Rhody Trader

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On this side of things I work with a professor friend on a trading system project. It’s neural net based. Don’t ask me about the specifics of it. He’s doing on the heavy lifting on his side. My role in all this is to provide the real world perspective, to poke and prod and challenge things.

Right now the focus is on stock trading, and the results look very good. The system is in a kind of beta period, running live but not in a public fashion as bugs get worked out in the underlying systems. It’s not really ready for prime time in any case, as while it’s been running since about March, we haven’t done any testing on data further back as yet to get a view on how it would perform in different market conditions.

But I digress. What I really wanted to talk about is the kind of academic/practioner battling I do with this prof. It can get intense at times. He gets caught up in the mechanics of the models and things and I try to get him to think about it from a prospective user’s point of view. This discussion on The Big Picture blog really rang true with me. I particularly loved the quote “..the result of very smart people falling prey to the psychology of idiots and refusing to actually think about a problem …”

Here’s another good article: How Scientists Helped Cause Our Financial Crisis.

There is a lot of happiness in the US this morning. I even think those who weren’t supporters of Obama aren’t overly upset at the result. This is quite the contrast to 2004 when I saw a great deal of anger when Bush was re-elected. The mood strikes me as a good thing, but I actually think the situation would probably be fairly similar if the results fell the other way. It strikes me that today the country breaths a collective sigh of relief that the Bush years are finally over and done.

I’m not generally one to place the blame at the foot of the president for everything ill which happens during his tenure. Nor do I heap praise on him when things are going well. There are a great many currents and events which drive things, some of which have roots going back decades. I will say, however, that our outgoing president did not aquit himself particularly well during his term in office. He was strong in the days following 9/11, but after that I start having some serious problem with his decision-making, particularly in terms of international relations.

For the record, I did not support either Obama or McCain as I never saw either one being well positioned to lead this country in the manner I’d like to see it lead. Obviously, Obama is now in a position to prove me wrong, and hopefully he does. I really haven’t liked the way things have been going in a lot of areas of the country. Maybe the change in administration and the potential change in the mindset of the country to go along with it will alter that course.

At this point, I need to say I’m very disappointed with black voters. The numbers I saw this morning said Obama won the black vote 95%-5%. You cannot possibly tell me that 95% of black voters agree with Obama’s policy ideas over McCains. That strikes me has highly improbable. If the balance were more along the lines of the 65% of other minorities which voted for Obama, I would find it a bit more realistic. That 95% number, though, tells me it was a race thing - that black voters were voting for the black candidate. It makes me sad. It also sets Obama up for a negative backlash in the black community when he doesn’t pursue policies a large portion of them want to see.

Now we get into the really telling part of things. Over the next couple of months we are going to see the composition of Obama’s cabinent, which will tell us some things. We’re probably going to see just about right off how he’s going to handle the economic situation and what he’s going to do about Iraq, as in the latter case there are some immediate decisions he’ll have to make.

You could almost say Obama’s first 100 days start now.

Congress is also on the clock. They’re approval rating was worse than Bush’s, but they still picked up seats in both the House and Senate. They better produce or it’s almost guaranteed that the brooms will be coming out in 2010 to sweep them right back out of power.

Here’s a fantastic quote I just came across:

But the economics profession for the past thirty years instead focused on producing stochastic calculus porn to satisfy young men’s urge for mathematical masturbation.

It was written by Arnold Kling in his Economists with Pseudo-Knowledge blog post. His basic premise is that economists don’t really have a clue how to sort out what’s going on these days. Highly controversial, of course.

The level of USD/JPY is bringing me to recall the early years of my life as a professional forex analyst. Back in those days was the first time the 100 level had been broken to the downside, which was obviously a big deal. It was a fun time to be analyst because things were just flying. I remember actually wanting to go into the office on Sunday evening to see how Asia was going to start the new week.

Interestingly, in the end the selling ran out of steam and right about when it did the Bank of Japan came in a bought USD, driving the market right back up. It was about the most well-timed intervention I can remember seeing.

I’m becoming increasingly convinced that traditional ways of viewing and interpreting market sentiment are no longer valid. There has always been a bit of “wise guy” element to reading market psychology. I’m referring here to looking at things like the covers of magazines, the views of pundits on television, what people talk about at cocktail parties, and all that.

It used to be that a major financial headline on the cover of a magazine like Time was a pretty good indication of the end of something. These days, though, the news cycles are so much faster that the media is on top of the things much more quickly. As a result, the public is aware much more rapdily than used to be the case.

On top of news and information dissemination happening much more rapidly, I think there’s more awareness of those sentiment readings. As a result, we’ve got this funky feedback mechanism where contrarian analysis is becoming a large part of what would have otherwise been the standard view of things. That means to a large degree there really isn’t a contrary view.

I think the only really meaningful sentiment reading is what people are actually doing. That shows up in prices, volume, and open interest, as well as in the Commitment of Traders data.

Yeah. It’s that time again in the stock market. Four times a year I have to pitch in with coverage of conference calls and earnings previews. It’s a major pain. Most of the time my focus is on technical and quantitative analysis of indices, sector ETFs and individual stocks. In other words, each quarter I have to take spend less time coming up with interesting trading ideas and more time focusing on the fundamentals and news items. It’s annoying.

Several folks have commented in recent days that the governments, central banks, and the like around the world have been going at this financial crisis piecemeal rather than addressing it in a unified fashion. The criticism they are leveling is perhaps a bit harsh in general given that in some cases it has clearly been a case where action was needed very quickly to put out a specific fire - like banks going under.

That said, all of these numerous and various efforts taken around the globe do give the impression of a lot of panic action. For example, the move by Ireland to guarantee deposits created a capital drain from other Eurozone countries where there weren’t guarantees in to Eire. That worsened things in the big picture rather than improved them. In other words, those officials were just reacting without really considering (either that or they were intentionally taking advantage of other EZ members, which has other implications). The idea was perhaps a good one, but more consideration and coordination was required.

When someone, or some institution, is in reaction mode it generally means less than optimal decision-making. Now that the leaders are getting together, maybe we’ll see some more considered action.

Here goes:

Apparently US consumers have built up about $850 bln in credit card balances. Why not just have the federal government pay that all off? It’s a bit pricier than the Paulson plan, but think of the benefits!

• We immediately improve the financial standing of the majority of adults in this country.
• The financial system is massively liquified, easing the current crisis.
• There would be tens of billions in savings on interest charges.
• Consumers will have a clean slate to start consuming again.

OK. Clearly this plan has some moral hazard and other fiscal issues. It would be enormously popular, though.

The Financials are down like 8%. Those darn shorts must be back in there driving prices lower.

Oh, wait. There are no shorts.

Doh!

The other day it was suggested to me that I check out Zeitgeist - The Movie. I was told it’s a real mind trip. Haven’t had the chance to watch it yet, but I’m looking forward to making the time (2 hours). The trailer is interesting. If you follow the link you can watch the trailer (first video) and the movie (second) right from that page.

Have you watched it already? What did you think?