1-2 Knockout

Question:

Which group is more full of shit?

1. National Association of Realtors 

With the market correction nearing an end, home prices are expected to rise again...Real Estate remains the best investment available. (NAR, 2006)

Oh, wait, you mean home prices actually FELL in 2007? AND the Case-Shiller Index fell by almost 10% in 2007 and ~22% since 1/2007?

D'oh!  (for even more fun, try this set of mindboggling mathematical impossibilities from NAR's most recent "Economic Report")

or

2. National Retail Federation

The National Retail Federation today released its forecast for the upcoming 2008 holiday season, projecting that sales will rise 2.2 percent this year to $470.4 billion. (NRF, 9/2008)

Whoops, turns out total sales actually FELL 2.3% from 2007 #'s.  Typo, perhaps?

I know, you're all completely and utterly shocked (SHOCKED!) that these trade groups blatantly lie over-and-over again, yet are still quoted and even looked to for unbiased information by consumers and media outlets.  I remember one morning a few months ago watching CNBC when they announced the NRF's holiday sales predictions and, despite being maybe 1/2 awake, having a nice little chuckle to myself, as I was reminded of one of my favorite quotes:

No man has ever gone broke underestimating the intelligence of the American people.

--P.T. Barnum (attr.)

Just for shits & giggles, can any of you lawyer types out there figure out a way to sue the National Association of Realtors for their role ("now is the best time to buy!", "prices always go up!", etc, ad nauseum) in the real estate collapse? 

Merry Christmas!

excuse the crappy blackberry pic, too much espresso!

The Cause of, and Solution to All of Life's Problems

I have found the cause of the credit bubble. 

And it is Johnnie Walker.

Know this, Sirs and Madams, it pains me to even type these words, as I have been (and continue to be) quite the fan of the succulent syrup since my college days. 

Know also, that I do not mean to imply (or do I?) that everyone on Wall Street has been drunk for the past 5 (+/-) years, although I'm sure some may inevitably claim such was the case. 

Moving on.

Please, gents and ladies, if you haven't already seen it on TV yet, take a gander at this Johnnie Walker ad,  (link fixed, thanks RT!) entitled "Keep Striding"

For those of you not paying attention to the text appearing over the powerful imagery, let me spell it out for you:

Keep Rising
Keep Building
Keep Climbing
Keep Exploring
Keep Uniting
Keep Innovating

Enjoy Johnnie Walker responsibly or (Ed: some such nonsense)

Sound familiar?

Cheers, and happy weekend!

Incomplete, Incoherent Rambling on (the Role of) Quantitative Investing

Long story short I was reading about the ever=fascinating and slightly irritating Ray Kurzweil earlier, and per Wikipedia, apparently he began a venture in 2006 to use Artificial Intelligence to drive quantitative investment programmes, dubbed FatKat (Financial Accelerating Transactions from Kurzweil Adaptive Technologies).

What got to me though, was this:

 "...he predicted in his 1999 book, The Age of Spiritual Machines, that computers will one day prove superior to the best human financial minds at making profitable investment decisions."

Ray has a history (and a slight ego to boot) of making predictions for technological change, many of which have turned out to be both prescient and accurate.  One cannot help but wonder how colored his judgment may be from his successful past experiences applying technical and scientific thought advances to other fields such as education and healthcare though. 

Finance, and more specifically profitable investing, presents a variety of challenges which have brought down virtually every systematic strategy over any significant period of time, going back as far as such things have been recorded.  Until the past year or two one had to go back an entire decade (whoa!) to the spectacular chronology of When Genius Failed , but over the past 24, or really 12 months we've seen the 'new breed' of quant geniuses getting crushed as badly, if not worse, than their non-quant brethren.

I think if Kurzweil, himself, cared to contribute to this rambling, his argument would hinge on the fact that the failure of quantitative investment schemes (or lack of relative success) of late is due to the human element, not necessarily the technological, although the two are inevitably and inextricably linked whether they like it or not.

The most historically spectacular investing failures, regardless of the system (or lack thereof) employed by their practitioners, have shared many a characteristic, among them ego, hubris, pride, arrogance, and intractability rank at or near the most frequent and serious offenders.  My inclination, one I believe is supported repeatedly by history, is that there is not one single investing strategy which (out)performs in any and all circumstances.  I realize this is not necessarily the claim of many quant funds, however, in the grand scheme of things, it seems to be the ultimate aspiration, or at least nerdy wet dream of many.  

The quants' search for the ultimate algorithm, for the AI that's always one step ahead of mere mortals may very well be an impossible task, or even a fool's errand.  That there is a very public, multi-party game being conducted, where each party believes that, utilizing essentially the same set of tools as the other parties, they will outsmart them, seems inherently ridiculous to me.  Of course, this can also be said for the larger investing game as well, although the number and variety of approaches (not to mention the "quality" of many participants) opens up the odds some, although the point is hardly lost on me.  Much in that same vein, what we've seen is that rather unsurprisingly, the proliferation of quantitative investing has created an even more profound feedback loop in various markets than already existed just with the more 'traditional' methods and participants. 

The logical action for the prudent quant is then to adjust the models to better account for the actions of others with similar strategies.  Throw in another factor here, tweak a little stochastic calculus there, no big deal.  Of course, if everyone (or a significant # of participants controlling a significant amount of money) makes these changes, then you run into the unsurprising eventuality where everyone is essentially second-guessing each other, and thereby second-guessing themselves, much in the same basic fashion even the most novice retail brokerage account holder approaches the investing game.

What then, is the purpose, besides to tout one's technical or mathematical acumen, if the results do not stand up to scrutiny, if it can't weather the storm better than say, going to cash.  Contrary to many a financial professional, being down less than your (bullshit) "benchmark" in a severely down market as we're currently in does not strike me as worthy of celebration.  When, in a severely down market, you've outperformed cash, well Sir, now we're talking!  Crack out the good shit, we're having ourselves a party tonight!

Now, back on track (one resembling the Nurburgring, perhaps).

As many an investor has acknowledged, in this game, being right, and being profitable aren't necessarily one-in-the-same.  While admittedly comparing apples to an orange grove, over the past year or two many technically advanced quant funds, with access to a virtually unlimited supply of data and analytical power, suffered serious losses.  During this same period, myself and several acquaintances, with significantly less resources (to say the least!), have achieved positive returns, all-the-time wondering how it was possible that everyone else could get it so wrong.  By "it", of course, I mean the basic conceptual bets.  For example, as I'd mentioned over the course of the past 9-12 months, the short Retail trade seemed completely obvious if one was willing to look at the body of evidence available.  When I shorted Lululemon (LULU) at around $36 (after recommending it months earlier as a short before I started @ 1-2 Knockout when it was trading over $60), the analyst estimates were based on entirely unreasonable growth rates, given what I saw was the inevitable shitstorm we were heading into, the same shitstorm in which we currently find ourselves.  I can't speak for every quant model of course, but of late it seems to me that many such funds failed to see the forest for the trees.  That is, the data was there, but when one is looking for very complicated relationships, perhaps its not too surprising that some very simple connections went relatively unnoticed.

My intent is not to highlight my genius (nor to even claim such a thing exists; hint - it doesn't), but to simply point out the fact that perhaps the most highly-correlated factor or driver of investment success is not the sophistication of the system, but the ability of the manager (whether man or machine) to stay curious, and informed, and to keep an open, and humble mind. 

Are quantitative strategies useless?  Of course not, don't be ridiculous! They are yet another tool in the prudent investor's toolbox, which, when used "wisely" can yield spectacular results.  However, just like with any other powerful tool, an over-dependence upon, or misuse of quantitative analysis can be, as we've seen, catastrophic.

Excuse the rambling, its 2am 3am for Christ's sake! 

Thoughts?  Discuss amongst yourselves in the comments.

(Detroit's) Back in (the) Black (or not...)

So I spent a little time over the past day or two going through the recently released Automaker Bailout Bill, which apparently is to be called, the ‘‘Auto Industry Financing and Restructuring Act," or "AIFRA", as the cool kids call it.  Lacking a password to unlock the original, and being way to unambitious to crack it, unfortunately I wasn't able to upload my annotated version, so lets go through this thing the hard way:

Section 2.a: Findings

 The Congress finds the following:
(1) A combination of factors, including errors in the business model of domestic automobile manufacturers...

What, what is this?  A tacit admission that they dug their own grave?  REALLY?  Can someone else verify this is, indeed, the FIRST finding?  Right there, up-front, fo serious?

The Shark, it Has Been Jumped (Middle East Edition)

For those of you who ain't down with the hot beats all the kids are listenin' to these days, lemme learn ya'll somethin. 

I give you Busta Rhymes' new track, "Arab Money".  Abridged lyrics:

[Chorus: Ron Browz]
Shalai Lai Lai Halilili Hai Lo!
Hi Li Ba Lai Hey Hi Li Bai Lo!
We gettin' Arab money!
We gettin' Arab money!
Ha La Shiki Hai Lili Ba La!
Milli Ai Lai Shi Lili Ba La!
We gettin' Arab money!
We gettin' Arab money!

[Verse 1: Busta Rhymes]
Now, there ain't no way that you could kill the beast dead
I got Middle East women and Middle East bread
I got oil well money in the desert playing golf
Dolce shorts, dashiki with a Louie Scarf
Chest cold, diamonds make a nigga wanna cough
In Dubai, 20 million on the villa loft
And then I step up in the club and then these other niggas mad as shit
The way I make the people wanna sing the hook in Arabic!

[Chorus]

Seven star hotels, Maybach, movie sick
Big bitches, knock-kneed camel-toed groupie shit
Women walk around while security on camelback
Club on fire now, niggas don't know how to act
Sittin' in casinos while I'm gamblin' with Arafat
Money long, watch me purchase pieces of the Almanac
Y'all already know, I got the streets buzzin'
While I make you bow down and make Salaat like a Muslim

[Chorus]

See, now I take trips to Baghdad dummy
While I use stacked chips and count Arab money now
I don't need to get fresh, about to grow a beard duke
So much cake even the money look weird too
Domestic bread, and I'm broad, I'm tryna eat right
Prince Alwali, Bin Talal, Al Saul
They respect the value of my worth in Maui, Malaysia
Iran and Iraq, Saudi Arabia!

When American rappers start tying you into their songs, its probably a good sign that shit is about to (slash already has) hit the fan.

Guess throwing all your money into ridiculous development projects like islands in the shape of palm trees and a map of the World, and the tallest building on the Planet wasn't the best idea (duh).  

Make of This What You Will...