The Next VIX Move

CBOE's S&P 500 Implied Volatility Index (VIX) has a very high likelihood of making a run at the $60 level in the next few quarters...a very high likelihood, indeed. 

That is all.

Occupy Wall St. / Tea Party Nash Equilibrium

Let's envision a hypothetical synopsis (read:  "hypothetical game scenario Nash equilibrium") where Occupy Wall St.'ers (player OWS) and the Tea Party (player TEA) found common ground...at least enough ground to strategically bargain over a few of their important policy items.

Aside:  For a prior example of our Nash Eq. analysis...see here.

If we presume that each group had a bifurcated agenda that included only two items (1:  end [or not] the Fed, and 2:  raise [or not] taxes), we can create a simple game scenario to analyze the probable outcome of this hypothetical coordination.  First, we must make some further assumptions as to the ordinal preferences of the two groups:

Assumed Preferences of player TEA (preferentially ranked by our subjective, empathy-based assessment)-

1. End Fed / No Tax Raise = [TEA success / TEA success]
2. No End Fed / No Tax Raise = [No TEA success / TEA success]
3. End Fed / Raise Taxes = [TEA success / No TEA success]
4. No End Fed / Raise Taxes = [No TEA success / No TEA success]

Assumed Preferences of player OWS (preferentially ranked by our subjective, empathy-based assessment)-

1. End Fed / Raise Taxes = [OWS success / OWS success]
2. No End Fed / Raise Taxes = [No OWS success / OWS success]
3. End Fed / No Raise Taxes = [OWS success / No OWS success]
4. No End Fed / No Raise Taxes = [No OWS success / No OWS success]

2*2*2 = 8 possible outcomes

When the analytical smoke clears, we find the Nash equilibrium (read:  "most probable outcome, given the givens") to be the scenario where:  1) The Fed is ended, and 2) Taxes aren't raised...period. 

Will any of this actually happen?  Likely not, as our "leaders" (as they exist in their current form) will play OWS and TEA off of one another, sensing that strategic cooperation between the two groups might signal the terminal end of their own status quo chicanery  "leadership" (as it exists in its current form).  But - in case of the rare event that there was a mass cooperation of OWS and TEA members - you know the likely outcome.

IM(1)PETUS

I cannot believe the growth that is occuring in the monetary aggregates (M1, M2, etc.).  It looks like the Fed is targeting the aggregates now that policy rates are drunk and lying on the dirty kitchen floor.

Ben Bernanke = Paul Volcker * (-1)

Is China Preparing to Debase the Yuan?

It seems that the recent China currency bill passed by the US has done exactly what we though it would:  piss off China - royally.  We laid this out there a few weeks ago, and aren't surprised by the reaction. 

What's the likely next step?  Read this post (paying particularly close attention to the final paragraph), and you should get a better idea.  Please, don't take our word for it - PBOC has already begun increasing the yuan's daily trading ranges...and I'm sure it's [NOT] for the sake of a brisk yuan rally.

Timmy G:  Eat your tiny, marbled heart out...you walking calamity, you.  

Joy -v- Pain

Historical word frequencies ("Joy" in blue, "Pain" in red) from Google Ngram.

A Gentleman's Wager:

TIPS prices decline in November.  November ends as red month for this late-money thesis...UNLESS Ben launches another bologna rocket at the market.

China Beach(ed)?

The recent copper weakness has sent many clamoring as the red metal is a heavily-watched barometer economic health.  Who am I to disagree?  I'll add a layer of complexity to the copper weakness - mainly as it relates to Chinese business debts.

An economic vignette:  Many Chinese businesses have been using physical copper as collateral for their debts.  Recent yuan appreciation (this is what you wanted Timmy G., always remember this) has already stressed many Chinese manufacturers; creating fissures in their mercantilist fantasies.  Now, you "peanut-butter" in a sharp fall in (likely levered to begin with) collateral values (leverage^2), and you see a scenario of P.A.I.N. for innumerable mainland businesses.

A contraction in collateral values is a very serious occurrence, especially in times of jittery economics.  For those that need enlightening:  collateral value contractions are a key component of credit crises.  Collateral value erosion is like the guy that is always hanging out around the murder scenes...he's there for a reason, folks...because he's actually the killer.

Getting factual economic information out of China is tough (ask Hugh Hendry), so you'll have to handicap every shred of news you hear (or don't hear) about the nation.  I'm lucky, as I work with many Chinese nationals...so I can get a better feel for what's going on behind the facade of Command Economy Propaganda.  I'll be watching, listening, waiting.

I think the yuan appreciation rate is about to slow down/reverse (much to the chagrin of our Treasury Secretary).  Near-term price target on the CNY/USD of 6.44.  What you can expect to hear:  lots of China scapegoating from the US followed by "unofficial" ; ) retorts in the Chinese financial media. 

Mainland China CSI Equity Index - Source:  Bloomberg

 

Temporal Insomnolence

From WolframAlpha's database:


It is hard to sleep when the tide in your affairs is lapping at your feet.

Multi-Scale Corn Futures Probabilities

Here's a tasty graphic from some recent corn futures analysis:

Might we expect some corn weakness over the next few weeks? 

Bernanke: "It may take some time"

The past few statements by Fed Chairman Bernanke have included slight undertones of defeat.  They've also been heavier on the temporal language.  The road to recovery will be long, but we will get there one of these decades.

If you haven't read the Jackson Hole speech, you can do so here.

Real Fixes for the Broken US Economy

Ben, Treasury, Obama...lend me your ears:

You want to fix the broken, stimulus-addicted US economy?  Get started with these issues:

1.  Encourage savings as opposed to encouraging frivolous spending on discretionary items.  Really.  Create a national initiative that will encourage non-speculative savings (a.k.a. "401K savings").  The power of money saved is not to be underestimated.  If all of the Gucci outlets fail due to a lack of frivolous US spending...so be it.  The long-term outcome will be much better.  Bring back the piggy bank.

2. Discourage revolving consumer credit.  If I saved $1 today, but added $1 of consumer debt (with a 20% APR), I really dissaved $0.20.  I really simplified the last assumption, but it's appropriate.  Reserve most credit consumer credit for non-revolving issues, i.e., home purchases, auto purchases, and fixed investment.

3.  Stabilize the dollar.  Allow savers to experience the joy of a stable or appreciating currency.  Your mismanagement of the reserve currency will get us into very big trouble one day.

4.  Educate young Americans about personal financial issues.  It is insanity to think that we teach American 5th graders how to put on condoms in sex education programs, yet we don't teach our students about personal finance.  The banking cartel loves for Americans to be barefoot and pregnant - intellectually speaking - as Americans are far likelier to line up on the other side of the banks' asymmetric deals.  Teach American high school seniors how to avoid "raw deals" before they go out into the world.  Teach them about Libor, mortgage payment calculations, and the powerful effects of compound interest.

5.  Regulate the Federal Reserve.  Regulate this juggernaut, lest you wake up one day and find yourself regulated by it.  There are far too many conflicts of interest that exist within the walls of this bank and its shareholding member banks.  

   

That Wasn't An Earthquake on the Eastern Seabord...

...that was Dominique Strauss Kahn getting his charges dropped.



Badda-Bing!

Because Shooting Him Would've Been Too Obvious...

Deven Sharma to leave S&P.

When does Geithner leave the Treasury?  That's all I want to know.

Roman Go(l)d Worship

Serious students of economic history know that banking got its start inside the temple.  Some say it has yet to leave.

Seriously fellas, JC doesn't care about your gold.

Long Bond: Fuel Almost Spent (Near Term)

So far, the 30-year U.S. Treasury has been mounting a magnificent rally.  As Templeton might say:  this rally has been "fueled by skepticism."  I'm no skeptic of the long bond, and some of you know that it was one of my long themes for 2011.  The long bond's secular rally is very much in tact (which is starting to really creep me out - in economic terms), but the short term behavior of the 30-year is starting to resemble the final nights of John Belushi.

The cold months won't be kind to the long bond bulls...but the secular rally is NOT OVER, folks.

My opinion:  Let the thing succumb to the forces of gravity, then...accumulate.  Give the correction at least 4-6 months before you start nibbling.   

30-Year UST

      

A Secular Natural Gas Bull Catalyst

From WaPo:

Getting ready for a wave of coal-plant shutdowns

By Brad Plumer

(JOHN GILES/ASSOCIATED PRESS) Over the next 18 months, the Environmental Protection Agency will finalize a flurry of new rules to curb pollution from coal-fired power plants. Mercury, smog, ozone, greenhouse gases, water intake, coal ash—it’s all getting regulated. And, not surprisingly, some lawmakers are grumbling.

Industry groups such the Edison Electric Institute, which represents investor-owned utilities, and the American Legislative Exchange Council have dubbed the coming rules “EPA’s Regulatory Train Wreck.” The regulations, they say, will cost utilities up to $129 billion and force them to retire one-fifth of coal capacity. Given that coal provides 45 percent of the country’s power, that means higher electric bills, more blackouts and fewer jobs. The doomsday scenario has alarmed Republicans in the House, who have been scrambling to block the measures. Environmental groups retort that the rules will bring sizeable public health benefits, and that industry groups have been exaggerating the costs of environmental regulations since they were first created.

So, who’s right? This month, the nonpartisan Congressional Research Service, which conducts policy research for members of Congress, has been circulating a paper that tries to calmly sort through the shouting match. Thanks to The Hill’s Andrew Restuccia, it’s now available (PDF) for all to read. And the upshot is that CRS is awfully skeptical of the “train wreck” predictions.

First, the report agrees that the new rules will likely force the closure of many coal plants between now and 2017, although it’s difficult to know precisely how many. For green groups, that’s a feature, not a bug: Many of these will be the oldest and dirtiest plants around. About 110 gigawatts, or one-third of all coal capacity in the United States, came online between 1940 and 1969. Many of these plants were grandfathered in under the Clean Air Act, and about two-thirds of them don’t have scrubbers:

(FGD = Flue Gas Desulfurization, SCR = Selective Catalytic Reduction)
CRS notes that many of the plants most affected by the new EPA rules were facing extinction anyway: “Many of these plants are inefficient and are being replaced by more efficient combined cycle natural gas plants, a development likely to be encouraged if the price of competing fuel—natural gas—continues to be low, almost regardless of EPA rules.”

Still, that’s a lot of plants. Won’t this wreak havoc on the grid? Not necessarily, the CRS report says, although the transition won’t be simple. For one, most of these plants don’t provide as much baseload power as it appears on first glance—pre-1970 coal plants operating without emissions controls are in use, on average, only about 41 percent of the time. Second, the report notes that “there is a substantial amount of excess generation capacity at present,” caused by the recession and the boom in natural gas plants. Many of those plants can pitch in to satisfy peak demand. Third, electric utilities can add capacity fairly quickly if needed — from 2000 to 2003, utilities added more than 200 gigawatts of new capacity, far, far more than the amount that will be lost between now and 2017.

Granted, those upgrades and changes won’t be free. The CRS report doesn’t try to independently evaluate the costs of the new rules, noting that they will depend on site-specific factors and will vary by utility and state. (Matthew Wald recently wrote a helpful piece in The New York Times looking at how utilities might cope.) But, the report says, industry group estimates are almost certainly overstated. For one, they were analyzing early EPA draft proposals, and in many cases, the agency has tweaked its rules to allay industry concerns. And many of the EPA’s rules are almost certain to get bogged down in court or delayed for years, which means that utilities will have more time to adapt than they fear.

The CRS report also agrees with green groups that the benefits of these new rules shouldn’t be downplayed. Those can be tricky to quantify, however. In one example, the EPA estimates that an air-transport rule to clamp down on smog-causing sulfur dioxide and nitrogen dioxide would help prevent 21,000 cases of bronchitis and 23,000 heart attacks, and save 36,000 lives. That’s, at the high end, $290 billion in health benefits, compared with $2.8 billion per year in costs (according to the EPA) by 2014. “In most cases,” CRS concludes, “the benefits are larger.”

Granted, few would expect this report to change many minds in Congress. Just 10 days ago, Michele Bachmann was on the campaign trail promising that if she becomes president, “I guarantee you the EPA will have doors locked and lights turned off, and they will only be about conservation.” That doesn’t sound like someone who’s waiting for a little more data before assessing the impact of the new regulations.

There Be No Stockpicking Here

Source:  Birinyin & Associates

The S&P 500 realized correlation is very high.

Implications:

1) Idiosyncratic features shouldn't currently be the driver of your equity selections - you might as well index.

2) Equity market is at heightened risk for an across-the-board tail event...be it the positive or the negative tail.

3) Equity long-short strategies (executed on S&P 500 names) will have convergence troubles.  If you are going to insist on directionless strategies, do it through options and earn some vega points.

4) Dispersion traders should be eating well.

5) The risk-on/risk-off/risk-on/risk-off saga continues...

Is This a Bear Market in...Oxytocin?

I have an obsession, I'll admit.  I have an obsession with learning and information acquisition.  Everything is fair game to me (intellectually), and I often like to learn about seemingly unrelated things - only to later marvel at the relationships that exist between them...or so I think.

It was about two months ago that I noticed a startling trend:  baby deer being abandoned by their mothers. Why is this startling, you ask?  Maternal instinct is one of the strongest primal forces, period.  That's why.  Widespread instance of maternal instinct breakdown among a very sensitive animal - the deer - is worth noticing.  Within one week's time, I heard of three different instances of fawn abandonment from people that I knew (they all found an abandoned fawn).  All three of these people did not live near one another, so it wasn't an isolated case that was experienced by three people.  I decided to do a little digging, and found many recent articles about the widespread abandonment of newborn animals by their mothers.

Fawn abandonment article. 

Many of these articles blamed the historic drought that is currently entrenched in the southern U.S. as the causal factor.  This all sounded like a "good enough" explanation at the time, and I was partially satisfied with this explanation.  I still couldn't totally understand the logic of the abandonment, as children are almost never economically-rational decisions.  Having children is an almost guarantee that there will be instant competition for the resources that you own.  If mothers are rational economic actors, then all mothers should abandon all children, unless the happiness/utility that the child brings outweighs the sadness/dis-utility that the child's competition for the mother's resources brings.  I guess these new mother deer didn't see much utility in their fawns - and with the coldness/detachment of a rational-economic-algorithmic-logic machine - they left their cute, new competitors to die.  I'm convinced there is a lurking variable...

The Payoff:
This morning, I was reading a piece about a neuroeconomist (yes, I know what you're thinking) who is an expert on the hormone oxytocin.  Oxytocin is a hormone that - among other things - is a driver of levels of trust and love.  The higher a person's oxytocin levels, the more they're likely to be a trusting, loving person.  I've heard all of this before, and have found it fascinating.  What I found most interesting - and keeping things in the context of the tome I just wrote up to this point - were the comments about how low levels of oxytocin can lead to 1) difficulty with a mother's milk production, and 2) maternal neglect.      

Excerpts from oxytocin article:
"...Dale later discovered that oxytocin stimulated the release, or let-down, of mother's milk by contracting the smooth-muscle cells around the mammary glands..."

"...In addition, oxytocin has been shown to facilitate nurturing behaviour in mice and rats: when oxytocin was blocked, the rodents stopped caring for their young and displayed signs of 'social amnesia'..." 

Recalling an excerpt from the fawn abandonment article:   
"...Other does are abandoning their newborns because drought-induced malnutrition has robbed them of their ability to produce milk..."

I don't have the resources to spot-check the basal oxytocin levels of Whitetail deer - but if I did - I might find unusually low levels of the hormone.  The lingering questions I have are:  1) is this (presumed) bear market in deer oxytocin also being experienced by man(?), and 2) what is causing this bear market in the trust/love hormone?

South-of-the-Border Skew

Risk.net reports that Mexico Carlos Slim has been a dominant driver of Brent crude's recent put skew.  After the recent global equity market schism, reports surfaced that Carlso Slim had shaved over $5B in personal wealth from his portfolio.

Let's rethink this for a moment, or - at least - sharpen the loss figure a bit.

Slim's loss funtion:  min{-max(K-BrentPRICE, 0) + ~$5B,  ~$5B}

"Hedges?!?!  No necemos 'stinkin hedges'!!"



Ben to Liquidity: "Gotcha!!"

Ben finally trapped his nemesis, Mr. Louis Liquidity.  Everyone can rest now that this dangerous hooligan is off the streets.

Maestro: "We print, therefore, we are."

..."The United States can pay any debt it has because we can always print money to do that. So there is zero probability of default" said Greenspan on NBC's Meet the Press....

http://www.cnbc.com/id/44051683

What!?!?  The Fed prints money to help the US pay for stuff that it can't afford?  No!  Say it ain't so, Maestro!!





What reserve currency mismanagement/abuse/debasement looks like - US dollar monthly chart.

Will S&P Retract the US Downgrade?

Thinking out loud to self:

What are the odds of the US government threatening (behind the scenes, of course) to absolutely destroy the lives of the people that were in charge of making the downgrade call at S&P UNLESS S&P retracts the downgrade "based on a calculation flaw?"  They're probably just a little bit greater than one might think.

"So you're telling me there's a chance?"

Oh, and as for that Downgrade...

Quick thoughts:

1)  Mega hurdle for Obama 2012 re-election bid.  This can and will be used against him in every venue.

2)  Geithner needs to go - for real.

3)  Over 75% of the Congress and Senate should be furloughed, fired, or tried for dereliction of duty and/or reckless endangerment.  Pink slips and/or judgments should be handed down by the people...for the people.

4)  Fed will be expected to become the shock absorber, again.

5)  Fed will ramp the debasement process, as a near-term "solution."

6)  If there are no other big name downgrades for nations in similar fiscal situations (think:  UK, France, Japan, etc.), we'll know that the wolves are circling the perimeter of the United States...and our independence will likely be challenged in the next decade(s).

Full Page Gold Worship Ad in WSJ

CNBC ran this full page ad in this weekend's WSJ for their three (yes, three) part series about gold.

Quick Take on Gold Investment
Most think that gold is just a dirty inflation hedge.  It's actually so much more than that.  Gold - as an investment - performs tremendously well during times of sovereign stress as well as during epochs of social paranoia and mistrust.  Many people are currently less trusting of their banks and governments than they were in 2006-2007, so this makes sense.  The passions of man are never constant, and people will again (one day) lend their faith and trust to their governments and financial institutions.  The want/need to hold gold will then diminish.  We're currently experiencing a bear market in faith and trust, coupled with the dynamic duo of 1) fiat debasement and 2) sovereign stress.

At this moment, gold is still an appropriate holding.  Caveat:  please be aware that we are entering / have entered the final act of the gold boom.  How long this act will last is hard to say, given recent events.  The central bank gold scramble, the gold parties, the gold infomercials, the three-part series on gold, the unsustainable growth rate, etc., all are pointing to an infatuation saturation.  When the passions change - and when we can put our feet back on sovereign ground (or when gold margins go sky high) - gold will begin its lumber to the downside.

To those who believe that a gold standard will be reinstated:  that would create an instantaneously-deflationary shock so severe that 2008 would look like an appetizer.  You had better hope that you don't get what you wish for in this case.  A poly-metallic standard would be the only thing that could even be considered.

Cause(s) for Pause(s)

If you haven't yet noticed the spells of malaise and fatigue (economically speaking) that seem to occur near/shortly after the end of the Fed's quantitative easing programs...you probably should start to notice.  There comes a point, and the BOJ can affirm this, when accomodative policy starts to become the cause of market weakness - as opposed to the antidote.  The dynamics are deep...but this can happen.  QE3 will bring a unique set of risks that may include unintended market havoc.

I leave you with two questions to quietly ponder:

Could it be possible that our economy cannot thrive  function normally without support from the Federal Reserve?  

If you can control the US economy, does that make you more powerful than the US lawmakers?

Steven Seagal on Being Immortal

The hair...the dog...the ears...the clothes...the night job...the supernatural running ability (here)....Steve, you're a vampire.  See you in my nightmares.

On Debasement

I'll keep this brief, which isn't how I typically like to do things.  The math says everthing you need to know.  For those of you who have no idea what this may be about, please rapidly avert thine eyes to this place:  http://www.tmz.com/

No Debasement
1285/1	=	1285
1285/1	=	1285
1285/1	=	1285
1285/1	=	1285
1285/1	=	1285
1285/1	=	1285
1285/1	=	1285
1285/1	=	1285
Debasement
1285/1	=	1285
1285/0.99	=	1297.98
1285/0.98	=	1311.22
1285/0.97	=	1324.74
1285/0.96	=	1338.54
1285/0.95	=	1352.63
1285/0.94	=	1367.02
1285/0.93	=	1381.72

Strategery!

Debt default averted.  No tax hike, no static debt ceiling.  You heard the outcome here first, comrades.  Now let's get back to the ever-evolving Israel/Iran game set...or the BOJ unlimited Yen EVER!!! game set.

What Dereliction of Duty Actually Looks Like

Boehner:  "Barry, you going to buy some of those US sovereign CDS call swaptions along with the rest of the GOP?  We're going to be rich!  I don't give a damn how it all turns out...I'm buying an island near Fiji."

Barry:  "Boner, you think the Democrats are stupid?  We did that weeks ago.  Long as hell, baby!  Let's smoke a cigarette."

Source:  Drudge

Steven Seagal on Forgiveness

Debt Ceiling Futures From Intrade

This contract represents a vehicle for a debt ceiling raise above $15.1T by 08/31/2011.  As the whore of Babylon (James Cramer) always says, "There's always a bull market somewhere...BOOOOOOYAHHH!!!!"

The Selfish Motivations That Will See the Debt Ceiling Higher

If the US fails to meet its financial obligations; career politicians will lose pay.  You really think some of these jokers will risk losing some of their compensation and/or government benefits?  What are they going to do - go look for a new job in the worst labor market in over 50 years?  While it would be a fantastic exercise for them to go through...it ain't gonna happen! 

It's all theater.  An 11th hour agreement will see the debt ceiling raised, and taxes will remain static.  Fed will be "signaled" to fire up the printing press in order to levy the unseen tax of inflation.


We're going to bend this can like Beckham.

Reiteration of the Debt Ceiling Debate Outcome

Outcome: Reps cave, dems cave. Reps allow debt ceiling to raise, dems don't raise taxes, and we teleport back to square one. The American political system will again prove to be a total prank.

See here for details.

Steven Seagal on Running

Greek Debt Restructuring

Announcement of intentions to partially restructure Greece's debt are hitting the wires right now.  We'll call this moment "t-zero."  The seal has been broken.

Jolie: "...you gotta try everything."

Being a blog that is dedicated to markets and social issues/observations, I was delighted when I read a fascinating article about how much cool stuff Angelina Jolie lets her children try.  This article was about the crickets (yes, the insect) that she now lets her adopted children/NATO regiment eat.     

http://marquee.blogs.cnn.com/2011/07/21/angelina-jolies-kids-eat-crickets-like-theyre-chips/?hpt=hp_t2
 
She cited some neat adopted mother's rule about letting her child - of foreign descent - embrace things from his/her original culture.

You don't say?

I wonder if she was using this rule when she decided to name her child, of Cambodian heritage, "Maddox?"  I also suppose that it's customary for Cambodian children to receive mohawk haircuts at the age of 2?

I'm sure that A.J. is a great mother, and this is all in jest - but seriously...let's rattle off a quick list of things that "Motherbear" Jolie has tried during her time on planet Earth:

1.  Loving Billy Bob Thorton. (check)
2.  Getting Billy Bob's name tattooed on her body.  (check)

3.  Wearing a vial of Billy Bob's blood - a likely biohazard - on a necklace. (check)

4. Loving women.  (check)

5.  Replace Billy Bob's name with Jenny Shimizu's in numbers 1-3...read aloud for full effect.  (check, check, and check).

I suppose that when your mother is Angelina Jolie, and she wants you to "taste the flavors" that life has to offer...you had better get your game face on...because mother means business.

Earth Falls in Love With Hamad and Tattoos His Name on Her Bum

Is there such a thing as having too much money?  Hamad will tell you that it's just not possible...as he drives one of his monster truck-limos into the side of a Shiite orphanage (for entertainment, of course).  Subtle Hamad, subtle indeed. Give me an "H!"  Give me an "A!"...

http://www.thesun.co.uk/sol/homepage/news/3703941/Billionaire-sheikh-carves-out-his-name-in-desert-in-capital-letters-visible-from-space.html

Day-Ahead Live Cattle Futures Price Predictive Model

The evolution of markets has been particularly apparent over the past few years.  Certain markets are now evolving into their bigger/faster/stronger selves, and conventional methods of market negotiations no longer seem to work as well as they used to.

This much we know.  

Markets do not trade with the "looseness" that they used to.  This is an earmark of markets that experience increased competition.  Everyone has to fight harder for smaller margins.  If a market participant decides to throw in the towel, the bigger/faster/stronger market will quickly fill his/her void with another eager participant.  Markets miss-eth no man.

On to the point...

A market that has been rapidly evolving over the past few years has been the live cattle futures market.  What used to be a haven market for fundamental ag traders is now becoming something other than that.  Live cattle (LC) has begun a metamorphosis that has left many dumbfounded.  Like many markets, LC is being quantized/computerized.  Heavier volumes are now in the Globex contract, volatility has expanded, and LC has generally become...well...a whole new animal.

What can be done?  Can the old-school traders beat back the new bloods?  This is unlikely, as the new entrants have already permeated the market and will only leave under the guise of regulatory reforms.   The new bloods have the golden goose.  If you had the golden goose, would you give it up so easily?  I did a piece of analysis not too long ago that created a day-ahead LC price forecast based off of certain independent variables.  The model is a multiple linear regression, and the inputs were selected using a stepwise algorithm.  The data that I used to create/validate/test the data were of daily granularity, and encompassed the period 11/1985 through 04/2011.  I did not eliminate certain colinear factors, as I wanted to see how they compared in the model.  This adjustment for multicolinearity would be done via principal components analysis and subsequent dimension reduction...so get off my back.


The list of inputs includes:
1) Feeder cattle futures prices, volumes, and open interest for the prompt contract.
2) Dollar index futures prices, volumes, and open interest for the prompt contract.
3) Corn futures prices, volumes for the prompt contract.
4) Live cattle open interest (no prices, as I'm trying to predict price using other factors).


That is 9 inputs used to predict tomorrow's LC closing price.

I'm getting really tired of typing now, so I'm going to post the goods.  Point of all of this is to challenge yourself to adapt.  If you don't know where to start...I'm providing you with a gentle nudge.

Model RMSE:  6.2537

Input variables		Coefficient
Constant term		20.47030067
Corn_Close		0.03267086
Corn_Volume		-0.00000992
LC_OI		-0.00007584
D_Close		-0.02621647
D_Vol		-0.00047742
D_OI		-0.00017357
FC_Close		0.8829565
FC_VOL		-0.00028675
FC_OI		-0.00040499

Simply multiply all of the above beta coefficients by their respective inputs for today, add the constant term, and ponder the output (which, again, is a predictive model for tomorrow's LC price).   In the chart below, note how the differential between the model and LC actual has become smaller over the last two years.  These errors are "drifty," but look like they're tightening up (working harder for smaller opportunities...even when armed with smart bombs).

Competitive markets...gotta love 'em.

Pie-on-Murdoch Action

How did the Generation X-er with the flannel on get past security at the Murdoch hearing?  That's all I want to know.  It could've been much worse...that could've been a bowl of chocolate pudding.

FX Comments

EUR -  Net comm. positioning on the verge of being greater than net large trader positioning.  This alone will prove to be another headwind for a fundamentally and technically weak currency.

AUD -  Reading reports of a slow-creeping sense of economic sobriety in the land down under.  Consumer demand is eroding in Australia, and the Aussie housing market is a slow motion train wreck.  The structure of the Aussie R.E. market isn't the same as the US market, but all speculative R.E. bubbles end the exact same way:  in lots of tears and BK's.  AUD still has lots of momentum behind it, but once this momo thrill is gone, the spill is going to be interesting.

JPY -  The whipping boy of the Plaza Accord continues to be maligned by the Federal Reserve.  Every time the BOJ tries to intervene in the yen market, the US happily obliges by digitally-creating more dollars to sop up yen.  The Fed cares not that Japan has been in a decade's long depression...the Fed only cares about a slow, orderly erosion of the dollar's value.  Any other outcome is deemded unacceptable.  Yen uptrend will be one for the history books. 

USD -  Cheap/stable.  Crises are the only things that seem to make the dollar rally now, as folks panic into cash.  This is what the reserve currency of the world has been reduced to:  a long-equity-vega-type instrument for unsophisticated investors.  The next time the $US rallies 20%; the fear will be palpable. 

Tradition -  Chairman Bernanke told Ron Paul during last week's Fed dog/pony that the reason central banks hold gold is due mainly to "tradition."  I almost choked when I heard the Chairman say that.  Anyhow, tradition is making new 2011 highs (at $1599/oz. of tradition) as I write this.  Also, the tradition/nostalgia spread is pretty wide, and is looking ripe for some compression.       

The Future of High Speed Comm.

I enjoy marveling at the latest/greatest in technology.  The ingenuity of man is amazing, and I never want to get to "that" point where I feel as though I no longer understand things (because I failed to keep up). 

I want to point out a technology that I've been watching evolve for a little bit:  quantum optics.  I'll save you the longwinded/half-ass attempt at defining what quantum optics are, and just provide you with a quick def from Wikipedia:

"Quantum optics is a field of research in physics, dealing with the application of quantum mechanics to phenomena involving light and its interactions with matter."

This technology is now being applied in the communications field as a way to send super-secure information at hilarious speeds, and over very long distances.  [High frequency trader enters from stage left and exclaims:] "Great Scott!  This will lower international trading-venue-arb latency!"

I also believe that many of these quantum-encrypted messages (carried in/on a laser beam) will, per the principles of quantum mechanics, change state if intercepted by an unintended party.  You could pass privy information at stupid-fast speeds AND if it's not for your eyes...the message could be engineered to corrupt. Insider trading is about to take a futuristic turn.  And in totally unrelated news, Goldman Sachs just purchased 20 quantum laser beams. 

"Avert thy eyes from our laser beams, people!"

Above:  Slightly visible quantum optic ("friggin' laser beam") in action.

BHP + NG -12B

Exxon, Chevron, and now BHP.  Empathize with these giants, and try to understand the reasons behind their natural gas acquisitions.  Natural gas is, as I've stated many times over, one of the most under-appreciated (and underpriced) commodities. These large players have made strategic NG acquisitions for a good reason.  These low NG prices will likely prove to have been one of the greatest buying opportunities in recent energy history.

While many will quickly - and bearishly - rebut with the tired argument about the glut of shale gas in the US, one must remember that this isn't breaking news to anyone...and that markets are forward-looking mechanisms.  Exxon, Chevron, and BHP are all smarter than I am.  What do they see on the NG curve that so many are missing?

http://www.bloomberg.com/news/2011-07-14/bhp-agrees-to-purchase-petrohawk-energy-for-12-1-billion-in-all-cash-deal.html

Gaga-plegic

Lady Gaga dug pretty deep on this one.  Christopher Reeve is turning in his grave (with the help of supernatural orderlies).

A Mid Year Lookback at the Dow 2011 Forecast

At the beginning/end of every year, I create a couple of forecasts for markets that are key (to me).  The process helps me to conceptually wrap-up the prior year, and move on with my life.  The forecasting method is my own.  While I do use some techniques (VAR, etc.) that can't be deemed as "mine," I use them in my own special way(s).  There is also a discretionary component to the forecasts, as I always reserve the right to totally scrap something that doesn't make any sense. Ex:) A plunge in the DOW to 100 pts. doesn't make any sense, so if I generate a forecast that calls for this...I will make some overriding assumptions/adjustments, and carry on.  I will never put 100% faith and trust in any model or method, Amen.

The point:

I created the pictured forecast in January of this year.  You can tell that the start date of the forecast is not 2011.00, and it is because I created the thing in the first couple of weeks (no point in creating a forecast for days passed, IMHO).  The forecast is of the DOW Jones Industrial Average.  The forecast is NOT of price (obviously), but of a denoised DOW forecast's first difference (DOW momo forecast).

Inherently, the denoising reduces the accuracy of the forecast, as the DOW doesn't move as cleanly as the forecast does (we could only hope to be so lucky).  I doubt that incorporating white/black/brown/pink noise into this forecast would've made it any more accurate than the smoother version.  I don't care for 95% error bounds either, as I'm not interested in peddling ambiguity.  For me, the forecasts push my brain into a binary frame of mind:  1) forecast is working, so follow forecast, or 0) forecast isn't working, so don't follow forecast.  This is so much easier for me to deal with, mentally, so I'll keep doing it.

The forecast has been fairly accurate for the balance of 2011.  Anything above the zero line means the DOW should have a positive trend.  Anything below the zero line means the DOW should have a negative trend.  Of course, you also have to interpret the rising/falling tendency of the forecast.  If the forecast is above the zero line, and it is falling...this means the rally will likely peter out near the threshold cross.  The opposite interpretation holds for attempted bottom ticks.

Lurk away.

Potential Vix Forecasting Methodology?

Last week, I decided to make a volatility measure that incorporated an instrument's crossing rate along with a traditional measure of volatility.  Econometricians:  please refer to Augmented Dickey Fuller test literature for a refresher.  Long story short - I created this volatility measure, and am calling it "Crossing Rate Weighted Volatility," (CRWV).   The user has the benefit of not only measuring the amplitude of the expected deviation, but the frequency of this amplitude as well.  This is a totally different story. 

The plot thickens...

I found myself zipping through the CRWV model today, and I started working with the CRWV on the VIX (CBOE S&P 500 IVol Index).  Long story short, I found that if you take a ratio of the VIX to its own CRWV (all adjusted by a scalar constant...for aesthetics, mainly), then lag the VIX by approximately 90 periods on the CRWV...there is an interesting correlation.  I haven't had time to stress test this relationship like I normally would - but I will.  I just wanted to get this out there to start generating some ideas.  Because there is this correlation that exists at a 90-period (weekly data) lag...I'm sitting on 90 weeks of potential VIX forecast data, and I'll be forward testing this out-of-sample data accordingly.  I'm going to tinker with this idea, and I'll be giving updates to this project as they come.  Note that the correlation has been growing stronger as time marches on.  Spurious?  Maybe.  It's worth checking into.  

[Please excuse the low quality of the graphic, as I'm sitting at my terminal at work, and can't give things quite the attention/TLC that I could from home.]

Mumbai Blasts

Instability it Pakistan will lead to instability in India.  There has recently been a military campaign in Pakistan that has been focused upon one of the more dangerous parts of the country.  When you swat a hornet's nest, the hornets get angry.

WSJ reports that one of the explosions occurred at an opera house.  From this slice of info, we might deduce that the attacker/bomber was likely from the segment of society that does not frequent the opera houses of Bombay. 

http://online.wsj.com/article/SB10001424052702304911104576443753384835910.html?mod=WSJINDIA_hpp_LEFTTopStories

Cisco's Pink Slip Pop

Yesterday, Cisco's sharp intraday rally - that occurred in the first few hours of the morning session - was an interesting display of the shareholder model at work.  For those that missed the news, Cisco announced that it would soon drop the axe upon 10,000 more employees.  When the news "broke" (a.k.a. "getting rehashed by CNBC hours/days after publication"), the stock began to rip.


The downside:  you lost your job.
The upside:  your employee stock holdings got one last boost at the hands of people celebrating your job loss.

Shareholder vs. stakeholder discussions will be encouraged in the future.

Dr. John Nash: "And the [Debt Ceiling Standoff] Winner Is..."

The Reps AND the Dems!  "Win" will be loosely defined here as "getting what you wanted."  But how?  Why?  Well, we can make quick work of a two-player, non-temporal game set (player one = Reps, player two = Dems).  Let's analyze the players' decisions given the two hot-button issues:  1) Raising/No Raising the Debt Ceiling, and 2) Hiking/Not Hiking Taxes.

If you're the Reps, your list of preferred outcomes (ordered by preference) would look like this:
1.  No Raising of the Ceiling/No Tax Hikes (Absolute win by Reps)
2.  Raising of the Ceiling/No Tax Hikes
3.  No Raising of the Ceiling/ Tax Hikes
4.  Raising of the Ceiling/Tax Hikes (Absolute loss by Reps)

If you're the Dems, your list of preferred outcomes (again, ordered by preference) would look like this:
1.  Raising the Ceiling/Tax Hikes  (Absolute win by Dems)
2.  Raising the Ceiling/No Tax Hikes
3.  No Raising of the Ceiling/Tax Hikes
4.  No Raising of the Ceiling/No Tax Hikes (Absolute loss by Dems)

Now that we have our player/preference data, we can simply wave the magic wand of Game Theory over these values and determine that the Nash equilibrium (thus, the likely outcome) will be Dems concede on taxes, and Reps concede on the debt ceiling.  Essentially, no one will really gain much at all.  The standoff will simply end with an 11th hour concession swap agreement...then it's back to some bigger/faster/stronger version of square one.  Dems won't push for higher taxes if Reps won't push for a firm debt ceiling.  This is your strategic outcome.