Jeffrey McLarty

I’ll let this speak for itself, on my market outlook.

Here’s my all-time favorite indicator. There isn’t even 10 years of data, but we are in the middle of the I.T. revolution, so this indicator doesn’t need to go back longer. I don’t care if they are right or not, or the earnings don’t come true next year, this index measures the number of bullish analyst reports to bearish analyst reports. Enjoy.

This will be like every crash before: One of the greatest chances in decades to buy stocks.

I have no rationale, other than, look at history.

People will need to live somewhere…so housing won’t hit 0.

Gold isn’t not affordable, so anything pegged to it, like every currency, won’t hit 0.

People need to eat, so anything necessary to produce food, won’t hit 0 - heir go, their will be work, that is jobs & wages…won’t hit 0.

Are stocks closer to a bottom, than a top? Absolutely. It might take a year or two to prove me right, but they are.

A smarter man than me once said, to the “optimists, go the spoils”. He just so happens to be panicking, TODAY.

Innovation will save capitalism, PROMISE. TOO many problems in this world for it not to.

Look alive folks, get your head up, hit the asks & raise the bid. It’s going to be okay.

Love it. Hint - you likely have to click the pic, to see the right side of the graph.

Thanks Jesse F.

Thanks StockCharts.com

So, I’m taking the next 11 weeks off from blogging…and pretty much existing too.

I’m going to attempt to write the CFA level 1, 6 hour exam, December 6th.

The books showed up, tonight.  2775 HUGE-bi-colored-no-picture-pages.

Work + Trade/Invest + Eat + Sleep + Study.

Apparently, lots of people fail, not cause they can’t master the material…but because they aren’t dedicated.

So hopefully, with my new structured education in finance, you can all expect - a new, smarter, Jeff.

Some people people believe they are one and the same, others believe it is only a matter of holding time. I disagree with both.

I believe an investor chases yields and value creation by providing capital & resources.

I believe a trader chases changes in yields and value fluctuation by managing assets & opportunity.

By those defintions, investors do not short, and are free to speculate, but they do not allocate capital to non-yield bearing assets (oil, gold, options, futures, indexes).  Traders can have longer holding times than investors, and may have a broader view of macro-economic trends.

Heir go, I am both.

A friend of mine, a guy I wish I had gotten to know better when I had the chance, a fellow engineer, Wayne Miranda, is headed to Ghana this November. He is going to help the local farming markets. He and the team from EWB (Engineers Without Borders) are going to help any way they can. He asked me for my thoughts, by basically giving me an open ended “Jeff, do you have any insight, to get me started on understanding markets and how to analyze them?”

Coincidentally, I’m actually in the middle of reading a book that was recommended to me. I say Wayne, be sure to check out “Competitive Strategy: Techniques for analyzing industries and competitors” By Michael Porter. Yes, that’s Micheal of “Porter’s 5 forces”. It even has a chapter in the book entitled “Competitive strategy in Emerging Industries”. It should at least, get you started. Like I said, I’m not done reading it…but it’s the only one I can point to that pertains to this topic. They have printed 60 editions, and in 19 languages.

The rest of this post are my philosophies. Philosophies I’ve collected through observation and with communication from greater minds than my own. Most are common knowledge, some are made up hypothesis, all are deeper than anybody first thinks. So here it goes.

Whether you’re a real-estate developer, an equities investor, an options trader, used car dealer, insurance broker, fisherman, farmer, job seeker, actor, doctor, lawyer, engineer, a bum on the street…fish in the sea, grain of rice, or any other person/organism/organization attempting to exist anywhere on earth - you’re part of a market. This is obvious to me, and likely many others, but we can all name somebody that doesn’t understand the fundamental framework behind the market they may or may not consciously be aware of operating in. For any market participant, I would say the number one word for them to be aware of for analyzing (and predicting) is IMPACT. If you want to get specific, think “Impact to yields”. That’s yields, for the stakeholders. Yields as in the benefits, the value created, from the investment of a resources (time/money/energy/knowledge/research/etc).

I hope I can avoid further rambling while attempting to explain what I mean by the aforementioned, as I discuss the complex dynamic, any market faces. It’s because of this complex dynamic, that markets are hard to predict.

At its most simplistic operations, a market, is all supply and demand. But more than just with reference to say, a certain commodity. What’s critical is the supply and demand of everything, because it IMPACTS everything else. After a while, it’s easy to conclude that everything (and everyone) is a commodity. Number of job seekers, is the supply of labor, while the employed are the supply of tax dollars. The supply of labor, IMPACTS wages. Changes in wages IMPACT the supply and demand of investment, in an industry. Wages also IMPACT tax dollars, and thus government spending, which effects consumer confidence and so on and so forth. Supply and demand of a commodity, will IMPACT the supply and demand for the end product. Which is why supply and demand are often brought to an equilibrium - by more than just the direct producer or consumer. They are brought to equilibrium, because stake holders (investors/workers/customers/etc.) chase yields (profit/money/nutrients/etc.).

Anyway…as promised, some concepts, outlined.

Causality Rules

Market participants are causal, that is they react, and often anticipate, thus can make any market appear to be anti-causal. Which in itself, creates a self-fulfilling prophecy. If people believe in likely positive outcomes, based on present actions, they will proceed with those present actions. The reciprocal is true for avoiding negative outcomes. I don’t know if this is a law or not, but it means that if an asset class, or investment in a sector, or training people for the industry, is expected to rise in value, increase yields, or provide better jobs …then, that’s what will happen. Market participants will make it so. Since the rule of causality prevails, if participants positive expectations, don’t come to fruition, or even don’t flourish with as much positive results as expected, negative repercussions will cause an outflow of investment. Eg. If people buy shares, in a company, for $X, expecting a yield of Y%, and actual yield ends up only A%, where A < Y, then shares will be sold off until the yield of the asset reaches Y%.

Opportunity costs exist

This seems obvious, but breaking this down, can get pretty over-whelming. At the heart of opportunity costs, lies the word CHOICE. Choice of impact. Any market participant has a choice to make a decision, or not. They can delay, but the delay will have IMPACT - be it delaying the good, or the bad. A choice, is an option. An option has value. The value is anticipated, based on probabilities and expectations. One can only spend dollars, time, or resources once - doing so has IMPACT. Not doing so, has IMPACT. The present value, combined with probabilities of IMPACT, is the opportunity cost.

Operating requires over-head.

Stuff will be wasted, things will go wrong, time/money/resources do have to be spent in order to maintain operations. That’s impact. Give up & give in to the fact that one-time expenses (impact) are necessary, and you’ll have more time to focus on the infinite annuities. While not to be taken lightly, the annuities should be the highest focus. Side note, this logic, is at the root of EWB’s philosophies & intentions -> the teach a man to fish vs give a man a fish complex.

Intrinsic AND extrinsic motivation persist

Employees normally work, for the money. But some break this mold, and do it for the learning. Or maybe it’s just a passion. To some it might be the love for the game, or eg, they may work as doctor because their mom died of cancer. Never under-estimate, or pretend to assume, any other player’s motivations.

Inefficiencies exist and are temporary

It’s just a question of time scale. If the yields are too good, that will change, for the worse. If yields aren’t good enough, the organizations which are weaker will fail, and the stronger will increase yields. Market forces will drive yields down to a reasonable return for the risk involved. One can argue that, a market will react to change, eventually, and that change is by definition infinite and dynamic. Thus, inefficiencies of some variety will always exist. These inefficiencies in discussion pertain to the aforementioned unfair yields. Maybe they are re-occurring, or overlapping with other inefficiencies, but in general the inefficiencies that continually persist are the repercussions of lag in foresight of market causality. Of course, the aforementioned is the direct debate to the “efficient market” hypothesis.

Irrationality persists, longer than rationality

It’s just an observation I have. It’s what leads to bubbles. Generally, human emotions (greed & fear) take over and create an arena of hardly predictable behavior. But, anticipating this hardly predictable behavior, is half the battle.

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I didn’t specifically say “IMPACT” in all of the aforementioned philosophies and ideas - but, my readers are smart - extrapolate for me.

Sigh…I rambled…oy.

I know, Wayne, your e-mail sort of requested more applied logic while at the same time recognized the vagueness of the information you sought, but, it’s late…and, i’m out of my supply of time. Let’s do dinner one night this week.

Anybody besides me, find it funny, that one of the proposed tools for saving the troubled GSEs is to buy warrants?

WARRANTS…basically, a fancy call option, just another DERIVATIVE.

BUT…we all know, SMART derivative sellers rake it in, so I’m all for their plan and glad somebody was smart dumb enough to think of it.

Based on this, I think it’s fair to call Webster’s, have them change the definition to the following:

Warrants - A contract between two parties; one that hopes a business succeeds, and the other that will need to spend/lose money, irrecoverably, for the same business to succeed.

For the laymen, the government is going to buy contracts, that give them the right to buy NEW shares, in the future, at a certain price, in exchange for cash today.  If the shares are worth less than the agreed upon price it was stupid for the buyer, and beneficial to the seller.

This relation sort of makes sense. You know, for the same reason it would make sense for a parent to pay off some of the debt, of a maxed out credit card in their kid’s name, after their kid lost his money lending money to his friends who bought too much AMERICAN BUBBLE gum.  But, if the bubble gum loans ever turn a profit…the parents will at least have the option, to get a cut.  That’s fair, I guess.

This is the stuff I think about.  Do you own any asset at all, where the price fluctuates with a predictable volatility?  Consider the following.

I will sell, the right, but not the obligation, to buy my 568 sq foot condo, in one of the most central places in Toronto, for $275K, in 3 years from today, in exchange for $21K in cash today.  Considering futures (pre-sales for 2011) are selling for approximately $300K today, it may or may not, be a good deal.

I will also buy, the right, but not the obligation to force the sale upon somebody, for $240K, in exchange for me paying them $2K.  This may be worth it to you - is it? 

This $21K, and $2K, is derived from my intrinsic expectations for what the market could potentially do, as well as a binomial method.  In the first case, the money is worth more to me to have the cash, rather than the potential.  And in the later, the $2K worth of insurance, is worth it. 

Measuring the implied volatility, this is works out to 7.5%.  Way cheaper, than any stock which usually clips between 25% and 45%, and it’s not rare to see IV approach the double digits on say - a pharmaceutical company, where perhaps the implied volatility is in fact worth it.

Before you comment, you must understand, that this is an offer, it is the bidders responsibility to assess the value for themselves.  That is, REALIZE: the market is not guaranteed to move in ANY direction, or ANY magnitude.  If you think it is - slap yourself.

Timothy Sykes wrote, An American Hedge: his story from starting to trade, the rise of his fund, and fall of hist fund. These are my thoughts. 

Thank-You Timothy Sykes. Thanks, for sharing your down-to-earth opportunistic & inspirational story as well as for giving me great insights into the mind of one trader.

In Tim’s book he reminded me, I am but one market participant, and every one of us plays by different rules. This was a great book, both for the witty written words he self published and also for what was written, between the lines. Reading Tim’s thoughts, learning from his experiences, and extrapolating/hypothesizing to what was really going on during his ups and downs yielded unexpected dividends for a young eccentric trader/investor like me.

With his book, Tim offered a fun glimpse into the mind of; a trader who has unknowingly mastered causality, and an entrepreneur who laughs in the face of the improbable.

Tim offers up his ‘tell-it-like-it-is’ and some ‘do-as-I-say-not-as-I-do’ advice, and illustrates through example why he believes discipline is the most important trait for a trader to possess. I do concur. But what I meant before, about reading between the lines, is that he illustrates (without explicitly writing about) the importance of understanding causality. It was great to read that Tim’s documented version of his thought process, more or less, show that the closer a trader adheres to the fickle whims of market causality, the closer the trader gets to unparalleled returns.

I was impressed to learn of Tim’s experiences, not only as a trader, but also as a social leverage wielding entrepreneur. He details the fun ride he had as a student who blatantly laughed in the face of the irrational games played on the capital markets, then immediately moved to exploit those same games by eventually taking on New York. He chronicles the rough, chicken and egg situation, new funds can find themselves in when raising capital. As a wannabe fund runner, I was glad to hear of all his reflections, even if our styles and viewpoint are often completely opposite, while at other times, identical.

It is with no surprise, that Tim writes a page turning story detailing his trades (both good and bad), his naivety, his cockiness, and his passionate inspiring stop-at-nothing drive towards different checkpoints. Any reader will undoubtedly also pick up a hint of heinz sight laden commentary, when it comes to his previous experience and of course lessons learned on the markets, networking, marketing, business management, and random stories. This was all, to be expected, and Tim delivered.

This wasn’t the type of book, I would typically read. But, I’m glad I did. I would recommend the book to anybody young, with at least a few years ‘on the street’ or anybody who is so obsessed with the capital markets and volatile trading stories they dream in dollar signs. The book is a must-read for anybody who may one day want to start their own fund. However, I am only speculating that his experiences will help anybody in the latter category. Any professional with more than 5 years in the business, will likely find Tim’s story, a light, amusing and even jaw-dropping read. Or, so I would guess.

Disclosure: Tim gave me a signed copy, and wanted to know what I thought. I was skeptical at first, that I would not learn anything. But, I’m glad I read it with an open mind.

Stay tuned for a review of Mohammed El-Erian’s, ‘When Markets Collide’.

If you would like your book reviewed, feel free to contact me.

Any heavy internet user, who likes thinking about humanity, will thoroughly enjoy this clip. Promise.

Of course the title of this post…is a subtle refrence to the greatest movie of all time. This TED talk, reminded me of it…just a little.

Mass transit is up double digits YoY in every state, yet they can’t increase capacity because of fuel costs.  Rock and a hard spot.  What goes up? -> fare prices + inner city real-estate.  Like prices, lifestyles are sticky.  Yes, economically sticky.  Get long elevators, if you know how. Otis isn’t public, I checked. I’m long cranes, for the same reason.

The 19th century belonged to the horse, the 20th…to the car, the 21st…the bike…I hope the jet pack makes a recovery before we hit the 22nd

It’s Tuesday, and I haven’t made it through this week’s economist yet…I’m sad.  But, I’m getting used to wearing a cape to work, and I’m glad I’m working on Bay-street all this week…(for you Americans that’s Canada’s Wall-street).

And…I’ve got to sell some stocks I own, so that the firm I joined can maintain independence with those who we audit and/or consult.  And, I can’t tell you which ones I have to sell because, then you’ll know that they are clients of ours.  Soo…blah…this really ticks me off about working for deloitte.  Luckily the carrot they hang in front of our nose referred to as ‘

Started my 5th or 6th day job last monday….Working in the Technology Integration practice, in the Systems Development service line, as a Business Technology Analyst…for Deloitte.  That’s a mouthful.

I think Deloitte is breeding super heroes…I can’t put it into words, any better than that…is that obnoxious to say?  All I’m saying is that, I am super impressed with the company culture and training that’s available.

I’m not sure if I’m going to fit in here, or not…time will tell.

They sent me to Arizona for my second week…I think it’s a million and a half degrees with the A/C on. I get back next week.

Sounds like my first project, could take me to Montreal and/or Paris…but I’m not sure, at all.

Orientation and a 2 hour commute has had me tied up, and barely able to glance at Mrs. Market…after I get back from Arizona, I’m looking forward to moving downtown Toronto at the end of August…my commute will shrink from 2 hours down to 2 minutes.  So, with that time difference…I’ll be back in the online conversation and dancing with Mrs. Market again.  Looking forward to it…and getting onto my first project at Deloitte.

Growing middle class, consuming more and more meat and processed foods…what do you think, get long SDA, or am I too late?

Fertilizers and Pesticides for agiculture…good. Lithium for mobile…good. Soda Ash for paper, glass, and detergents…good. What do you think, get long FMC?

No position…yet.

…seems like a pretty sharp man, and if Dan Conway likes him, so do I.

I just discovered this site, and I hope this picture updates dynamically, as time passes…I think it will…but look at what time frame he has been BUYING…pretty heavy buying, THIS year, if you ask me.

Just click this, to see his buys and filings…pretty cool, and some interesting ideas.