The Big Picture - Macro Perspective on the Capital Markets, Economy, Technology, and Digital Media

FusionIQ Investor
https://www.fusioniqinvestor.com/

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All of the Big Picture conference videos are now available.

Here is the latest video posted: Markets in Turmoil: A Macro, Quant & Technical View

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Watch all of the Big Picture Conference for $39.95 or choose just the speakers you want to see on FORA.tv

James O’Shaughnessy is a well known “value quant” for his book What Works on Wall Street (4th Ed). He has a new column in Marketwatch discussing what he calls  “the top stock-market strategy of the past 50 years.”

According to Jim, using a combination of value and momentum strategies — “Trending Value” — is the best performing strategy since 1963. To capture this, he ranks stocks based on:

• Price-to-Sales
• Price-to-Earnings
• Price-to-Book
• Price-to-Cash Flow
• EBITDA/Enterprise Value
• Shareholder yield (dividend yield + rate of share repurchases)

O’Shaughnessy ranks all of these on a 1-100 basis for his Trending Value portfolio. He works with the top 10% of those ranked stocks with the best composite score. He selects a concentrated portfolio of 25 stocks based on trailing six-month momentum, creating an extremely cheap group of stocks that are on the mend.

Its an interesting ideas, one worth exploring . . .

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Source:
The top stock-market strategy of the past 50 years
James O’Shaughnessy and Patrick O’Shaughnessy
Market Watch, December 16, 2011
http://www.marketwatch.com/story/the-top-stock-market-strategy-of-the-past-50-years-2011-12-16

Dow Jones Industrial Average 1900- present (log scale, monthly)

Click for ginormous chart

Source: Monthly Chart Portfolio, Merrill Lynch Market Analysis, November 4, 2011

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I mentioned yesterday I had a long term chart of secular bear markets that was informative; the above chart (via Merrill Lynch) is what I was referring to.

There are three issues worth noting here plus one important caveat:

1. The long 10-20 year secular bear moves seem to have lots of major rallies and sell offs; the ups and downs are intense, but make little in the way of net progress. After 15 years, the average secular bear is essentially unchanged.

2. The roller coaster ride leaves investors psychologically exhausted. They come to forget the good times of so long ago, and believe there is no way out of the morass. Naturally, they are reluctant to believe in the new bull market once it begins.

3. The major bottom seems to occur about halfway through; this implies that the March 2009 lows will not be revisited (note I only wrote IMPLY and not guarantee or forecast!)  If we look at the current Bear versus the ’66-’82 (with lows like ’73-’74), it suggest that 8500-9000 on the Dow is possible, but barring another crisis 6500 is much less likely. And it also suggests that the next secular bull might begin around 2016-18.

Now for the caveat: We have but one century of data, and within that 100 year span, only four examples of long term secular bear markets. We really need 500-1000 years of data, 20-40 secular bears during the era of modern capital markets. That would allow us greater confidence that these four patterns aren’t merely coincidences.

See you around 2900 to validate the data . . .

What does it say about the state of our exchanges that trader on proprietary and execution desks now can buy a software program to alert them to the activities of Co-Located Algo Servers?

“HFT Alert, the first real time software designed to detect high frequency and algorithmic trading systems. HFT Alert identifies when these trading systems are running and what stocks are being affected. HFT Alert can detect several types of algorithms as well as stocks experiencing elevated quote rates associated with algorithmic trading.”

We are now apparently in a silicon based arms race to learn when quotes are real and when they are spoofed faux quotes driven by HFT algos designed to increase volatility.

The exchanges once operated fro the greater good of the investing public, akin to nonprofit utilities. They are now hellbent on chasing away private investors who will eventually learn that this is a zero sum game, and co-located HFTs are a tax on saving and investments . . .

Video here; Descriptions here, press release here.

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An NYU Poly Department of Finance and Risk Engineering professor has a forthcoming paper in Algorithmic Finance that claims that “Markets are efficient if and only if P = NP.”

Why is this important? Most economists think markets are at least weakly efficient (I disagree).

Computer scientists think that P != NP — that current prices fully reflect all information available in past prices.

This paper claims they both cannot be correct; one must be incorrect. The author’s proof is that they both cannot be correct at the same time, and therefore one must be wrong.

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Abstract:

I prove that if markets are efficient, meaning current prices fully reflect all information available in past prices, then P = NP, meaning every computational problem whose solution can be verified in polynomial time can also be solved in polynomial time. I also prove the converse by showing how we can “program” the market to solve NP-complete problems. Since P probably does not equal NP, markets are probably not efficient. Specifically, markets become increasingly inefficient as the time series lengthens or becomes more frequent. An illustration by way of partitioning the excess returns to momentum strategies based on data availability confirms this prediction.

click for larger chart

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Michael Gayed observes:

“When the TIP/IEF price ratio (Inflation-Protection/Nominal-No-Inflation-Protection) trends higher, it means bond market is swinging towards increased inflation expectations. When the ratio is trending down, bond market is favoring deflation through outperformance of Nominal bonds.

Inflation hedge tends to be equities: risk-on. Deflation hedge tends to be nominal bonds: risk-off. In nearly all cases, the ratio moved ahead of the stock market (mid-2008 downtrend before Lehman Crash, November 2008 ratio low before March 2009, Europe Problems April 2010 before Flash Crash/Correction, August 2010 QE2 inflation bets and stock market rally, decline for most of 2011 before August Summer Plunge). Curious to see that the trend now still appears lower even with QE3 on the horizon, no? May be suggesting bond market doesn’t believe QE3 will cause inflation and ultimately work.

If that’s the case, the stock market may be in for a rude awakening…”

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Michael A. Gayed, CFA is Chief Investment Strategist at Pension Partners, where he structures portfolios. Prior to this role, Michael served as a Portfolio Manager for a large international investment group, trading long/short investment ideas in an effort to capture excess returns. In 2007, he launched his own long/short hedge fund, using various trading strategies focused on taking advantage of stock market anomalies. Michael earned his B.S. from New York University, and is a CFA Charterholder.

Kevin Slavin argues that we’re living in a world designed for — and increasingly controlled by — algorithms. In this riveting talk from TEDGlobal, he shows how these complex computer programs determine: espionage tactics, stock prices, movie scripts, and architecture. And he warns that we are writing code we can’t understand, with implications we can’t control

Hat tip Flowing Data

We’ve been doing a lot of behind the scenes tweaks to FusionIQ, and there are some wicked cool features coming in the fall.

Meanwhile, the redesigned home page is up — its much lighter, cleaner, and easier to read. We are bringing the same critical eye to the redesign of the interior as well. I want this to be insanely easy to use, with as short a learning curve as possible (I’ve been pushing ofr this for a long time, and its finally coming to fruition) .

We also set up a freebies for casual surfers: I really like the free technical analysis and stock screen report we’ve generated — punch in any NYSE/Nasdaq symbol, and you receive a free report on that stock via email. We also set up a free 30 day trial of the system (credit card reqd). Play with the system for 29 days, then cancel — no cost to you.

Surf over and check it out

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History may not repeat, but it often rhymes.

This table, assembled by Ron Griess of The Chart Store, shows what markets have done over the past century following any stretch of down 6 consecutive weeks.

The data reads both binary and inconclusive: If the markets are merely oversold, then you get a nice snapback, and one year later, the markets could have rallied anywhere from 1%-78%. But if the 6 weeks down is the start of a major correction or even market crash, one year later you could be down anywhere from 5% to 61%.

(I’d like to play with this data run a bit, and see what else I can conclude . . .)

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