The Big Picture | Quantitative

Lehman Brothers $20 Price Target Complete

Monday, June 30, 2008 | 05:15 PM

in Quantitative | Short Selling | Trading

In the beginning of June, I noted that Lehman Brothers (LEH) was reiterating a sell signal on the Fusion IQ ranking system. So too was CIT Group (CIT).

Lehman closed at $19.81, and is now at an eight year low on "Take-under" speculation. CIT is $6.81, about 32% below the June 3rd call.

At the time, we put a $20 price target on Lehman, and warned against owning CIT. LEH is since down 41.4+%; CIT is down 28.77%.

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I rarely use the blog to promote our Quant tool, but damn, if you missed this one, you left a lot of money on the table. I am reiterating these two calls because they were such jumbo winners -- 30% in less than a month. If you haven't tried the tool you are missing out on an enormous moneymaker.

Advertisement over.

Visualizing Data

Wednesday, June 11, 2008 | 03:29 PM

in Mathematics | Quantitative | Technical Analysis

My friend Paul has a chart from BP's data, Visualizing Global Oil Markets: 1965-2007 (not my favorite chart porn in the world).

Lately, I have been greatly enjoying the way numbers are depicted in a visual context, vis Visualizing Data. The site tends towards an eclectic depiction of data, which provides different ways of thinking about numbers, modeling, and the world.

I find it to be a fascinating exercise. This approach has very much colored how I approach and contextualize data. Some recent examples from the site:

Explore Your del.icio.us Tags and Bookmarks

Themail splits your emails into keywords and phrases:

17 Ways to Visualize the Twitter Universe

Enron Email Connections

Personal Visualization for the Obsessive Compulsive (to understand OCD, this is an inventory of every distinguishable object in a bedroom - books, DVDs, CDs, documents, storage bin)

And my favorite: Area Codes in Which Ludacris Claims to Have Hoes

Fun stuff!

Half Empty? No Such Thing!

Thursday, May 22, 2008 | 06:01 PM

in Data Analysis | Psychology/Sentiment | Quantitative

Is the glass half empty, or half full?

I have heard that question posed many times, and never been happy with the standard answer. I've always believed there is no such thing as half empty. A 10 ounce glass with 5 oz in it is half full. (Half of zero is still zero -- assuming your calculation does not consider it an error).

You can say, correctly I might add, that with 5 oz in it, when it formerly had 10 oz, it has been half-emptied.

But this is essentially a grammar, not philosophical problem.

The answer depends upon whether you are asking for the current volume, or the recent trend.

The Recession Buy Indicator

Sunday, May 18, 2008 | 09:00 AM

Interesting piece by Mark Hulbert in the Sunday NYT on the Recession Buy Indicator. This timing signal was created by Norman Fosback author in the mid-1970s of the popular investment textbook “Stock Market Logic.” The book, though out of print, was first published in 1976, and has gone through 18 printings, selling more than a half-million copies (used copies are available at Amazon and elsewhere).

The indicator goes something like this:

"The [ Recession Buy Indicator] focuses on the four business barometers that together make up the federal government’s index of coincident economic indicators. These four focus on industrial production, manufacturing & trade sales, nonfarm payrolls and personal income. The Recession Buy Indicator is triggered when — as is the case today — each of these four gauges is below its level of six months earlier. On such occasions, Mr. Fosback considers the economy to be in a recession or very close to it."

I love this sort of approach, for several reasons: It is a contrarian play, which has tremendous appeal to me; it provides an objective, mathematical way to make a buy or sell decision; it has a significant body of backtesting.

Since creating the indicator in 1979, it has triggered 4 buy signals. Over the 12 months following, NYSE average gains were 37%, and after 3 years, 106% (triple the stock market’s average).

Before you mortgage the house to buy long dated index calls, however, there are a few caveats worth noting. The previous signal was in February 2001 -- 18 months before 2000-2 bear market lows. Buyers of that signal got crushed in the ensuing selloff.

That sort of miss is the reason Ned Davis Research is less of a fan. While the average performance of the indicator was very good, the misses are enough to caution not blindly following the signal. And, during some recessions, the stock market’s actual bottom came much later.

"That is one reason, he said, that his firm doesn’t mechanically issue a buy signal six months after the economy begins to turn downward. Instead, it prefers to await confirmation from a number of its other indicators that a bottom has been formed. In the current market, that confirmation has not yet come, he said, and his firm has a policy of not trying to predict when it will."

Hulbert's use of data and statistics is why he is always an interesting read . . . Good stuff.

UPDATE: May 18, 2008 10:23am

Alternate views can be seen here and here .

Sources:
An Alarm Is Blaring: Time to Buy
Mark Hulbert
NYT, May 18, 2008
http://www.nytimes.com/2008/05/18/business/yourmoney/18stra.html

Stock Market Logic a Sophisticated Approach to Profits on Wall Street
Norman Fosback
Hardcover: 384 pages
Publisher: Inst for Econometric Research (1976)

Fusion IQ Podcast

Monday, March 03, 2008 | 01:15 PM

in Podcast | Quantitative | Weblogs

I had a lot of fun discussing FusionIQ with Andy Horowitz of the Disciplined Investor. If you are looking for a broader explanation of what Fusion does, this is a good overview.

(click to play)

TDI Episode 46: The Premiere of FusionIQ [41:57m]:

Subscribe in itunes

Global Warming Denialists: We Suck at Math Also!

Saturday, March 01, 2008 | 08:26 AM

in Politics | Quantitative | Science | Technical Analysis

"Not only do we misunderstand Science, we're bad at math, too!"

So say the innumerates.

Every now and then, I venture over to other fields to see what the debates look like. The most recent laugher was amongst the global warming denialist crowd.

Why? In 2007, the average global temperatures dropped by 0.595 degrees centigrade. This is a fact. The response from this group was to say (verbatim) "Twelve-month long drop in world temperatures wipes out a century of warming."

Um, no. As the charts below reveal, it does nothing of the sort.

As we say all the time with the Non-Farm Payroll (NFP), you look at the overall trend, not any single data point. A monthly NFP of 10,000 does not guarantee a recession, nor does a single month of 200k job gains guarantee an expansion. And neither monthly release eliminates the trend of the prior 100 data points.

All data series have anomalies -- large magnitude points that may be curious, or unusual. To claim that a "Twelve-month long drop in world temperatures wipes out a century of warming" simply reveals a disturbing statistical/mathematical incompetency that is rather embarrassing.

The 20 year and 130 year charts clearly explain what this quite clearly.

The shorter term chart shows a volatile series, with high magnitude aberrations to the upside (1998) as well as the downside (2008):

>>
Yeah! Global warming has been defeated! (1987-2008)

The longer term chart unequivocally reveal a long term trend, as the data points move from the lower left to the upper right

Boo! Global Warming Remains an Ongoing Trend (1880-2010)

Sources: Watts Up With That?

If the above long term chart was a stock, would you short it?

Now, my own views on Global Warming are spectacularly conventional: Take 6 billion people, give them an industrial revolution; then for the next 2 centuries, have them burn all manner of carbon products. Its not too hard to imagine this activity might impact the system in which it takes place.

These aren't the ravings of an enviro-nut. I am a big time energy consumer. I don't lecture anyone about their energy consumption. Anytime someone offers me a ride on a private jet, I jump at it. Yes, I dislike SUVs -- but that's because they are ungainly, unsafe, handle poorly, and go-too-slow. I personally have way too many motorized vehicles, all but one of which skew towards high-horsepower, go-fast, poor-fuel economy end of the scale. Trust me when I tell you a 6 speed manual transmissions in a V12 is not about saving gasoline.

Another disclosure: I have been long oil for 5 years, and quite a few oil companies for much longer. I am not a shrinking violet when it comes to recognizing the ongoing demand for energy, and the role that carbon based products are likely to play over the next decade or longer. I have personally profited hugely from these oil positions.

But I am at heart someone who loves math and statistics, and who finds the abuse of the truth to be offensive. Anyone who claims that a high magnitude outlier within a volatile data series conclusively proves this or that -- someone who chooses to ignore the broader data trend -- is simply putting their own mathematical ignorance and innumeracy on display.

Your mileage may vary . . .

UPDATE: March 1, 2008: 1:45PM

Do not misunderstand my position: I am not advocating pro or con for any specific policy, nor am I arguing against nuclear power.

What I said above is the person who made the statement that the past 12 months average temperature decline has wiped out a century of global warming is a clueless innumerate.

I appreciate the many intelligent statements in comments. My beef is with the chart and the math, not the policy discussion.

Source:

4 sources say “globally cooler” in the past 12 months
Anthony Watts
Watts Up With That? 19 February 2008
http://wattsupwiththat.wordpress.com/2008/02/19/january-2008-4-sources-say-globally-cooler-in-the-past-12-months/

The Innumerate (mathematically illiterate):

Temperature Monitors Report Widescale Global Cooling
Michael Asher
Daily Tech February 26, 2008 12:55 PM
http://www.dailytech.com/Temperature+Monitors+Report+Widescale+Global+Cooling/article10866.htm

Evidence of Global Cooling
Brit Hume
Fox News, Thursday, February 28, 2008
http://www.foxnews.com/story/0,2933,333328,00.html

Drudge

Barrons Review: Is the Magic back at Disney?

Monday, February 25, 2008 | 01:30 PM

We've held onto The Walt Disney Co. (DIS) for quite some time.

I've mentioned it in a positive vein repeatedly -- over a year ago on PBS with Paul Kangas, and then again here (Tribune Media), and even a year before that on the Pixar takeover.

Why? A few years back, our quant tool (an earlier version of the FusionIQ software) had Disney highly ranked (12/05/2006). Since then, the shares have performed rather well, especially as the US dollar weakened.

But back in 2005/06, analyst coverage was rather neutral. Well, it turns out that the fundie guys missed the boat, while the unbiased quant assessment turned out to be much better at stock picking.

Since last year, however, there has been a deterioration of the many factors that go into the quantitative ranking of Disney: The short and intermediate term trend was broken, money flow slowed down, and institutional ownership slipped. The quant ranking of DIS started to drop to bearish levels (below 70), prompting us to exit the positions in our managed accounts.

Fast forward to this weekend's edition of Barron's: They had a glowing cover story titled "The Magic is Back" about Walt Disney and its prospects for the future. Problem is, its a few years late to the party.

Rather than merely assume Barron's cover story is a contrary indicator, we decided to run Disney through the system to generate a new unbiased metric. As seen in the chart below, Disney's master quant ranking is now down to only a 58 out of a possible 100.

Maybe there is some magic left in the kingdom, but objectively speaking, its not showing up in our system. With only a 58 ranking, I cannot tell if the magic has come and gone, or if its already reflected in the share price.

If you want to invest in Disney shares, then perhaps your money would be better served waiting for the quantitative ranking to improve. We consider it bullish when its ranking score moves back over 70 again. (I will set up an email alert based on ranking change and post it here if and when that occurs).

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Disney (DIS) daily
click for larger chart

Chart courtesy of FusionIQ

Three of the Nasdaq Four Horseman Are Limping

Friday, February 22, 2008 | 11:35 AM

in Markets | Quantitative | Technical Analysis | Trading

Apple (AAPL), Google (GOOG) and Baidu (BIDU) -- three of the NASDAQ FOUR HORSEMAN -- have been coming up gimpy since their FusionIQ timing sell signals (triggered at much higher levels several weeks ago).

These stocks have fallen precipitously since those Sells.

Only Research in Motion (RIMM) -- which gapped open strongly yesterday -- acts well. The other three horsemen stocks have clearly broken their uptrends, and are in the process of being repriced. We point this out because trading highly volatile names like these can be dangerous especially if one doesn't have a Sell Discipline.

Unbiased, indicator-driven trading signals can help make you a better investor. Whether its based on technicals, fundamentals, valuation or quantitative research, having a non-emotional layer to your investing/trading plan is always helpful.

I am biased towards our signals (FusionIQ), but any objective timing method that would have gotten you out of the way in these 3 names weeks ago is a good thing -- you would have avoided a lot of pain.

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Four Horseman of Nasdaq

note: Sell Signals are indicated with a red "S"

Apple (AAPL)

Continue reading "Three of the Nasdaq Four Horseman Are Limping"

AIG: Don't Try to Catch the Falling Knife

Tuesday, February 12, 2008 | 04:15 PM

in Derivatives | Quantitative | Technical Analysis | Valuation

Here's an excerpt of a report we put out on Monday:

AIG shares broke down through what had been solid support over the last three years on the second heaviest weekly volume on record going back to 1996. The breaking of support happened to coincide with news that outside auditors had found deficiencies in the way the company values some financial derivatives it has written based on collateralized debt obligations (CDOs).

Additionally with a FusionIQ Technical Rank of only 12 (out of a possible 100) forward returns for AIG do not look promising. The next downside target for AIG shares is $ 32.00 (green line) and this aligns nicely with the objective point and figure derived target of $ 33.00.

Analyst sentiment remains overly bullish with 14 BUYS and only 4 HOLDS, particularly given the recent breakdown in price. We would expect to see the analyst recommendation skew migrate from its more bullish posture over the next several weeks/months bringing additional downward pressure to shares.

From a tactical trading strategy rallies into strength can be sold into to either exit long positions or put on new shorts positions.

American International Group (AIG) -
Weekly Chart through Monday's close

chart courtesy of FusionIQ.com

The Flawed Fed Valuation Model

Tuesday, February 05, 2008 | 07:18 AM

in Data Analysis | Earnings | Fixed Income/Interest Rates | Quantitative | Valuation

There are lots of things that investors believe which I find perplexing. The Superbowl indicator is one, but the oddest to me is the so-called Fed Model, also known as the IBES Valuation Model.

It is not that the Fed model is so terribly wrong -- it has been both right and wrong over the years. Rather, it is the way too many people conceptualize it.

First, the definition of the Fed Model: Yield on the 10-year U.S. Treasury Bonds should be similar to the S&P 500 earnings yield (forward earnings divided by the S&P price). This, in theory, should inform you of when equities are over-priced or under-priced.

Note that the formula contains two variables: While it is commonly described as a way to evaluate when stocks are over- or under- valued, the other variable in the formula above is the forward S&P500 earnings consensus. SPX prices and the 10 year yield are the knowns, but while valuation and forward earnings are the unknowns.

Thus, the Fed model today might be telling you to things: When equities are undervalued -- or when consensus earning estimates are too high.

Let's see how that looks on a chart:
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graphic courtesy of Hays Advisory (June 2007)

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Looking at the chart above, we can identify some rather odd periods. The model had stocks extremely undervalued in 1979 -- just before a major 30% selloff. In 1981, stocks were fairly valued on the eve of the greatest bull market in history. From 1982-85, stocks bounced between slightly overvalued to undervalued, according to the model. In 1987, a very timely crash warning. 1998, an extremely early crash warning, missing a huge 2 year run in the indices. In 2001, it had stocks as undervalued -- and they proceeded to get a whole lot cheaper over the next 2 years. Equities have been extremely undervalued ever since.

Now, given that rather inconsistent track record, I find it hard to get too excited about this. But the most damning evidence against the Fed model is the period prior to 1960s. Over that entire, the Fed model had no utility whatsoever. "Out of sample" testing -- looking at a different set of data than the one proffered -- is quite damning to the Fed model.

Which brings us back to today. We continue to see the Fed model used to rationalize a bullish stance in equities. However, given that it is based in large part on analysts consensus for future SPX earnings, investors need to be extremely cautious relying solely on the Fed model. Why? Analysts are unflaggingly inaccurate at turning points. Example: Q3 S&P500 earnings consensus were +8% -- S&P500 earnings came in at -8%. Q4 has been similarly lowered, undercutting the earlier forecasts of undervaluation.

Now let's look at 2008. S&P 500 forward earnings over the next 4 quarters are as follows: Q1 = 3%; Q2 = 4%; Q3 = 20%; Q4 = 50%, according to UBS.

So stocks, so we are confronted with two possibilities. Perhaps, equities are seriously undervalued (that assumes earnings explode in 2H). An alternative explanation, and one I suspect is more likely: Analysts consensus earnings are wildly exuberant for the second half.

One last issue: Let's ignore the analysts, and merely consider mean reversion: As the chart below shows, earnings have been unusually high relative to history. If they merely mean revert, they will come down another 25%. Even worse, most mean reversion blows right past historical averages to opposite extremes.

Graphic courtesy of Vitaliy’s Contrarian Edge, from the book Active Value Investing: Making Money in Range-Bound Markets

The bottom line -- either equities are extremely under-valued, or analyst consensus earnings are significantly too high.

But to treat the Fed model as if it merely looks at valuation is to ignore a key variable -- future earnings consensus -- that tends to be wrong at the worst possible moment . . .

Sources:

Active Value Investing: Making Money in Range-Bound Markets
by Vitaliy N. Katsenelson
Wiley, September 28, 2007

A Profit Fumble -- or Not?
TOM LAURICELLA
WSJ, February 4, 2008; Page C1
http://online.wsj.com/article/SB120208551253339345.html

Fight the Fed Model: The Relationship Between Stock Market Yields, Bond Market Yields, and Future Returns
CLIFFORD S. ASNESS
AQR Capital Management, December 2002 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=381480

The Fed Model: The Bad, the Worse, and the Ugly
JAVIER ESTRADA
IESE Business School January 2006
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=877245

Solving the Price-Earnings Puzzle
CARL CHIARELLA
University of Technology, Sydney - School of Finance and Economics
SHENHUAI GAO University of Sydney - Economics and Business
April 2002UTS Working Paper No. 116
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=880002

Blog Synthesis: Gunning for the Fed Model? http://www.cxoadvisory.com/blog/internal/blog-fed-model/

Fun With Data Analysis: The Art of the Plausible

Sunday, January 27, 2008 | 10:50 AM

in Apprenticed Investor | Data Analysis | Markets | Mathematics | Quantitative

Barron's Mike Santoli looks at one of our favorite pet peeves: The use and abuse of data. His column this week, The Limits of History, notes that this has become especially prevalent of late:

"People who try to handicap the markets for a living practice the art of the plausible. Many trudge from conference room to lunch table to banquet hall lugging PowerPoint decks full of unobjectionable statistical touchstones for commission-wielding clients. At times of investor confusion and market dissonance, such as now, their art is often reduced to carving a slice out of economic history that ratifies their existing outlook."

Mike then proceeds to look at a "dog's breakfast of the kinds of historical analogies making the rounds." What is especially amusing about his list is the number of "Every time X happens, Y has occurred" that collectively produce all manners of mutually exclusive results. Since "X" occurred we will definitely have/avoid a recession; Stocks are undervalued/overvalued; Markets must rally/fall.

What is an investor to do? Whenever you are confronted with an "incontrovertible proof" based on historical data, prior to taking any action, I suggest asking yourself this short list of questions:

• Do we have enough historical examples? Is the data sample statistically significant?

• Causation or Correlation? Does "X" cause "Y" to occur? Or, are we presented with two things that may have the same underlying causes? Is there even interaction between X & Y?

• Coincidence? How possible is it that these two items are utterly unrelated (i.e., proof-we-are-clueless Superbowl indicator).

• Look for differentiating elements in different time periods: What factors are similar? What factors are different?

• Compare interest rates, inflation, dividend yield, P/E contraction or expansion, sentiment, overall market trend, business cycles -- across different eras. Might that account for potentially different outcomes?

• Any recent market environmental changes (regulation shift, financial innovation, etc.) have an impact? What might these specific changes do to the data? Consider Decimalization, ETFs, online trading, change in dividend tax, etc.

• Subjective versus Objective measures: Are the factors under discussion hard numerical data, squishy or somewhere in between? Percentage of stocks over 200 day moving average is objective; I find some chart pattern readings subjective. Earnings at time have been rather subjective; official inflation measures somewhere in the middle.

• Consider things in terms of probabilities, not outcomes: Assume a causative factor resulted in a specific event (X --> Y) 7 out of 9 times. The most you can say is that when "X" occurred in the past, it has resulted in "Y" approximately 78% of the time.

• There is a difference between historical occurrence and future likelihood. In the example above, this does not necessarily even mean that since "X" has just occurred, there is a 78% that "Y" will happen. Consider: was the first X/Y occurrence really a 100% or zero? Did the second one become 100% or 50%, then next a 66% or 33%?

• Contextualize data: Sometimes a single data point -- even a mean or median -- only tells half a story. Any data point can be trending or reversing. Going higher, lower, topping, bottoming. Each of these may have differing implications for what comes next. Inflation is high, but coming down. Gold is high -- and going up. It helps to think of data not as a still photograph, but as a frame in an ongoing film.

I'm sure there are more -- that short list is off the top of my head.

Any others? Please make your suggestions below. If we get enough good ones, I'll try to massage this into a more formal column.

Source:
The Limits of History
Mike Santoli
Barron's, MONDAY, JANUARY 28, 2008
http://online.barrons.com/article/SB120130827516518451.html

Barron's Stocks

Monday, January 14, 2008 | 01:15 PM

in Quantitative

These are the stocks in Barron's this weekend, and their master quant rankings in our system . . .

Note that many of these are on a Short-Term Sell Signals, and none have a score greater than 70. Given the macro tendencies of the Barron's Roundtable, they may be early in the calls.

Hence, these are worth watching over the next quarter for buying -- but none are really actionable immediately.

Risk Model

Wednesday, January 09, 2008 | 12:58 PM

in Markets | Psychology/Sentiment | Quantitative

Here is our forward looking risk model, as of last night's close.
Note that the most Bullish aspect is the excess bearishness!

Baseball Stats and Freakonomics Wannabes . . .

Saturday, December 22, 2007 | 08:31 AM

in Data Analysis | Mathematics | Quantitative

Much of investing relates to mathematics and the application of statistics. Markets are statistical data generating machines, and that data can be sliced and diced in a myriad of ways. We always pay close attention whenever we see an interesting application -- or misapplication -- of quantitative data that may be instructive or applicable to investing.

So I was particularly intrigued by a study in today's NYTime's OP-ED page that purported to look at the impact of steroids on the performance of Baseball players, based on the Mitchell Report. They asked the question: "In a complex team sport like baseball, do the drugs make a difference sufficient to be detected in the players’ performance records?"

Their conclusion? The authors of More Juice, Less Punch found that Steroids, Human Growth Hormone and the like do not have a net benefit to major league players. Based on their review of pre- and post- steroidal usage, the overall impact on players stats was de minimus.

I remain unconvinced.

Ever since Freakonomics became a runaway economics best seller, there seems to be increasing attempts by "rogue economists" and others to discover the hidden, counter-intuitive side of everything. This column seems to be of that genre. They would have been better served if they were channeling the statistical approach of Moneyball, instead.

When you come across broad attempts to explain complex systems, your inner mathematician should always be concerned that the methodology employed is sound, any initial assumptions made are justified, and the analytical steps taken are well supported.

In the present case, I suspect they are not. Consider the following statistical and analytical issues:

1. The authors of the Times Op-Ed looked at 48 batters and 23 pitchers named in the Mitchell Report; This may be too small a sample to draw any valid conclusion.

2. For pitchers, they studied ERA. Is the main impact pitching advantage of Juice the impact on ERA? That stat is a function of many things -- intelligence, pitch selection, opposing batter research, etc. -- not just physical power.

The authors ignored many other stats that might be more telling as to the impact of 'roids: Consider strike outs, average pitch speed, average number of pitches thrown per game, total games pitched. These data points would have been quite instructive as to the impact of performance enhancing drugs (PED) on issues such as strength and durability, even injury recovery.

3. For Hitters, they examined batting averages, home runs and slugging percentages. The same durability issues were overlooked -- games played and missed, total at bats, swings with ball contact, distance traveled of hit balls, etc.

And what about speed -- why not consider stolen bases? We know lots of runners and cyclers have been accused of using PEDs -- isn't this a valid data point to consider?

4. Dates: What were the Before & After dates? It appears that by drawing the line at the date of accusation, lots of PED usage will have taken place in the BEFORE data set. If the performance gains of the AFTER group, began in actuality during the BEFORE, the entire statistical conclusion becomes indeterminate.

5. No control group: All players begin to show statistical deterioration as they age, get worn down, injured, etc. How can we tell what their stats would have been looked had they not been juiced?

Rather than comparing pre-accusation and post-accusation stats, perhaps a better comparison would have been to look at the group of players who used PEDs versus those who didn't as their careers wound down. How do the two groups compare in their mid 30s? Late 30s? Early 40s?

Note that even this grouping may be flawed, because of the self-selection factor of those who chose to use the drugs in the first place (more injury prone, weaker, slower, etc).

6. False Accusations: Are any of the players accused in the Mitchell Report not guilty of using PEDs? I have no idea, but its a valid possibility. How might their false positives impact the author's conclusions regarding stats?

I don't know what the total impact of Steroids and Human Growth Hormone were on baseball player's performance -- but based upon the above, neither do Professors Jonathan Cole and Stephan Stigler.

~~~

One last thought: Why hasn't Baseball Commissioner Bud Selig resigned or been fired?

Shouldn't he -- like Merrill Lynch's O'Neal and Citigroup's Prince -- fall on his sword? This happened on his watch, and he apparently was asleep at the wheel. For this gross incompetency, Selig should be tossed aside like a used syringe.

Source:

More Juice, Less Punch
JONATHAN R. COLE and STEPHEN M. STIGLER
NYT, December 22, 2007
http://www.nytimes.com/2007/12/22/opinion/22cole.html

INDEPENDENT INVESTIGATION INTO THE ILLEGAL USE OF STEROIDS AND OTHER
PERFORMANCE ENHANCING SUBSTANCES BY PLAYERS IN MAJOR LEAGUE BASEBALL
GEORGE J. MITCHELL
DLA PIPER US LLP, December 13, 2007
http://assets.espn.go.com/media/pdf/071213/mitchell_report.pdf

Free Trial: Fusion IQ

Monday, December 17, 2007 | 02:00 PM

in Quantitative

As mentioned last week, I am setting up Big Picture readers with a free trial with our new quant tool: Fusion IQ Rank.

You will see when you poke around, this is a pretty high powered piece of software. Our goal was to make individuals better investors by giving them access to mathematical horsepower that they wouldn't ordinarily have access to on its own.

We will be spotlighting specific things you can do with the software over the next few months, including different screens, portfolios, signals, etc.

Go to the Fusion IQ home page , then select Subscribe. On the signup page, you will see a line that says Discount Code -- enter "BIGPICTURE07" and click on update.

The first 30 days trial is free, but you will need to enter a credit card number -- as long as you cancel before January 17th, you won't get billed.

Coming soon: High End Quant Tool for Investors

Friday, December 14, 2007 | 04:15 PM

in Quantitative

Consider this a teaser about a big announcement coming next week:

It seems that a certain high end quant tool is going to be made available to the public. I am working to see what we can do for blog readers.

Ultra-luxe, very powerful, and absurdly reasonably priced.

Its gonna be way way cool.

One Way Days: Are the rules different this time ?

Wednesday, September 12, 2007 | 07:08 AM

That's the intriguing question asked in a recent WSJ article, New Rules For Picking A Bottom?

Don't leap to the wrong conclusion. The phrase "Its different this time," in its most expensive permutation, refers to rationales why an unsustainable trend will continue, despite obvious risks.

The subject presently at hand is somewhat different: Why are usually reliable technical/quantitative signals failing to have much forecasting prescience?

One of the attractions of quantitative decision making is its attempt to bypass our inherent weaknesses. The way Humans developed has led to a great deal of fallible interaction with capital markets. Error prone decision making is hard-wired into our wetware. (See You just ain't built for it). We bring a lot of baggage to investing, courtesy of a few million years of evolution.

So it is always fascinating when decision making processes designed to bypass this weakness suddenly stops working. And we have seen several examples of this as of late:

90/90 Days: When 90% of volume is in the same direction, and 90% of price moves are also, you get a "One Way Day." These usually are very bullish signals.

"When stocks are approaching the end of a decline, investors tend to be in a panic, and their sell orders dominate trading. Then, once the selling runs its course, bullish investors step in with heavy buy orders that dominate trading and, in turn, signal the beginning of a rally.

Lately, that combination of heavy selling followed by heavy buying is exactly what the market has seen -- on steroids.

"We have been getting these days at the rate of one every 3½ days, and that's just crazy," says Paul Desmond, president of research service Lowry's Reports in North Palm Beach, Fla., who has done extensive research on the subject. "We don't have anything like that anywhere in our history" of data, going back to 1933, he says."

Other independent research shops have had related problems. Ned Davis Research tracks a variation which they call nine-to-one days (trading volume only). The problem is that the huge uptick in volatility has wreaked havoc with these signals. Because there were too many nine-to-one days, Ned Davis simply raised their 9-to-one threshhold to 10-to-one days.

This isn't the first time I've seen this: From 2001 thru 2003, the usually reliable Arms Index simply stopped being a good timing signal for buys. Dick Arms re-jiggered it, placing the basic index into an oscillating framework. Like Ned Davis' approach, this eliminated the previously rare but suddenly all too common signals. The weaker "false" signals were eliminated.

What is different this time is that 2 trillion dollars worth of fast money is in the hands of active hedge funds. Failing to adapt to that could be quite expensive for traders . . .

Sources:
New Rules For Picking A Bottom?
E.S. BROWNING
WSJ, September 10, 2007; Page C1
http://online.wsj.com/article/SB118937309413321829.html

Fear the Roller Coaster? Embrace It
DENNIS K. BERMAN
WSJ, September 11, 2007; Page C1 (THE GAME)
http://online.wsj.com/article/SB118947349416123314.html

Investors' View Of Risk Returns To Normal
Justin Lahart
WSJ, September 10, 2007; Page C1
http://online.wsj.com/article/SB118938618650822150.html

You just ain't built for it
Apprenticed Investor: Know Thyself
Barry Ritholtz
RealMoney.com, 5/3/2005 10:20 AM EDT
http://www.thestreet.com/_tscs/comment/barryritholtz/10221284.html

"Dear Investor" -- Quant Letters to Clients

Thursday, August 23, 2007 | 07:11 AM

in Hedge Funds | Psychology/Sentiment | Quantitative | Trading

These are floating around anyway, so we might as well offer them all up in one place: (Thanks, Rob!)

Below you will find the various letters written to clients from many of the quant shops which have experienced some "dislocations over the past month or so.

The list includes:

AQR (AQR.pdf)
Barclays Global Investor (Barclays.pdf)
Black Mesa Capital (Black Mesa.pdf)
Highbridge Statistical Opportunities Fund (Highbridge.pdf)
Renaissance Technologies (Renaissance Technologies.pdf)
Sowood Capital Management (Sowood.pdf)
TYKHE (GS) (Tykhe.pdf)

I found it particularly interesting that very few managers took real responsibility for what occurred. Only Jim Simons of Renaissance Technologies actually blamed their own system ("the principal culprit was our Basic System") for the recent performance issues.

QuantlettersAug07.pdf

Did I miss any? If so, forward a PDF to me for posting . . .

Update: August 23, 2007 10:23am

An amusing variation of these letters comes to us courtesy of Long or Short Capital blog via fund manager Scott Frew:

Long or Short Capital "Dear Valued Client"
"Dear valued client".pdf

Update 2: August 23, 2007 3:09pm

I see that most of these ran earlier this month in the WSJ:

Dear Investors, We're...

Hedge Funds Strain To Find Words to Say 'Sorry' for Your Losses
GREGORY ZUCKERMAN
August 16, 2007; Page C1
http://online.wsj.com/article/SB118720257346298683.html

Efficient Market/Random Walk Joke

Monday, July 09, 2007 | 09:58 AM

Here's my variation on the classic EMH joke:

Two Economics professors are walking back to their offices after giving a lecture on the Random Walk of stock prices.

"Look!" says one of the academics, "There's $1.7 billion dollars!"

"Nonsense!" says the other. "The market efficiency hypothesis states that security prices fully reflect all available information. That money is impossible."

"Schmucks!" laughs Jim Simmons of Renaissance Technologies. He picks up the money and goes back to his office.

You may now return to your previously scheduled belief system.

New TheStreet.com Column: Nine Stocks for Playing the Long Side Safely

Tuesday, June 12, 2007 | 06:30 AM

in Economy | Investing | Markets | Quantitative | Valuation

The Real Money column I mentioned Friday has been moved to the (free) The Street.com side: Nine Stocks for Playing the Long Side Safely

Before you yell "Capitulation!," understand that this was in response to client requests. I continue to have concerns about a laundry list of economic problems: inflation, slowing growth, slow job creation, rising interest rates, the drag from housing.

What led to this research and stock selection was a repeated request from research clients, managed asset accounts, and institutional traders, who have all asked some variation of this question:

"I am afraid this market is overvalued, over-extended, and overdue for a major correction -- but I want to play from the long side (variation: I cannot afford to fall behind my benchmark). How can I participate in a way that is relatively safe, but still allows me upside?"

The response we crafted was to quantitatively screen stocks for these characteristics:

1) Identify strong sectors with good money flow;
2) Screen for stocks with the best technical and fundamental potential;
3) Look for stocks within those sectors with desirable risk/reward characteristics;
4) Find stocks that are near good entry points;
5) Avoid the "runaway momentum" names;
6) Look for stop-loss protection that is a reasonable percentage downside away.

The column identifies nine firms, with entries, targets, and stop losses.

The stocks and sectors I picked, however, are more likely to outperform on a relative (as well as on an absolute) basis, especially if the economy slows further or slips into a recession. Our goal was to identify those stocks that will participate in the upside, but at much lower levels of risk.

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