Bad Bots

May 29, 2010

When I began the discussion of technical trading systems or “intelligent” software, AKA “bots,” it drew attention from various areas.  One of the more intriguing was a message from Bryan Sayers of

Having spent years at various banks with foreign exchange operations, I was not aware that the world’s most active market (by dollar volume) had any room at all for fraud, unless you count those great money laundering opportunities from Kenya.

Silly me.

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Two Holidays

May 28, 2010

Just now I revisited an old friend, Human Genome Sciences.  As early readers may recall, it was among a half dozen or so developmental drug companies I own(ed) and wrote options against.

When they run away, as both DNDN and HGSI did this year, I bid them farewell, and move back to the cheapies.  After all, when I’m selling covered calls, my bank account doesn’t care about stock prices, only percentage return.  And low dollar price stocks tend to have the highest implied (and actual) volatility on their options.

But today I bought HGSI and wrote July 25’s against them.  Read the rest of this entry »

One is Wrong

May 28, 2010

Catching up on the week’s financial news (life interfered with blogging again this week), I noticed a pair of housing-related stories early in the week that pointed in exactly opposite directions.

The bullish story got all the coverage.  What a surprise.  On a month-over-month basis, new housing construction went up more than expected.

The bearish story came from, and it was more than a monthly snapshot.  It was the grim reality of nearly four years of overhanging supply.

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Thanks, Jim

May 28, 2010

Jim Cramer has been telegraphing for a few days that he was going to hype his neighbor’s company on his TV show.

As you may recall, Cramer even had to give himself a bad timer award for his $20 a share buy recommendation for Annaly a couple years ago, so Mike Farrell’s amREIT has been in the Cramer penalty box for a while.

That changed earlier this week when Jim, playing his role of trading guru on his pay site, set up some of the other contributors a bit by asking them why they still considered NLY a short.  The payoff came last night on CNBC.

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Getting Serious

May 24, 2010

I’ve had a link on the site to an organization called “Justice for Children” since I launched this blog last fall. (Disclosure:  I am a member of the Board of this organization, and it gets the bulk of my personal charity every year.)

It’s a charity launched 20 years ago by a college friend who saw firsthand a tragically “broken” system of family courts and lax enforcement of child abuse laws.

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Model History

May 20, 2010

Continuing the theme of models and bots, here’s another chapter of my unpublished book, Mortgage Market Mayhem.

A later chapter covers the 2007/2008 failure of the credit models.  First came the 1990/1991 failure of prepayment models.

Just a reminder:  Any model based on historical data cannot predict what happens if new activity goes beyond the boundaries of that data.  That’s why I put out a faint defense of the Rating Agencies last fall.

They are NRSRO’s, or Nationally Recognized Statistical Rating Organizations.  It seems ludicrous to criticize them for using statistics to establish their performance projections.  We might as well have Nationally Recognized Opinion Blogs if we throw out statistics based on reality.

After the break, enjoy Chapter 14 of Mortgage Market Mayhem.

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More Buying

May 20, 2010

I added to my IOC and CMO holdings today, and put in the instructions to transfer another chunk of cash into the trading account.  Think of it as ‘averaging in.’

I’m still holding about a year and a half of living expenses in cash, and will keep bringing that cash into the trading account as things get cheaper, subject to a hard limit of keeping a year of cash out of the market.

My apologies to anyone following my lead, because it always seems to be a painful process with a little more downside after I buy (e.g. ELN, NLY and ANH the other day).   If only I could buy three days after I actually buy, but the existential time-shifting issues get me too confused when I try to figure out how to do it.


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Models vs. Programs vs. Systems

May 20, 2010

I was having an e-mail conversation with a long-time friend in the business yesterday about the Matrix Market blog post last week.

A little background – my bud has been modeling deals for more than twenty years, and we often discuss the internals of the behavior we try to capture in choosing variables and basis functions to apply to those variables.

He came up with a wonderful image of “algo” trading systems I thought I would share:

I might have compared algorithmic trading to two dueling rube goldberg machines.

He has a point.  I don’t think many outside the business, including the regulators, realize just how Wall Street systems come into being, or how they grow over time.

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Teaching the ECB a Lesson

May 19, 2010

Yesterday’s very limited restriction on bearish speculators by Germany is being met with a harsh object lesson.

The bears have enjoyed nearly unlimited leverage in their bets, something the bulls don’t have.  If only I could buy as much stock as I wanted and pay for it only when I feel like it.  That’s what naked short sellers get to do.

It’s even more extreme in bondland.

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Moving Cash In – Too Soon?

May 18, 2010

I began buying today with some of the cash I’ve had on the sidelines.  Naturally, the gremlins informed me I was too soon.

Still, I continue to like the amREITs below book value, especially when the futures market is saying LIBOR won’t be going anywhere for a couple of years.

The Fannie/Freddie buyouts are more than half done at this point, and the outsized hit to Annaly (after their assurances that they owned the kind of paper that wouldn’t be called) has resulted in a really major hit to their stock price.

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