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.