Wednesday, February 27, 2013

Great Stock Market Crashes: Black Monday In 1987

Great Stock Market Crashes: Black Monday In 1987: In early 1987, there was a rash of SEC investigations into insider trading. For the most part, people were aware of the tendency of Wall Street to look out for itself, but the barrage of SEC investigations, rattled investors. By October, investors decided to move out of the crooked game and into the more stable environment offered by bonds or, in some cases, junk bonds.

As people began the mass exodus out of the market, the computer programs began to kick in. The programs put a stop loss on stocks and sent a sell order to DOT (designated order turnaround), the NYSE computer system. The instantaneous transmission of so many sell orders overwhelmed the printers for DOT and caused the whole market system to lag, leaving investors on every level (institutional to individual) effectively blind.

An Iv-B market can become increasingly deceptive so eventually an I-O crackdown makes investors realize how shaky the economy is. It's like shoddy buildings having tenants until building inspectors scare people into moving out. When the market is built on leverage this can cause ceilings and floors,  for example the need for more capital stopped the growth of the US real estate market prior to the GFC so it reached a ceiling. Then the momentum of people buying crashed into this ceiling of no easy finance so prices started to crumble. Then as they fall people can no longer sell their homes and start defaulting causing more credit contraction, to avoid this people sell early increasing the free fall of prices until they smash against the floor of what is considered to be a low enough price. This is like Iv-B weeds growing, they strain to grow faster than others to get to the light before being overshadowed. If resources are scarce then they are starving as they grow until they start to collapse, then they try to divest themselves of unused branches and leaves to survive like people selling investments to stay solvent overall. it is also like in the Roy animal kingdom where Oy hyenas might overeat R gazelles by using the leverage of high spped chasing to catch more than this energy investment in flesh eaten. Then they have more offspring until this leverage causes hyenas to be starving, then some start dying while a core of the fastest ones survive as the R prey are decimated. Then the Oy numbers reach a floor where the R prey left can support them but the momentum of this drop causes another crash, they must change their survival habits to start having offspring again or those that do will have a greater share of the population as the R numbers grow again.

Choose Your Rationalization . . . | The Big Picture

Choose Your Rationalization . . .

By Barry Ritholtz - June 22nd, 2012, 7:53AM
Yesterday’s ugliness has the pundits looking at numerous explanations, correlations and motivations for what was the causation of the 2+% market sublimation.
All those “-ations” leave out the most important one: Rationalization. For that is what all of these tales actually were.
Consider the following “causes” trotted out for the move:
-Federal Reserve failed to deliver QE3
-Global economic slowdown
-Moodys downgrade of banks
-Spain/Greece/Italy (choose up to 3)
-Commodity bear markets
-Euro currency concerns
-Middle Eastern unrest
-US Election jitters
-All of the above
I have a different view:
The day-to-day action is nearly all noise. It contains a surprising degree of randomness, but its not as totally random as some academics would have you believe.

The I-O market is a mixture of Iv chaos and Bi randomness. 

Why? Sometimes we see price continuation, leading to distinct trends. This is often acted on, reflected in the trading behavior of both Momentum traders and Trend followers.

They are the Iv side of the market looking for momentum or energy while the Bi side is looking for positional or time based factors. The trend can then grow to a ceiling and the crash to a floor. 

Occasionally, a move in either direction gets over-extended. Hence, Contrarians and Sentiment watchers try to anticipate the counter-trend reaction move.

Arbitrage can work by the assumption of a normal price and changes from this are improbable aberrations. If the stock goes up they might bet it is not a trend or momentum, instead they short the stock expecting it come back to its normal value. They might also expect this trend to hit a ceiling and then crash back down to the normal price. 

Third, the market internals can shift, become aberrational. Technicians try to discern what this is telegraphing behind the scenes in the activities of the biggest institutions as they impact the stock supply demand battle.
Or not.
All of these cross currents described above are hardly reliable guide posts. They occasionally provide a modicum of insight, but just as often lead to confusion. Typically, they make day-to-day trading exceedingly challenging. The shorter your timeline, and the greater your assumptions, the far less reliable your investment strategies become.
The exception, ironically, are those folks who measure their holding periods in fractions of a second. High Frequency Traders (HFT) — a/k/a “cheaters” — mostly know the outcome of their trades in advance, courtesy of the information provided to them by the exchanges. Their high probability front-running is not available to ordinary investors, from  whom their profits are derived.
What investment decision have you rationalized today?

The Chinese Art Bubble Is Popping - Business Insider

The Chinese Art Bubble Is Popping - Business Insider

The Chinese art bubble seems to be deflating rapidly.
Abigail Esman at Forbes posted ominous comments from a top Chinese auction house:
Three years ago the market was very strong and prices very high, but it has come down because of economic strains and because it has been too high,” notes Wang Yannan,  China Guardian president.  “It would not sustain on that level.”  Further, she adds, the real demand for Chinese Contemporary remains domestic, suggesting that early expectations  for a strong global market in  the material are fading.
James Pomfret at Reuters heard similar talk from a Hong Kong ceramics dealer:
"The Chinese collectors don't have the same energy anymore. There are fewer objects going for over HK$10 million. It was crazy in 2010 and 2011, but it has cooled down," said Joey Low, a ceramics dealer in Hong Kong.
While there are still occasional record-setting sales—like that $27 million Chinese bowl sold in April—the overall market is weak.
Indeed many of the biggest sales at auction never materialized, like that $83 million Chinese vase that turned out to be a hoax or the $44 million bronze Chinese sculptures that were never paid for.

An Iv-B market can be using deception with both buyers and sellers, here auction houses as Iv agents can drive higher prices and commissions with short time high energy hype. Often the art comes from R-B artists as innovators creating a new exponential growth in prices like B roots sprouting into a new plant. The art market can then counter innovate by creating agents to sell and appraise this new art.

The Left Right Paradigm is Over: Its You vs. Corporations | The Big Picture

The Left Right Paradigm is Over: Its You vs. Corporations | The Big Picture

For a long time, American politics has been defined by a Left/Right dynamic. It was Liberals versus Conservatives on a variety of issues. Pro-Life versus Pro-Choice, Tax Cuts vs. More Spending, Pro-War vs Peaceniks, Environmental Protections vs. Economic Growth, Pro-Union vs. Union-Free, Gay Marriage vs. Family Values, School Choice vs. Public Schools, Regulation vs. Free Markets.

There are 4 main left and right wing interactions, V-B, V-Bi, Iv-B, and Iv-Bi. 
The new dynamic, however, has moved past the old Left Right paradigm. We now live in an era defined by increasing Corporate influence and authority over the individual.

Some V influences over B workers are much stronger becaause Bi protections of unionism and community groups have fragmented. 

These two “interest groups” – I can barely suppress snorting derisively over that phrase – have been on a headlong collision course for decades, which came to a head with the financial collapse and bailouts.

This is like Y lions attacking R gazelles and undercutting the food chain, it can occur with weakened I-O regulating of businesses. 

Where there is massive concentrations of wealth and influence, there will be abuse of power.  The Individual has been supplanted in the political process nearly entirely by corporate money, legislative influence, campaign contributions, even free speech rights.

 Often however R or B can win out because being individuals they have secrecy and deception as tools. 
This may not be a brilliant insight, but it is surely an overlooked one. It is now an Individual vs. Corporate debate – and the Humans are losing.

Some of this is also people losing against AI used by corporations such as financial trading in the stock market.
• Many of the regulations that govern energy and banking sector were written by Corporations;
• The biggest influence on legislative votes is often Corporate Lobbying;
V companies use Iv lobbyists and often have a revolving door where members of their team are in government like with Goldman Sachs and the Treasury.

• Corporate ability to extend copyright far beyond what original protections amounts to a taking of public works for private corporate usage;
Changing G public property into GB private property.

• PAC and campaign finance by Corporations has supplanted individual donations to elections;
• The individuals’ right to seek redress in court has been under attack for decades, limiting their options.
• DRM and content protection undercuts the individual’s ability to use purchased content as they see fit;
V corporations against B music listeners, however they can use piracy which is hidden and deceptive as a response.

• Patent protections are continually weakened. Deep pocketed corporations can usurp inventions almost at will;
• The Supreme Court has ruled that Corporations have Free Speech rights equivalent to people; (So much for original intent!)
None of these are Democrat/Republican conflicts, but rather, are corporate vs. individual issues.

Romney’s Success at Bain Capital: The Business as Scam Model | Op-Eds & Columns

Romney’s Success at Bain Capital: The Business as Scam Model | Op-Eds & Columns

It’s not just the tax code that PE companies game.  By loading the companies they acquire up with debt, PE firms like Bain make them much more vulnerable to bankruptcy. While the creditors who lent the acquired company money presumably understood the risk, there are often many inadvertent creditors such as suppliers, landlords, and even workers through their pension. (The debt is always held by the acquired company not by Bain, which carries no risk beyond its limited investment.) If a Bain-owned company goes under, these inadvertent creditors can take big losses. In the case of pensions, part of the loss will come back to the taxpayer through the Pension Benefit Guarantee Corporation.

This is Iv agents using V loans to raid Bi pension funds for profits like Oy henas attacking a Ro herd of buffalo, then it might have to be repaid by Ro government pension programs. 
PE companies like Bain also profit by breaking implicit promises made by the companies they acquire. There are numerous cases around the country where state and local governments have made concessions to local businesses in the form of tax breaks, land sales, infrastructure improvements and sometimes even industry specific training in public schools in order to keep a firm located in the area. Many small businesses would be reluctant to renege on their side of the bargain and shut down a factory. PE firms like Bain, don’t feel bound in the same way.

Iv agnets compete with each other to use deception and lbuff for profit, those that don't miss out because I-O weakness prevents exposure of this.
Similarly, there is often a sense of reciprocity between workers and employers where workers understand that if they work hard in their younger years and acquire firm-specific skills, their employer will keep them on the payroll in their older years when they may not be as productive. This can be a profitable long-term strategy. However, a PE company like Bain, that doesn’t care about the long-term, can break the second half of this deal for sizable short-term profits. (My colleague Eileen Appelbaum has afuller discussion of the ways in which private equity firms earn above normal profits.)

Iv-B is a short term highly leveraged tactic which gets resources from V-Bi that has a long term low energy strategy.
In short, Bain Capital is not about producing wealth but rather about siphoning off wealth that was produced elsewhere in the economy. There is no doubt that one individual or one company can get enormously wealthy if they are able to do this successfully. However you cannot have an entire economy that is premised on the idea that it will siphon off wealth produced elsewhere. It is not clear that Mitt Romney understands that fact, but certainly the general public should when it goes to vote this fall.

 Sometimes this can still be a positive sum game where all parties benefit, when the economy has plenty of resources this process can be like some trees growing faster by the Iv branches getting more Gb nutrients from the soil. If it becomes G-GB then in a zero sum game there can be winners and losers, if the economy is poor it becomes a Roy negative sum game. Here hedge funds become Oy and might do this to stay solvent with massive debts to Y companies. Whoever wins against these Oy vulture funds might then minimize their costs and losses.

Leverage this

The Epicurean Dealmaker

Finance has always been complex. More precisely it has always been opaque, and complexity is a means of rationalizing opacity in societies that pretend to transparency. Opacity is absolutely essential to modern finance. It is a feature not a bug until we radically change the way we mobilize economic risk-bearing. The core purpose of status quo finance is to coax people into accepting risks that they would not, if fully informed, consent to bear.

This is the nature of an Iv-B economy where Iv agents use deception to lure in B clients and each other. it causes false optimism and growth towards a ceiling and eventual collapse. Weak I-O regulatiors and markets prevent transparency moderating this momentum and deception.

Financial systems help us overcome a collective action problem. In a world of investment projects whose costs and risks are perfectly transparent, most individuals would be frightened. 

This causes V-Bi stagnation, Iv-B bluffing about results often leads to more innovation.

Real enterprise is very risky. Further, the probability of success of any one project depends upon the degree to which other projects are simultaneously underway. 

Like growing seedlings where only one might grow into a tree and overshadow the others.

A budding industrialist in an agrarian society who tries to build a car factory will fail. Her peers will be unable to supply the inputs required to make the thing work. If by some miracle she gets the factory up and running, her customer-base of low capital, low productivity farm workers will be unable to afford the end product. Successful real investment does not occur via isolated projects, but in waves, forward thrusts by cohorts of optimists, most of whom crash and burn, some of whom do great things for the world and make their investors wealthy. 

These are Iv-B waves of momentum that crash and burn when they hit the ceiling like ocean waves hitting a beach.

But the winners depend upon the existence of the losers: In a world where there was no Qwest overbuilding fiber, there would have been no Amazon losing a nickel on every sale and making it up on volume. Even in the context of an astonishing tech boom, Amazon was a pretty iffy investment in 1997. It would have been an absurd investment without the growth and momentum generated by thousands of peers, some of whom fared well but most of whom did not.

The losers become like humus for the newer Iv-B seedlings.

J'accuse, Part Deux

The Epicurean Dealmaker

J'accuse, Part Deux

Damn, now Justin Fox needs to be spanked.
And here we come to the rub. Private equity has boomed in recent years, but not for the tax reasons Mr. Fox claims. It has boomed because it has been successful, thereby attracting all sorts of LPs who want to invest their capital in an asset class (or way of investing) that delivers good returns while offering diversification from other more liquid traded asset classes. It has boomed because there has been a coincident global liquidity glut in the credit markets, which has delivered very low-rate, almost condition-free debt financing to PE firms to grease their acquisition of more and larger companies.

Many economies such as Japan and China with artificially lower interest rates had to lend their money in US dollars, part of their economies were V-Bi savers looking for Iv-B higher interest investments like the V-Bi parts of a tree looking for roots and branches giving growth. This growth in Iv companies was also like Oy predators using leverage to go after companies, often they did this by raiding the Bi pension funds like Ro herds being attacked. This caused the Bi unions to break up into B workers that competed with each other for lower wages, the Iv hedge funds then had a more profitable company from this plunder and sold on leverage for large profits. This was then like the economy cannibalizing itself when deregulation weakened the I-O market, it is like the O middle of the food chain in the Roy animal kingdom weakening allowing Oy predators to decimate Ro herds destabilizing the food chain. 

 And it has boomed—in the face of this massive dual influx of debt and equity capital—because it has continued to be able to find plenty of target companies, both public and private, which it can buy for X and sell for 1.6X. Private equity indeed comprises a larger part of the capital markets and the M&A scene than it ever did, but this is because there continues to be a very large number of underappreciated, undermanaged, and underinvested companies out there in the economy that are ripe for the kind of transformational investment private equity does so well. And it appears that there are a lot more of them now than we ever thought there were in the past.