months while taking on a new job, getting married, going on a honeymoon and moving from the East to West coast? Gosh!

Well, that’s about to change. [incredulous looks…] (more…)

When I read this?AP report, my head spun.? Why?? That’s what happens when the media spins every number coming out of the Fed until you can’t help but get some bodypart caught in the whirlpool.? This is a perfect example of what happens when monthly changes in economic releases are compared instead of looking at year-over-year.? Ahead Of The Curve spends several chapters discussing the flaws of comparing one month to the next instead of looking at annual rates of change.

If you believe this article, we are all doomed.? But a simple glance at y/y charts shows that income has been?accelerating like a shot and that this, in turn, has now caused consumption rates to turn upwards.? So the very numbers that spell doom to this writer, are actually reflective of an improving picture.? Same numbers, completely opposing views.? Here are the y/y charts of my two favorite economic indicators, real hourly income and real PCE (i.e. consumption):

09292006income-1.jpg09292006pce-1.jpg (more…)

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