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Monday, January 31, 2011

Manny Mondays: Egypt "Black Swan" Edition

Morning all! In trying to keep with all of the Egypt updates over the weekend got me thinking - is Egypt our "Black Swan?" Or least a close relative of sorts? It's probably too early to fully ascertain all of the implications of the uprising, but we can still speculate a bit, which is what I thought we'd do this morning. So folks, what do you think could be some of the geo-political, economic, and market implications? Will hot money flows flee other emerging markets? Rising oil prices, and resulting commodity and food prices? Will there be at least a short term flight to "safety", and/or to the least bad of a bad lot of currencies, namely the U.S. dollar? What are the potential longer term implications?

Here is a small sampling of articles from over the weekend:

Dollar, Yen, Swiss Franc Gain Versus Euro for Second Day on Egypt's Unrest

Dubai Shares Fall Most Since May on Egypt Unrest, Pacing Mideast Decline

The Egyptian Unrest: A Special Report

Opposition Rallies to ElBaradei as Military Reinforces in Cairo

Israel Gauges a Conflicted Partner

Oil ETF Call Trades Soar to Record Amid Egypt Unrest

Unrest in Egypt Unsettles Global Markets

What else is on your mind this morning?

Thursday, January 27, 2011

Friday Potpouri





All Egypt All The Time

ElBaradei's return to Egypt could offer the opportunity for a good alternative to the current leadership.

When ElBaradei, the former UN nuclear chief and Noble Peace prize winner, announced in late 2009 that he was returning to settle in Egypt after decades abroad and to work to move the country toward democracy, it created political waves.


an action unprecedented in Internet history

"At 22:34 UTC (00:34am local time), Renesys observed the virtually simultaneous withdrawal of all routes to Egyptian networks in the Internet's global routing table. Approximately 3,500 individual BGP routes were withdrawn, leaving no valid paths by which the rest of the world could continue to exchange Internet traffic with Egypt's service providers. Virtually all of Egypt's Internet addresses are now unreachable, worldwide."

"Internet and mobile phone text message users in Egypt have reported a major disruption to services as the country prepares for a new wave of protests against the 30-year rule of Hosni Mubarak, the president."

(Can this happen in the United States?)

In pictures: Anger in Egypt


I came across these two pieces of information recently and though I would share it with the group. Without taking a position on the matter myself, I felt they offered a counter argument to the endless suicide-inducing stress fest we are fed daily on this subject from both the main stream media and econoblogosphere.

Misunderstandings Regarding State Debt, Pensions, and Retiree Health Costs Create Unnecessary Alarm

Summary

A spate of recent articles regarding the fiscal situation of states and localities have lumped together their current fiscal problems, stemming largely from the recession, with longer-term issues relating to debt, pension obligations, and retiree health costs, to create the mistaken impression that drastic and immediate measures are needed to avoid an imminent fiscal meltdown.

The large operating deficits that most states are projecting for the 2012 fiscal year, which they have to close before the fiscal year begins (on July 1 in most states), are caused largely by the weak economy. State revenues have stabilized after record losses but remain 12 percent below pre-recession levels, and localities also are experiencing diminished revenues. At the same time that revenues have declined, the need for public services has increased due to the rise in poverty and unemployment. Over the past three years, states and localities have used a combination of reserve funds and federal stimulus funds, along with budget cuts and tax increases, to close these recession-induced deficits. While these deficits have caused severe problems and states and localities are struggling to maintain needed services, this is a cyclical problem that ultimately will ease as the economy recovers.

Unlike the projected operating deficits for fiscal year 2012, which require near-term solutions to meet states’ and localities’ balanced-budget requirements, longer-term issues related to bond indebtedness, pension obligations, and retiree health insurance — discussed more fully below — can be addressed over the next several decades. It is not appropriate to add these longer-term costs to projected operating deficits. Nor should the size and implications of these longer-term costs be exaggerated, as some recent discussions have done. Such mistakes can lead to inappropriate policy prescriptions.


Pension Obligations

Some observers claim that states and localities have $3 trillion in unfunded pension liabilities and that pension obligations are unmanageable, may cause localities to declare bankruptcy, and are a reason to enact a federal law allowing states to declare bankruptcy. Some also are calling for a federal law to force states and localities to change the way they calculate their pension liabilities (and possibly to change the way they fund those liabilities as well). Such claims overstate the fiscal problem, fail to acknowledge that severe problems are concentrated in a small number of states, and often promote extreme actions rather than more appropriate solutions.

A debate has begun over what assumptions public pension plans should use for the “discount rate,” which is the interest rate used to translate future benefit obligations into today’s dollars. The discount rate assumption affects the stated future liabilities and may affect the required annual contributions. The oft-cited $3 trillion estimate of unfunded liabilities calculates liabilities using what is known as the “riskless rate,” because the pension obligations themselves are guaranteed and virtually riskless to the recipients. In contrast, standard analyses based on accepted state and local accounting rules, which calculate liabilities using the historical return on plans’ assets, put the unfunded liability at about a quarter of that amount, a more manageable (although still troubling) $700 billion.

Muni Bonds: Default Fears May Be Overblown

As investors flee, some analysts say predictions of widespread defaults, spurred by big state deficits and lost tax revenues, are lacking in evidence

Tom Kozlik, a municipal bond analyst for Philadelphia brokerage Janney Montgomery Scott, sent clients a note on Jan. 14 reminding them of Warren Buffett's advice for navigating market turmoil: Be greedy when others are fearful. There's been plenty of fear in the $2.9 trillion U.S. state and local government bond market, typically a safe haven for individuals seeking tax-free returns and little risk of default. With states facing budget deficits estimated at as much as $140 billion and cities reeling from tax revenue lost during the housing market bust, some are calling that safety into doubt.

Meredith Whitney, the banking analyst who won fame for predicting that Citigroup (C) would be forced to cut its dividend in 2008, says she expects as many as 100 municipal defaults this year, adding up to "hundreds of billions" in debt. On Jan. 11, Edmund F. Kelly, chief executive officer of insurer Liberty Mutual, said his firm has cut its holdings of municipal debt in Connecticut, California, and Illinois, three states that are heavily indebted and strapped for cash, saying the market was being propped up by the belief that Washington will bail out local governments. JPMorgan Chase (JPM) CEO Jamie Dimon, speaking at a health-care conference on Jan. 11, warned of municipal bankruptcies on the horizon, cautioning investors in the market to be "very, very careful."

Again, I present this information to you without taking a position on this issue myself.

Wednesday, January 26, 2011

The Volume Fix

As many of you know, I’ve been studying volume patterns to go along with my knowledge of price patterns. IMHO, when used with other tools, volume patterns will give a dimension to the market activity and to individual stock activity that from my perspective don’t seem to be gained by other tools.

But before we start with the volume, we need to consider what tools we use and what they tell us. When we look at any chart, it tells us what happened in the past. We look to that information and add our knowledge, gut feel, and history of what took place in another time, and use the combined information in an attenpt to predict the future. We can then assign a probability to that future.

In order to correctly assign probabilities, it takes more than just chart information. We might look at market internals because as we all know, a stock tends to follow the market. I have done relative strength observations for a long time now, and have found that stocks do trend, the successful ones trend higher than the market. But we might look at other tells, like Oil, Gold, some sector ETFs, and other market internals. We should consider structural factors as well, such as the FED printing money. Additionally we have psychological information such as we know that for the last 6 quarters, when a company has reported earnings, 70% of the time, the report has beaten estimates (1). With that information, and a chart that, based on our knowledge of charts looks like the stock might move upwards, we might consider that it will do just that.

Over the last week, I have studied about 70 stocks which exhibit volume trending patterns that increase in volume by at least 10% per day over a 3 day period. Of these, 17 reported earnings during the period. Statistically, a 25% hit on one random factor is extremely unusual. Anyway, here are the results:

10 Of the 17 stocks showed increasing price trend during the 3 day volume increase period. Of these 10, 9 of the stocks popped up on the report day.
2 of the 17 stocks showed decreasing price trend during the 3 day volume increase period. Of these, both of the stocks popped lower on the report day.
The remaining 5 stocks neither popped higher nor lower, they stayed within their price range for the period.

Here is ERIC, an example:




Now, having learned this, my favorite short was X. I was going to short into earnings, under the assumption that the earnings report would suck. However, I applied what I learned from the above, and see what happened on the 10 minute chart: increasing volume, increasing price, for more than 3 periods. I exited my short at 55, just a tiny tiny amount lower than my entry. Good thing I did.




(1) http://www.bloomberg.com/news/2011-01-20/u-s-stock-index-futures-fluctuate-before-jobless-claims-housing-reports.html

Tuesday, January 25, 2011

Updating

Good morning everybody
I thought around two weeks ago that the market was going to move awway from this price zone but nothing happened.
Still waiting for an impulse strong enough to do the task.

I'm checking different scenarios with the expectation of getting more help during moments that look dull to see if they respond somewhat reliably.

Even though the leg that started in September has more to run timewise at least I'm very interested in determine if the up movement keeps going till April-May and then reverse or if the movement up is almost complete and now the price action is merely wasting time until it reaches that moment.

The correction in case of appear is not going to be substantial at least for a few months that view didn't change to me.
So if we have some meaningful correction in the next couple weeks (not 1-1.5%) the most probable moments should be:

1)In the next 48 hours

2)Between Jan 29 and Feb 3rd.

Again the movement should be swift, not stopping after a move down of 1% for instance, has to keep going down 8-10% withouth interruption.In that case the coming months will be a topping process where new highs are not acquired, or at least consistently.

If that kind of reversal is not attained means in my view that the move up has room to keep going up and not merely wasting time (the price action) till Apr-May, but going to new highs.

New highs is still my preferred view but will see if it holds in the next couple of days and to the first days of February.

Dan

Monday, January 24, 2011

Manny Mondays: Is the China Bubble About to Burst?

Morning all! I've been seeing more and more mention of the China bubble bursting lately (Rock's recent mention of it spilling over to Singapore's housing market also caught my attention) but this article that ran in The Telegraph on Sunday particularly caught my eye - Hedge funds bet China is a bubble close to bursting.

Here are a couple of key excerpts from the article:

There have been academics and analysts who have argued about the dangers of China’s economy overheating for some time. But for many, the fact that hedge funds, particularly those with track records on previous crises, are launching specific funds is the sign that the bubble is close to bursting.

One academic said: “Economists have contrarian views all the time. But these hedge funds have their shirts on the line and do their analysis carefully. The flurry of 'distress China’ funds is a sign to sit up.”

More analysts are becoming bearish too. Last week, Lombard Street Research put out a note warning of China’s “already dangerously home-grown inflation”.


According to the article, many of these funds believe the many implications on the rest of the world may also be dire if/when the China bubble does indeed burst:

The analysts said figures showing the continuing boom in China were far from welcome: “On the contrary, Chinese policymakers have to slam on the brakes.” The financiers are warning that rather than depending on China as the prop of the recovery plan, Britain needs to be braced for another shock.

A recent study by Fitch concluded that if China’s growth falls to 5pc this year rather than the expected 10pc, global commodity prices would plunge by as much as 20pc. China is the global price-setter for oil, coal and base metals.

According to Corriente Advisors: “We expect the economic fallout from a slowdown of China’s unsustainable levels of credit and growth to be as extraordinary as China’s economic outperformance over the past decade.”


Or, might this be a contrarian signal that things in China might still have some room to run before the jig is up? It seems like the China bubble is one that so many have been calling for a very long time now, yet they roll onward without it blowing up. Yet. What does everyone think?

Friday, January 21, 2011

Friday Potpouri


File this under weird:

Bjork (yes that Bjork) Iceland wants to reverse Magma deal

"International pop music queen Bjork says the government of her native Iceland is prepared to reverse a deal that saw Vancouver-based Magma Energy Corp. buy geothermal energy producer HS Orka, denouncing the transaction as a secretive agreement with “no benefit” to the local economy.

The award-winning singer has been on a crusade against foreign takeovers of Iceland’s resource assets. Following a karaoke marathon and petition she helped organize earlier this month, she met with Iceland’s prime minister and finance minister to make her case for scuttling the Orka purchase."



Onion News Network - Keeping You Safe From The Lies

The Onion is starting it's own network ONN, and this story caught my eye:

Morbid Curiosity Leading Many Voters to Support Palin

"A recent poll shows 62% of Americans say they don't want to vote for Palin, but kinda just have to see what would happen."


Giants Fan Visiting Philadelphia Feels Betrayed By Bud Light Ad For Eagles

"PHILADELPHIA—New York Giants fan Mark DeLeon, 36, told reporters Monday that he felt shocked, hurt, and betrayed after seeing a billboard stating that Bud Light was also the official beer of the Philadelphia Eagles. "What the hell is this? The Eagles—our division rivals for Christ's sake," said a visibly distraught De≠Leon, adding that at the moment he saw the billboard, he realized all the posters, commercials, and promotional plastic cups pairing the low-calorie lager with his favorite football team were "complete bullshit." "While they're at it, why not just put a stake in my heart and tell me Bud Light is also the official beer of the fucking Red Sox." DeLeon added that he plans to take revenge on the disloyal company by drinking Bud Light Lime."

Go Bears!

Thursday, January 20, 2011

Thorsday Open Thread


We seem to be nearing another inflection point in the market

U.S. Stocks Near ‘Significant’ Top, Tom DeMark Says

Jan. 18 (Bloomberg) -- U.S. stocks are within a week of “a significant market top” that is likely to precede a drop of at least 11 percent in the Standard & Poor’s 500 Index, said Tom DeMark, creator of a set of market-timing indicators.

DeMark’s Sequential and Combo indicators, designed to identify market tops and bottoms, are giving a sell signal on the main U.S. stock benchmark for the first time since mid-2007, he said in a telephone interview. The S&P 500 began its 57 percent plunge from a record in October 2007.

“I’m pretty confident that in one to two weeks, the market will be in a descent,” said DeMark, founder and chief executive officer of Market Studies LLC. “It could be pretty sharp.”


or are we?

LOWRY’S: NO MAJOR TOP FORMING

“In summary, just as at the April high, there are currently no indications a major top is forming. As to the extent of any short-term pullback, investors should monitor measures of short-term Supply for signs of a sharp increase. Also, the April top was quickly followed by a pair of 90% Downside Days. Similar intense selling after any near term market high would again suggest a deeper correction is possible, potentially the 5% – 7% range rather than a milder 3% – 5%. However, the probabilities argue strongly against anything approaching the April – August decline.”

The experts seem to disagree! Which one is it? Are we about to turn? Up or Down?

Wednesday, January 19, 2011

Volume is the Key

I don’t know if it’s an asset class, but I’ve been studying volume and volume changes (or volatility) for more than a year now. After watching the plays in volume, I would like to tell you some information I’ve discovered, and conclusions I’ve reached. You might want to use this information, or not.

1. Big boys play in one day, and in as short a time as possible in that day. The good ones use their HFTs or hire HFTs to observe and gauge the volumes at or near the point they wish to make a trade. The bad ones just make the trade through brokers. So on the charts below, I will show you where a huge trade moves the market, and where a huge trade does not. The reason they make the play as fast as possible is because observers and small traders see huge volume spikes, and either short or long and enjoy the ride on the big play. These small traders also cause the market to move, costing the big trader more money.

2. Big boys hate to make trades, because of the cost of making the trade. Remember, we get to remove the cost of our trade when we calculate the profit/loss. But the big boys don’t. Their costs include the brokers’ fees, as well as the stock price move during the trade, both of which directly affect their bottom line. So they hate to be wrong. When they’re wrong, you will often see them appear on Bloomberg or Money, in order to play their agenda and move their position, probably so they can get out. Usually not so they can get in, because that would be a warning and traders would listen. I saw one come on Betty Liu’s show, and she ripped him a new one. I was proud of her. (As an aside, the next day and for the following week, she was missing with no “I’ll be out and xxx is taking my place” announcement, so she could have gotten a week off to think about it, or it could have been a vacation. I’d love to know which.)

3. Big boys are more often right than wrong. When stocks that are at a high, with high stochastics and outperforming the market % gain show a big volume sell, most of the time the stock goes significantly down in price over the next quarter. Conversely, when the stock is at a low, with low stochastics and underperforming the market show a big volume buy, the stock goes significantly up in price over the next quarter.

4. Often, before a big buy or big sell, there is stock volume movement. Now, I’m not one to insinuate there might be insider trading, but you have to wonder why these larger-than-ordinary volumes appear just days or even hours before the large volume trade is made.

5. After a big buy or sell moves the market, there are often after-shocks where the price continues to move. It moves Fibonacci-like and can continue in the direction caused by the big trade, or can move in the opposite direction, as a recovery. I’m not sure why, but it may be because traders or bots consider things other than volume, and just continue and follow the money. In any case, putting market orders above and below the big move’s pricepoint will often catch the direction and this play can make some money. You simply cancel the market order which isn’t executed.

6. During earnings season, you will observe increased volatility. I am now studying the volume action for 5 days prior to the reporting. Again, looking for unusual volume action, under the supposition that there may be , um, some advanced warning given to some, um, special individuals, who, might, um, possibly, trade on that information, in possibly some significant volumes? Naw. Couldn’t ever happen. Could it.

Now, the charts. Yes, Rock’s giving you charts again. Sorry.

First, here's a big price move as we would expect with a big volume buy:



Now, here's a small price change, but again, huge volume:



Here's an aftershock where the stocs were low, but the stock had done a big move upwards. The Sell happened, and the aftershock continued:



And finally, here is an example of, um, maybe advanced warning there's gonna be a big buy. Note the volume increase 6 days before the big buy.

Tuesday, January 18, 2011

The magic wand

Yes we all know how he uses it to our great delight or distress, depending on what side of a trade we are.

His decisions erase conflicts off the map and food inflation is just an annoyance in his wordly quests.

Can we think that he doesn't have real power at the wheel, or on the contrary that he is omnipresent and we better don't fight the Fed?

My silly opinion lies more like he has power until he doesn't. Don't think linearly this kind of events.Part of his prestige resides in Benjamin Strong and Paul Volcker.

Why? Because they knew what they were talking about and they were proved right.

B. Strong headed the Fed Res Bank of New York and had the power equivalent today of B.Bernanke.He didn't like the idea of monetary tightening (there were no inflation to justify that kind of move) as a way to combat speculation in Wall Street in 1928.

The Fed started tightening money supply anyway in the spring of 1928.We know the consequences that followed to that movement.
Mr Strong knew what he was talking about but a non linear event alter the landscape, tuberculosis for him and death by Oct 1928.

About Mr Volcker we know how he tight monetary policy and break the back of inflation a few decades ago.
So in one case for omission of paying attention to someone who knew and in the second case for let it do what was best for the country (though painful) to someone who knew what he was talking about.

With that precedent the Chairman gets some credit (sorry about the pun) and fighting the Fed proved to be not rewarding lately.

There's lots of unintended results, but the bottom line is raise liquidity with semblance of order in the banks (from the depositors point of view) and people will speculate in the markets.

If playing that card the Fed always will be a force to reckon with.
But when push come to shove I side with non linear events any day and all their apparent power is just like playing a rol in a staged drama on a theater, that they can not control but just play their part.

What I do allows me to travel back and follow developments how they surfaced and at different moments what happened and the result on the general population.

And when we have like at that moment a cut around 42% of the salary in the still employed, events that massive are not avoided by some non linear event like the death of B Strong.

See? is non linear, is just bad luck that the right guy for the job died.Well looks like a random event but exist another kind of "linearity" that shows me no matter what happen to B. Strong hardship could not be avoided.

Ameliorated maybe? Honestly can not respond that, I can guess that instead of a 42% paycut could have been 29% but who knows?. What I know for sure is that the forces behind all this non linear events would have been present anyway causing equivalent hardship.

Making not possible in my humble point of view assume that a time of wild economic expansion was in store hadn't been for B Strong's death.

So sumarizing, yes the Fed holds power but just acting out forces that they can not control (maybe increase or diminish the end result). But is not posible for them to create that force, they can only create fiat.

Check the two greek people that die in May 2010 and next day the flash crash.Were this two people that powerful? Just the fuse? Is attributed to certain things the cause like and endogenous event because is more elegant to have a reason than to say that we haven't a fucking clue.

So for the quants mathematics are everything in the markets my view is more like using astrology in try cracking the codes, because how can you model with numbers only sheer panic or greed?.

Regarding the market I keep the same view since Jan 7 2011 nothing change much

http://anonymoustraders.blogspot.com/2011/01/eqypt-trip-part-two.html?showComment=1294388972928#c5010572766355837570


About NVDA in two days there's a small chance that a correction starts gaining momentum but the stronger one comes around feb 6 if the whole market helps coming down. Keep tight stops people.

Dan

Monday, January 17, 2011

Manny Mondays: Whither Europe?

Happy MLK Day everyone! Since the U.S. markets are closed today, I thought I'd focus my sights across the pond on Paul Krugman's Sunday NY Times Magazine's article about Europe's burgeoning currency crisis and whether the European Union can be saved or not, as well as the consequences for them and the rest of the world if it is not held together.

In the rather long article, Krugman takes a deep, detailed historical look at how Europe got to this point and what's likely in store for them down the road:

Here's an excerpt:

The tragedy of the Euromess is that the creation of the euro was supposed to be the finest moment in a grand and noble undertaking: the generations-long effort to bring peace, democracy and shared prosperity to a once and frequently war-torn continent. But the architects of the euro, caught up in their project’s sweep and romance, chose to ignore the mundane difficulties a shared currency would predictably encounter — to ignore warnings, which were issued right from the beginning, that Europe lacked the institutions needed to make a common currency workable. Instead, they engaged in magical thinking, acting as if the nobility of their mission transcended such concerns.

Krugman also looks at the bind many Euro-denominated countries now find themselves in, as they lack the flexibility to devalue their currency to help spur a recovery in their respective local economies and make themselves more competitive in the global economy:

Still, there are obviously benefits from a currency union. It’s just that there’s a downside, too: by giving up its own currency, a country also gives up economic flexibility.

Imagine that you’re a country that, like Spain today, recently saw wages and prices driven up by a housing boom, which then went bust. Now you need to get those costs back down. But getting wages and prices to fall is tough: nobody wants to be the first to take a pay cut, especially without some assurance that prices will come down, too. Two years of intense suffering have brought Irish wages down to some extent, although Spain and Greece have barely begun the process. It’s a nasty affair, and as we’ll see later, cutting wages when you’re awash in debt creates new problems.

If you still have your own currency, however, you wouldn’t have to go through the protracted pain of cutting wages: you could just devalue your currency — reduce its value in terms of other currencies — and you would effect a de facto wage cut.


He argues that despite some of the positives that the Euro brought to Europe, it's lack of "fiscal integration" (along with lack of a common language and shared culture) was, and still is, one of the main problems with maintaining its viability over the long term. Krugman even makes a comparison to the situation in Argentina back in the 90's when it continually tried to save its peso link to the dollar and culminating with them defaulting on their debts and only paying back about 35 cents on the dollar.

He then proceeds to outline four potential "plot lines" for the Euro and the likely effects of each on Europe, the U.S., and the rest of the world.

Go read the whole article here:

Can Europe Be Saved?

My question today is this: What's the ultimate end game here for the Euro? And, if the European Union fails to survive, and the Euro goes the way of the dodo bird (or in very least continues its slow descent), what are the ramifications for them, the U.S. (particularly the U.S. dollar) and global economy itself? One thing I'm thinking is perhaps a stronger dollar at least temporarily? And, yes, as a renter of both TLT and UUP, I am talking my book, but what does everyone else think?

Friday, January 14, 2011

Volatility As An Asset Class



I came across an intriguing idea about treating volatility as an asset class, which commonly consists of equities, fixed income, cash equivalents, real estate, and commodities.

Vix and More

Bill Luby is the author of the blog "Vix and More" and he was asked recently to do a guest columnist for Barron's "The Striking Price".

From his website:

"Speaking of which, I have elected to focus on volatility as an asset class for today’s guest column, which bears the title, Ways to Turn Volatility into an Asset Class. Part of my thesis is that 2011 is the year that volatility goes mainstream, largely due to the rise of volatility-based exchange-traded products, which are in the process of bringing volatility trading to the masses. I also repeat an earlier assertion that before the year is over, XVIX and XIV will gain significant traction as buy and hold volatility vehicles."

Ways to Turn Volatility into an Asset Class

There is a quiet revolution going on in the investment world. Volatility, once seen as the domain of institutions and options traders, is about to enter the mainstream and by the end of the year should be well on its way to becoming established as a mainstream asset class.

In sum, volatility is moving into the mainstream and becoming accepted as an asset class. The most recent crop of volatility-based ETPs has accelerated that process with vehicles that are suitable for buy and hold investors and also take advantage of the persistent contango in VIX futures.

These products are frequently misunderstood, but among the group are excellent alternatives for hedging, diversification and speculation. In short, the investment opportunities are substantial enough that it makes it worth the time and effort to learn the idiosyncrasies of these volatility ETPs.




These exciting new vehicles will allow investors and traders to take advantage of a new and more accurate way to hedge risk, speculate and to diversify their portfolios. Given that Black Swans are as common as turkeys these days it pays to know as much as possible about using volatility.

Thursday, January 13, 2011

Long Term Demographic Changes

A few article I came across recently on some rather large demographic trends that I have been following for the last few years. Mainly, that households are becoming larger, while at the same time, immigration is slowing. These changes appear to be both large and long lasting so I think it would behoove us to keep an eye on them in the future, as the progress of these two social movements will likely have an effect on many other parts of society; Housing, education, retirement, elder care, childcare - etc.

Households Doubling Up

In February, after being evicted from their Gainesville apartment, Holly, James, Madison and their good-natured pit bull, Caley, moved into a cramped bedroom in the house where Holly grew up. Neither of Madison's parents had been able to find work for more than a year.
Of the myriad ways the Great Recession has altered the country's social fabric, the surge in households like the Maggis', where relatives and friends have moved in together as a last resort, is one of the most concrete, yet underexplored, demographic shifts.

Immigration Slowing

Census Bureau data released in September showed that the number of multifamily households jumped 11.7 percent from 2008 to 2010, reaching 15.5 million, or 13.2 percent of all households. It is the highest proportion since at least 1968, accounting for 54 million people.
http://teachingwithdata.blogspot.com/2010/09/illegal-immigration-slowing-quickly.html
The Pew Hispanic Center, a non-partisan research organization, says that the number of illegal immigrants living in the United States is down about 900,000 from 12 million to 11.1 million, though the population is hard to estimate. This two-year trend marks the first statistically significant decline in the undocumented population in the last twenty years. The annual inflow is down more sharply: from a peak of 850,00 per year at the beginning of the decade to around 200,000 per year for the period of the study -- March 2007 to March 2009. The decline in illegal immigration was most notable from Central and South American countries other than Mexico.

Wednesday, January 12, 2011

Get Ready to Short NVDA

The Managing Director (remember him?) strolled into Rock’s office. Rock looked up from his desk, and instantly knew something dire was afoot. The only time the MD came to Rock’s office was because he didn’t want a recording of the conversation entered into the archives. Otherwise, Rock woulda been called on the carpet to the MD’s office.

“Rock,” said MD, “we want you to develop a set of platforms based on MIPS”. Rock’s eyes widened. MIPS was a very fast processor which runs a Reduced Instruction Set, not an Intel-compliant instruction set at all. And Rock’s company was an Intel shop (although there was some interest in AMD’s processors). “Here’s a brief list of the set we want.” MD handed over to Rock a napkin, which looked like it had blood and beer on it, and a number of platforms’ rough specs were in pencil—you know, those ½” diameter pencils with lead the size of your mouse’s cable.

Rock looked incredulous. “You know the Marketing Wish List has me buried till 2032 with all the Intel and AMD platforms,” replied Rock, “and we’re already bringing in catering every night and weekends for dinner,” said Rock, wishing he had chosen a job in the public sector. “I can’t possibly do that on my budget.” Rock knew that point was unarguable, and usually stopped MD or anyone else who wanted something extra done, because as we all know, development is an Overhead Expense item, and is best outsourced, so it doesn’t appear on the bottom line. Nobody wants to add to Development’s budget. Ever.

“No problem,” said MD, “you can back charge those 33 ohm chip resistors for $25 each to the other division who needs these platforms, and hire what you need. The IRS audit fell for it before, so there’s no problem doing it again. We simply told them there were special test and sorting requirements.” So Rock did it. He doubled his staff, assigned half the current staff onto the MIPS platforms, and got it all underway. Rock wanted to review the status, so he called a meeting to be led by Product Planning so managers from all departments could see what MD had wrought.

Everything was fine, until Integration and Test’s turn. They put up a plan around UNIX. The Director of Marketing hit the ceiling. “Whadda you mean, UNIX? You know we’re an Intel Windows shop! We have cross-marketing agreements with Everything Windows!!! I mean, we can’t even spell UNIX”. Rock picked up the phone and called his peer at another division and said “I need a port of Windows to run on MIPS yesterday!” A few calls to MD later, the details were worked out, and when the platforms hit I&T, the port was ready. The platforms were brought up, and working. Test programs were written and executed.

Time for another Project Evaluation and Review Meeting. Again, things went fine until I&T put up their test plan. There were no applications on it. Again, Marketing hit the ceiling. “Whadda you mean, there’s no apps that will run on this platform? I thought you told me it ran Windows!!!”. It did run the OS, because we had ported the OS into the language that MIPS understands.

But not one single company we talked to was willing to port their application to run a new instruction set, the MIPS instruction set. Nobody wanted to double their support and maintenance and release structure for an unknown market. Our production line was set to build boat anchors. And Rock had to face a layoff because of all the extra staff that had been hired for the MIPS program. It was a sad sad day. It took a whole lot of $25 chip resistors to pay for that one. But Rock’s bonus wasn’t affected.

Now, in the anecdote above, simply substitute “ARM” for MIPS. And you will see why shorting NVDA is a good idea. If you want, read
http://news.cnet.com/8301-13924_3-20028066-64.html
and very carefully read the last paragraph.

NVDA’s marketing has always been horizontal; they work real hard to make their chips run on Intel (AMD) platforms, and leverage the Intel marketing (and IBM and Microsoft and Dell and and and and… marketing). With an ARM, they will need to change to a vertical market because even though there will be a version of Windows running on ARM, there won’t be any compatible apps, Just like Rock’s case above, so the only thing left is a vertical market for them.

Changing a marketing and sales organization from a horizontal to a horizontal PLUS a vertical organization is beyond the capabilities of all but a handful of senior executives. And with the risk involved, it is doubtful those senior executives will take the chance that they can make it happen.

Plan to short NVDA. You know the drill. Upside-down W with lower highs.

Tuesday, January 11, 2011

What bias?

Hello everybody:

I was considering what bias means in humans and why it's so difficult to be rational and follow facts. That’s what happens to us in the markets and life in general.

It came to mind after thousands of comments in several blogs, how easily people retrench to basest lines of defense and get a blurred vision of facts.
The overwhelming majority ignore this, appeared in the Arizona Daily Star in June but was available on the web Saturday.


“Get on Target for Victory in November. Help remove Gabrielle Giffords from office. Shoot a fully automatic M16 with Jesse Kelly.


Um…help removed…shoot M16...with a politician? All in the same sentence, presented as a fun kind of activity (my guess).
Sounds like an unusual activity to engage in, with a politician. More like preparing for a war.

This invitation makes me wonder could it be that some unstable person read it like a message? Usually unstable people alleged getting lots of messages from TV or radio inciting them to act. Could it be? Well maybe you see a bias.

This wasn’t the important thing in the discussions at all. Troubling.


Now, imagine that I present Wall Street bankers as some kind of kids that cannot control themselves (I would be tacitly implying) that they somehow are not too responsible because kids lack accountability in a serious sense…hey is in their nature…they can’t control themselves, you know kids.
The regulators are the ones mainly responsible because we are dealing with kids.

They are not kids, a racketeering ring is more apt to describe them in my opinion.
So presenting them in that kind of way shows bias too, because relieve them of accountability regarding how many lives got destroyed through time because of them.
(Other groups are involved too, of course).

Just more bias…well, it’s a war right?

And how wars are useful to some few of these rings?

Read what “The fighting Quaker” Maj. Gen. Smedley D. Butler said 75 years ago in “War is a racket” (very short piece available on internet) to have a grasp about beneficiaries of wars and how it works.
http://www.lexrex.com/enlightened/articles/warisaracket.htm

Something besides the book, that he said, caught my attention too :

“…I spent 33 years and four months in active military service and during that period I spent most of my time as a high class thug for Big Business, for Wall Street and the bankers. In short, I was a racketeer, a gangster for capitalism. I helped make Mexico and especially Tampico safe for American oil interests in 1914. I helped make Haiti and Cuba a decent place for the National City Bank boys to collect revenues in. I helped in the raping of half a dozen Central American republics for the benefit of Wall Street. I helped purify Nicaragua for the International Banking House of Brown Brothers in 1902–1912. I brought light to the Dominican Republic for the American sugar interests in 1916. I helped make Honduras right for the American fruit companies in 1903. In China in 1927 I helped see to it that Standard Oil went on its way unmolested. Looking back on it, I might have given Al Capone a few hints. The best he could do was to operate his racket in three districts. I operated on three continents“.


And now we can see a practical sample if it's true that history rhymes,


Argentina 1973-4. Minuscule public debt- self sufficient country. Che Guevara- Bolivia- extremists- bombs- deaths-military coup- people in the far right or left-elite get lots of debt-torture from the government-30000 people disappeared-population scared.

Having the population forced to chose among the two groups of wing nuts, scared from each other and from the government because “it is a war” (like a guy with explosives in their ass or underwear here) so government is allowed to become more and more powerful, intertwined with the elite and then comes the coup de grace, the act of magic:

All the private debt is transformed to public debt, taxpayers are going to pay for 25 years for debt that the elite got, plus the one that government incurred, you know it’s war.

Until the 2000 default. Debt restructured, smaller, so everybody happy now? Just keep paying.

It’s necessary turmoil or even terror so the population acquiesce to a stronger and more paranoid state, where anyone who dares question it, is dumb or unpatriotic . More control and less habeas corpus gets going.

With Bush the debt almost doubled in 8 years, people got silent because well, it’s war or because maybe were scared, maybe?. In 2008 offering the first stimulus and with Obama getting the second one. (probably in the first one he was somehow involved is my logical guess)loans were made again to take care of the world just right on the edge…see… you can almost see down there…the cannon…at the bottom…and the entire world is going to fall right there...and is going to hurt…if the banks don’t get whole and pay themselves royally to overcome their stress.

The question in my mind is just when the act of magic like in Argentina is going to happen again but here:

When all the private debt is transformed in public again, condemning millions of innocents.

They are not kids with candy at all. That’s just another bias.



Dan



Sorry I didn’t talk about astrology and the markets but this is my final piece about what I get on the web. I’m not going to bother you with that anymore for sure, I’m going to focused just on my stuff from now on.

I couldn’t resist because I love this nation and it hurts to witness the same crap for a second time in my life.

Next week I’m going to get about if the Fed governs equity prices or if they are just morons or what, (in my humble opinion).

Monday, January 10, 2011

Manny Mondays: Holiday Travel Pics Open Thread Edition

Morning all! Due a busy weekend and quite frankly not being in the mood to post anything at all serious, I'm opening things up today. Anything that's on your mind is fair game, so fire away.

However, here's one long Sunday NY Times article about the ongoing, yet under publicized (until now) scam, dubious "accounting" (and time bomb) that is law school in the U.S. (and student loan debts) that definitely caught my eye over the weekend and is well worth reading:

Is Law School a Losing Game?

Much of the content of the article is simply astounding to me (as well as the willful self-delusion among applicants & students), and tells me this problem doesn't reside only with law schools. I gotta believe it's more widespread. Here are a couple of striking excerpts:

“Enron-type accounting standards have become the norm,” says William Henderson of Indiana University, one of many exasperated law professors who are asking the American Bar Association to overhaul the way law schools assess themselves. “Every time I look at this data, I feel dirty.”

IT is an open secret, Professor Henderson and others say, that schools finesse survey information in dozens of ways. And the survey’s guidelines, which are established not by U.S. News but by the American Bar Association, in conjunction with an organization called the National Association for Law Placement, all but invite trimming.

A law grad, for instance, counts as “employed after nine months” even if he or she has a job that doesn’t require a law degree. Waiting tables at Applebee’s? You’re employed. Stocking aisles at Home Depot? You’re working, too.


It also seems that, according to the article, the lure of the easy money machine isn't only reserved for those well-heeled denizens of Wall Street:

Number-fudging games are endemic, professors and deans say, because the fortunes of law schools rise and fall on rankings, with reputations and huge sums of money hanging in the balance. You may think of law schools as training grounds for new lawyers, but that is just part of it.

They are also cash cows.

Tuition at even mediocre law schools can cost up to $43,000 a year. Those huge lecture-hall classes — remember “The Paper Chase”? — keep teaching costs down. There are no labs or expensive equipment to maintain. So much money flows into law schools that law professors are among the highest paid in academia, and law schools that are part of universities often subsidize the money-losing fields of higher education.

“If you’re a law school and you add 25 kids to your class, that’s a million dollars, and you don’t even have to hire another teacher,” says Allen Tanenbaum, a lawyer in Atlanta who led the American Bar Association’s commission on the impact of the economic crisis on the profession and legal needs. “That additional income goes straight to the bottom line.”


I'm sure that saddling many in our younger generations with hundreds of thousands undischargable (and unpayable) debt (and a subsequent life of serfdom) will end well though. What could possibly go wrong?

I'll leave you with a few photos from my recent trip to CO over the holidays:

Sunday, January 9, 2011

Sunday Fun Day

Some Pics from my vacation

Sunrise on The Nile

 
Cairo - No lane markers on that bridge!

 Obligatory Pyramid Picture

Nubian Boy - Aswan

Cairo Sunset

 
Luxor

London

Salisbury

British Museum

Bath

Saturday, January 8, 2011

The Singularity Has Happened

The Singularity has happened; we call it "the industrial revolution" or "the long nineteenth century". It was over by the close of 1918.

Exponential yet basically unpredictable growth of technology, rendering long-term extrapolation impossible (even when attempted by geniuses)? Check.

Massive, profoundly dis-orienting transformation in the life of humanity, extending to our ecology, mentality and social organization? Check.

Annihilation of the age-old constraints of space and time? Check.

Embrace of the fusion of humanity and machines? Check.

Creation of vast, inhuman distributed systems of information-processing, communication and control, "the coldest of all cold monsters"? Check; we call them "the self-regulating market system" and "modern bureaucracies" (public or private), and they treat men and women, even those whose minds and bodies instantiate them, like straw dogs.

An implacable drive on the part of those networks to expand, to entrain more and more of the world within their own sphere? Check. ("Drive" is the best I can do; words like "agenda" or "purpose" are too anthropomorphic, and fail to acknowledge the radical novelty and strangeness of these assemblages, which are not even intelligent, as we experience intelligence, yet ceaselessly calculating.)

Why, then, since the Singularity is so plainly, even intrusively, visible in our past, does science fiction persist in placing a pale mirage of it in our future? Perhaps: the owl of Minerva flies at dusk; and we are in the late afternoon, fitfully dreaming of the half-glimpsed events of the day, waiting for the stars to come out.

Friday, January 7, 2011

Eqypt Trip - Part Two

Hello!

First and foremost, thank you all so much for all the emails asking if we were ok, I'm so so sorry that we didn't get a chance to email sooner but as I said in my earlier email, we have literally been run ragged on this tour. I think our latest wake-up call has been 6:00am and our earliest was 1:45 the morning we left for Aswan.

Where to begin? I suppose at the beginning! We spent our first official day in Cairo touring a bit of the city with a very nice cab driver that the hotel helped us out with. Cairo is a very VERY big city. The first thing you notice when you get here are the constant noise of car horns. You might imagine that this could be very annoying, but this isn't a New York CIty "BEEEEEEEEEEEP! Hey you idiot, get out of my way" kind of horn honking, it's more of a "Beep beep! Hello my friend, I'm coming up behind you" It's very much like listening to a conversation. Another thing you notice right away is that there are no lanes, anywhere, nor have we seen very many traffic lights – according to our guide and various taxi drivers, they're optional!

You would imagine that the combination of 19 million people, no lanes, and no traffic lights, with people running and walking across traffic constantly would be chaos, and for the most part it is. Somehow though, like much of what we've seen in Egypt so far, the people of Cairo make it work! I've paid close attention to the condition of the cars, and although most of them are quite old and in need of repair, very few of them are dented. We also cannot get over how all of the pedestrians manage to weave their way though traffic without getting hit. I suppose I could look up traffic fatalities for Cairo, but I rather prefer the illusion that there are very few!

Whenever I come to a new city abroad for the first time I can't help but compare it to other places I've already been, it's not until I've spent a few days in a city that I can really get the unique feel of that particular city. With that being said, the very first impression of Cairo is what I would consider a mixture of Istanbul and Mexico City. It has the middle eastern feel of Istanbul, but the sheer size and sprawl of Mexico City. Now, of course, after having spent over a week in the country and four days in Cairo, - Cairo is . . . Well it's just Cairo. It's unlike anywhere I've ever been.

Before I get into more detail about what we've seen so far let me spend some time talking of the Egyptian people. To put it bluntly, if it were possible to fall in love with an entire population, we've done it. I have never, in all of my travels, met a more friendly, warm, open, helpful culture. All you have to do is glance in someone's direction, even in overpopulated Cairo, and you will receive a big sincere smile. I am always struck by how much HAPPIER people in other places seem to be than we are at home in the states. This, of course, is not to discount the grinding poverty that nearly everyone here must endure, but somehow, they not only do endure, but they find a way to look beyond their circumstances and maintain their happiness. It's such a contrast that it literally makes my heart ache that we, in the States, who have so very much, find a way, as a culture, to be so angry and unhappy about so many things. I suppose, when you get to the heart of it, that this is why I not only continue to travel, but am drawn more and more to places like Egypt. For all our wealth and success at home, it is as clear to me that these people still retain something that we have lost.

Now back to Cairo! As I was saying, we took a cab around our first day in town and went to an old Greek Orthodox Church. I have been struck by just how MANY churches there are here in Egypt. We hear differing numbers from different people, but it seems that the Christian population here is anywhere from twenty to thirty percent, comprised mostly of Egyptian Orthodox, Coptic, and Catholic. The churches are not small, and are all over the city. Most of them, like in parts of Mexico, have large neon crosses that light up at night. Various cab drivers and tour guides have told us that there are "no problems" in Egypt between the Christians and the Muslims. Although I know this to be only partly true, I can surmise, after having spent a little bit of time here, and spoken to many many people, that the problems that they do have here are the result of religious extremists. The vast majority of people really don't seem to care one way or another.

Most women here cover their heads, and we have seen a fair amount of women completely covered (all in black with just the eyes showing) but most of the women who do cover are wearing far more make-up than a "good girl" at home would. The most interesting thing about the religiousness of the Egyptian people that I have noticed is that you will occasionally come across men who have either very deep creases, or callouses on their foreheads from praying five times a day. I didn't see that in either Morocco or Turkey so will have to ask our guide whether or not this is a local thing, like maybe they smack their heads on the ground when they pray, or the rugs they pray on are rough.

We spent some time wandering around the grounds of the old Greek church, and then met our cab driver who took us to some shops so we could look at perfumes, papyrus, and gold. Perfume is a very big business here in Egypt, I did not know this before I came, but nearly ALL the base scents of popular perfumes at home come from here. They grow all of the flowers up near Aswan and crush out the oils and sell them to the big perfume houses in Paris and London . If you have a bottle of perfume or cologne at home, you can be sure that the base scent comes from flowers grown here in Egypt. What they sell here, are those base scents and they are strong. Just a few drops is all you need. Tim bought a gold scarab for his necklace, and I got a nice inlaid box, another popular item.

After our shopping expedition our driver drove us quickly through The city of The Dead, which is a cemetery filled with tombs that many families are now living in. Apparently the families who's relatives are buried in these tombs are ok with this arrangement because the families living inside the tombs maintain them for the family. I had heard about this place before we came here, but it wasn't quite what I was expecting. Much more third world grimy than ancient Egyptian. Another thing that I have learned on this trip, and would explain the disconnect between my expectations of the tombs and reality, is that Cairo is not at all an old city by Egyptian standards. It was founded in the early Muslim era (800's) and spent most of it's existence as a very small village along the Nile. As recently as 1800 there were fewer than 150,000 people in all of Cairo. So unlike Istanbul, Rome, or Alexandria, you don't really see very many super old things driving around Cairo.

I think I'll end this entry for now – we went to the Halili Market toward the end of our tour of Cairo, but we went back there last night with our group and I'll have far more interesting stories to tell about that when I catch up!

We are now on a bus ride from Cairo to Alexandria where we will spend two days. It's New Years Eve and I'm not positive what our plans are for tonight. We will be returning to Cairo on the bus though so I should have enough time to type up the rest of our trip.

John & Tim

Thursday, January 6, 2011

Thorsday - Egypt Trip

I have been saving Thor's emails about his trip to London and Egypt and here is the 1st one:

Just a quick note to let everyone know that we made it!

Our flight was absolutely brutal. The LAX to London leg was only delayed about an hour, and we made that up with a tail wind, but the flight leaving Heathrow to Paris was delayed about an hour and a half as well. With the size of the airport, and the terminal change, which in London requires a ride on the tube to get from Terminal 1 to terminal 4, gave us just enough time for a quick lunch. Our flight to Paris was fairly uneventful, but there was heavy snow in both Paris and London so of course our flight was again delayed. We were put on the airplane via a bus ride out to the tarmac and then proceeded to sit on the plane on the runway for 4 hours.

The temperature on the airplane kept going from warm to freezing - no fun. We arrived in Cairo at close to 3:00am local time at which point our luggage was apparently lost with most everyone elses on our flight. Apparently the snow in Europe has flights so screwed up that most of the luggage that made it on to our flight was backed up luggage from previous flights that had been delayed earlier in the week. We didn't actually make it to our hotel and into our rooms until 5:00am, making our total door to door travel time 29 hours.

A couple of quick first impressions before I sign off. We're staying at the Ramses Hilton and I upgraded the room that was offered on the tour so in terms of comfort and amenities you would never know we left the states. Although I always love to experience local life in the places we visit I have learned the hard way that when it comes to where we stay, it's best for me, because of my sleep issues, to bite the bullet and pay a little extra for a decent hotel. Although we do miss out on more culturally authentic lodging, I not only get good nights sleep in these kinds of hotels so have more energy to explore, but a more modern hotel will always have internet provided so we don't have to spend extra time searching out internet cafes to send you all my updates.

Our hotel is literally right on The Nile across the street from the Cairo Museum. Because I slept so late today, we haven't really done too much today. Our day so far has amounted to a trip to the mall across the street to buy a couple of shirts, some underwear, and some socks. Hopefully our luggage will show up soon, otherwise it looks like we'll be buying a new wardrobe in Egypt. Luckily we're in the land of Egyptian Cotton so that might not necessarily be such a bad thing! Egyptians so far are a very warm and open people. As I've said on previous trips I think you can get a good idea of what locals are like by how easily and warmly they smile. A smile here is met with an even bigger smile in return.

It would appear from the maps that we're close to central Cairo and MAN what a massive city, officially there are over 10 million residents, but unofficially, and probably far more realistic, that number is closer to 20 million. Traffic is absolutely insane, right outside our window, along the Nile, we can see many thoroughfares and they are crammed full of cars, lanes are just a suggestion and with the window to our room open, all you can hear are car horns! The city is practically throbbing!

Tim is taking a nap at the moment, and Call to Prayer just went off so I'm going to head out to the balcony so I can get my fill of this beautiful sound!

More later.

John & Tim

Wednesday, January 5, 2011

High Frequency Trading

There’s a lot of FUD about high-frequency trading. After reviewing much documentation on it, and discussing the math with a PhD in Applied Mathematics from MIT who’s been working in cryptography and numerical analysis probably for longer than you’ve been alive, I have begun to understand how and why it works for those involved, and how it places an unfair advantage in the laps of those who participate.

First, the computer hardware requirements are really special. The exchanges charge huge fees for participation, as that hardware needs to be placed at or near to the Exchange’s servers such that the hardware may be connected directly to the Exchange’s GbE (Gigabit Ethernet) network. The servers running a company’s HFT algorithms must be physically placed on the GbE links provided at the exchanges because retransmission of packets through physical layer links takes time. Latency in information on a trade of milliseconds will cause the probability algorithms running on the servers to become unstable, causing significant errors in the calculations of the buy/sell orders, their values, the bid/ask information, and other pertinent information. So Cisco and others have developed special low-latency switches that permit scalability on this exchange-provided GbE network.

The second piece of latency is in the operating system running on the servers. In our opinion, the HFT servers do not run a standard operating system, rather they would be running either a proprietary OS or pieces of an available open source or purchasable source OS, perhaps like Linux, where the OS could be modified to eliminate latencies and packet forwarding delays. (packets forwarded to other layers of software in the servers). The servers would all be running in parallel, because running a standard network topology where packets are forwarded would be far too slow.

You and I can’t afford these switches, servers, and specially modified operating systems, and we can’t afford the fees charged by the exchanges to be co-located on the Exchanges’ GbE links. Therefore, the playing field is not level. It is even not level for firms that do not have the IT smarts to develop the low-latency scalable networks and have predictive calculators running which have the answers done before the data arrives.

Whether the playing field should be level should be the subject of another post.

Having answers before data arrives is .key in HFT. You’ve heard about multi-processor chips from Intel, well HFT servers are exactly that, multi-multi processors which run algorithms on data that hasn’t arrived, so as soon as the data does arrive, the server with the correct answer simply puts out it’s precalculated answer, and the buy/sell order that has been precalculated is put in place. The other servers are off calculating the next one before the data arrives from the trade just placed.

By doing this, and placing orders in quadrants around the previous orders, one can collect a kind of topographical map of orders placed/filled or placed/not filled, and by doing so, one can predict the probable volumes of shares that are available at various price points. The map is kind of like a sheet that you’ve shook out over your bed, where there are billows and valleys, where some parts of the sheet will hit the bed before others. Once you know the characteristics of the air under the sheet, you can predict which parts will hit the bed first, and more importantly, next.

Now here’s the next one that’s unfair to us traders. If there’s only one HFT trader on any one given stock, that HFT is guaranteed to make money. So there are algorithms that evaluate how fast the sheet billows on any given stock, and these algorithms can determine how many HFTs there are participating. If there are more than your algorithm wants, your algorithm simply moves off to another stock. Also, the algorithms develop signatures, and if one of your algorithms evaluates the sizes, buys sells, and other characteristics, you can tell which company you’re competing with. In fact, you can figure out who you must not compete with in order to make money. That’s why almost all, and I will hazard a guess that all, HFTs make money. They know the competition.

There are numerous advantages given to HFTs on any given exchange, set up by Exchange rules. Just how this is accomplished is not for public view, but there are reports of several things given to HFTs to theoretically assist the Exchange in doing it's business. For example, the human market makers are gone, so computers have to have supplies of shares of stock to complete transactions. If an HFT provides these shares, the Exchange is grateful and may give that HFT a kickback. However, providing these shares gives the HFT an advanced view of the orders as well, so they may be able to place orders to make more than just the kickback.

At this time, there are no rules nor regulators nor regulations by which HFTs are controlled. It is up to the Exchange to police their own environment. How well this is done is unknown.