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Wednesday, November 26, 2014

The Days of Green Eyed Men

Common Knowledge is a slippery concept that been bugging me for a while. If something that everybody knows is not worth knowing, then what is the point of learning from wisdom of the past? If people learn from history, why are they constantly repeating old mistakes? If human nature never changes, how do I judge progress? The more I think and read about these topics, the more I get confused...

The theory and application of Common Knowledge is a relatively new field of philosophy, only about as old as I am. Wiki has a pretty good summary here (link) with following well known example:
On an island, there are k people who have blue eyes, and the rest of the people have green eyes. At the start of the puzzle, no one on the island ever knows their own eye color. By rule, if a person on the island ever discovers they have blue eyes, that person must leave the island at dawn the next day. On the island, each person knows every other person's eye color, there are no reflective surfaces, and there is no discussion of eye color.

At some point, a missionary comes to the island, calls together all the people on the island, and makes the following public announcement: "At least one of you has blue eyes". The missionary, furthermore, is known by all to be truthful, and all know that all know this, and so on: it is common knowledge that he is truthful, and thus it becomes common knowledge that there is at least one islander who has blue eyes. The problem: assuming all persons on the island are completely logical and that this too is common knowledge, what is the eventual outcome?

The answer is that, on the k-th dawn after the announcement, all the blue-eyed people will leave the island.
 I am a market practitioner, so pure philosophical problems interest me somewhat intellectually, but only to a point where I ask: "Whats the use?" Specifically in financial speculation, 'common knowledge' is misleading and can not be relied upon most of the time.

Federal Reserve (aka The Fed), is sort of 'public' outfit, entrusted to run Treasury Bonds of US... I know, I know... you can spare me a lecture about dual mandate this, and financial stability that... None of it is possible or feasible, at least not in the way they do it for a past few years. Besides, there is very little that monetary policy can influence in general - there is iron-clad statistic showing little or no correlation, but nobody cares to research. Then there is QE, that suppose to influence stock market somehow, while nobody paying attention to the fact that QE is directed towards bonds and not connected to SandPee in any shape or form.  The same nonsense being repeated on Tee-Vee for years became sort of reality, and conditioned investor psychology no doubt ... but I digress.

QE 1 was a bit different animal, but here is what simply happens.
When Fed buying Treasury and Mortgage Bonds on (not very) open market, newly minted cash flows from US Treasury - thru The Fed - to The Banks, to pay for bonds that Banks bought with (non-cash) funds, borrowed ... from The Fed. No new money is effectively created (note - I am not talking about inflation, as prices do spiral out of control, however it has nothing to do with QE). Treasury department just works as a low cost printer and intermediary clerk - small fish. Banks earn a risk-free spread, according to age old banking model "3-6-3 or better" (old joke: borrow at 3%, lend at 6%, hit the golf course by 3pm). Now The Fed returns cash to Treasury and keeps free Bonds to maturity, while receiving their own interest rate. Although it looks like just transferring money from left pocket to right one (I thought so too), its actually a very profitable enterprise. In fact (its a public record, but ones again - nobody bothers to look), The Fed has been kicking hundreds of billions dollars of profit upstairs to US Gov, after paying 6% vig (ahem, statutory dividend) to member banks.

Technically,  The Fed is the biggest and (quite possibly) the most successful bond fund in the World.
Observe 10 year note yield chart attached below. (For uninitiated, yield is an inversion of price. When interest that bond pays is rising - the price of same bond goes down, but when interest or yield plummets - bond prices go bonkers to upside).
Evidently, they've been riding this bull train since at-least 2008 and probably much longer than that, with QE (and especially QE3) as a perfect example of 'how to buy the dip'.
I took a liberty to throw in a crayon, projecting 1% 10-year note yield sometime in a year or two, based on rhythm of the chart and slope of blue channel. Not saying it will happen like that or at all, don't care to make predictions either. As a matter of fact, I was short treasuries last year, and long for most of this year (I trade 30-year bond - its a big boys game), without relying on any kind of crack-pot theories or cockamamie squiggly lines on a chart.
I have Gravitsapa for that... err, what are you using for intergalactic travel...?

So next time, when someone tells me that Fed governors is just a bunch of academics with no real world experience - I am going to spit into that person's left eye; and if they yell that "they know nothing" (extra Jim Cramer) - I'm gonna bitch slap them too.

The point of this exercise is this:
What I think is a common knowledge, may not be common at all...
O, and I think - my wife is THAT fucking MISSIONARY


A look-back nearly 5 years after this article was published.
In a chart of 10-year Note yield presented below: black arrow points to the time when "The days of Green Eyed Men" was published. Two blue lines are there to easily see 1.6% yield in 2015 and then 1.5 and 1.3 in 2016.
I'd say it's close enough for government work... No?

Saturday, November 22, 2014

Private and Public

Value is, therefore, nothing inherent in goods, no property of them, but merely the importance that we first attribute to the satisfaction of our needs, that is, to our lives and well-being, and in consequence carry over to economic goods as the exclusive causes of the satisfaction of our needs.   - Carl Menger

 Over the years of investing I accumulated a list of stocks I call "My Fetish Favorites". The list is not large, as it takes a lot for me to get totally fixated on a company. First of all it has to be a great business - I am talking a leader in its field, an innovator and a pioneer, preferably a monopoly or at-least with very little competition. Secondly, it has to have a charismatic figure at the top - not just any rich white guy, but a real cracker-jack mother fucker, the kind of person that is widely admired for smarts and determination and exhibiting vicious killer business instincts at the same time. Thirdly the company has to be making a boat load of money, have solid fundamentals and good prospects for future. All this is fine and good, but I don't get paid on feelings and I don't participate in their bonus pool - the chart set-up is what I need, but when I believe in stock that much I tend to disregard the price, which inevitably leads to losses sooner or later. Ones the 'fetish' is identified, I stop trading a particular stock, but don't remove it from watch list in order to keep an eye on future action. Usually after a period of few months or couple of years, I become disconnected enough to be able to analyze price plot objectively, find a good entry point, make a conservative bet... and lose money immediately.
Yep, fetish is a bitch.

Enter publicly listed private equity firms. Generally they involved in providing capital to existing companies for expansion or restructuring (glorified loan sharks), venture capital for growth startups (IPO scams), or leveraged buyouts with goal to rip company apart and sell pieces for a sum larger than whole (extra Gordon Gekko). There are not alot of them, with three easily identified leaders - BX, CG and KKR, collectively known as 'smartest guys in a room', connected all the way to the top, corrupt as fuck and loaded with dough up to the gills. Public doesn't follow them, except during scandals (which are rare).
Perfect investment.

My long time favorite (even before IPO in spring 2012) was Carlyle Group (CG), although it proved to be not a strongest chart of this bunch, I traded it successfully several times last year and left it alone ever since. 2014 has not been kind to PE firms, with stocks either consolidating sideways, painting incomplete topping patterns, or in outright bear market (like CG down more than 20% from February top). Hopefully its just a digestion of stellar gains these stocks had in 2012-2013, but it could be an end of their 'harvesting' cycle with much lower profits (and share prices) in near future. I haven't got a clue, and don't need one either, as I will let CSI Trend Method to sort this out.



There is PSP - globally listed private equity etf  from PowerShares with 2% expense ratio, 3 to 8% yield(?) and weird allocation.

Programming note: this theme continues under label 'CG' (fetish is as fetish does).

Monday, November 17, 2014

System 12 Plus - 11-2014. Keep Moving Forward

.this update cover activity from 11/17 to 12/14/2014.

Up into September, down in October, followed by up rip into November... epic!
Bull or Bear - everybody got to be stopped out at least ones on this roller-coaster. I didn't escape that fate either, having dumped most of portfolio just days from the bottom, and then buying all this back and more. Was it a mistake to sell at the lows? Yes and no. My misjudgement was in selling too late. Having already observed sell signals in early September, I held and even started to buy more good stocks before buy signals where registered. As it turned out - CSI (Composite Score Indicator, I developed this summer) would keep me out of trouble, but I didn't trust it enough to obey sell signals and tried to front run buy signals, which led to pissing my pants when market really went into free-fall. We where THIS close from full blown flash crash (no doubt) - the turn around was a straight up miracle. Importantly, it was a good thing I sold a lot, as I became calm and collected, and was able to operate rationally again. I didn't lose much either (just few hundred of capital), but profits evaporated... there where quite a profits... Later I was kinda glad that my portfolio was light, as it allowed me some time to analyze past trades and whole market situation. This review served a solid validation for my CSI Trend Method, so much so I decided to trade based on CSI exclusively from this time on.  Mid October rally produced legit CSI Buy Signals across most System 12 stocks, some areas I've been watching, and even Experimental S&P500 Trading Program.
All is well in a house of iBergamot...
Overall it wasn't a 'hard hit' at-all, just shake it off and move on forward.



BOT: nothing
SLD: MSFT on 11/19; CHL on 12/2 (damn it); GE on 12/2; PG and WMT on 12/3; JNJ on 12/12
DIVI received: PG, WFC, JNJ, MSFT

This is MD:

MD Control: RDS out, PG in
Disqualified: XOM (by a smidge), GOOGL (as of 11/17 I don't have either)
BABA is out until further notice

This is SD:
 IBM and BAC out; T and ORCL in

This is Arnott Overlay (AO) : XOM, GE, WFC, BRK, AAPL
 RAFI 1000 index was rebalanced. Most recent weightings are here (link). Last check 7/29/2014.

 Arnott Overlay and System12 Select Theme (AOS12s) of System9.
I just took all S12 trades in full position size, ending up at about 30% of LB account. It's a bit more than customary 25% allowed allocation to single strategy, but this method shows superior results comparing to everything else (as long as I use CSI that is...lol)

EEBL include: MSFT, WFC

-----------------------------------  GURU  ---------------------------------------

Since last update in September (post link), there where almost no changes to GURU holdings.
For reasons unknown, they added ALLY, LNG and returned AMT, but in smaller size. All three together are a bit less than their one standard allocation. Nothing was removed.
GURU holdings include these S12 stocks: AAPL,  JPM,  WFC

So far I traded HMHC - stop out at even, ENDP - still going, and i missed TMO entry