Step Away From the Fiat

Last December, I started a small venture with my friend, Danilo Malanczyj.  We’re (hopefully/probably/potentially) a few months away from spending a good chunk of change on advertising.

Question is, how much?  I/We have no idea – yet, and there are some big picture strategy questions which are still a function of our patenting success…but…

I do know enough, to proclaim the preliminary guidance online, is bunk.

“5 to 7 percent of sales” is a  ”rule of thumb” – I say B.S.

“11% of your gross sales, then subtract rent” – common, really, it’s a harder question than that.

“Set an ROI goal for your Marketing” – was getting closer, to something I want to do, but still in my view inadequate analytics.

I’ve spent, about 4 hours so far thinking about this problem.  I intend to spend quite a bit more time.  At this point, I’m fairly positive, answering the question “How much should a widget manufacturer spend on advertising?” involves quantifying the impact via a sensitivity analysis:

• Estimating/Modeling the per unit cost sensitivity to each marginal unit sold.
• Estimating the additional number of units sold, per marketing dollar spent.
• Adjusting pricing strategy, as a function of marketing campaign size.
• Quantifying the volatility of revenue, as a function of marketing dollars spent
• Planning for out-of-stock and negative cashflow due to higher than expected growth risk.
• Quantifying economies and/or diseconomies of scale, as a function of additional units sold.
• The weighted cost of capital and/or the ROI demanded by partners and investors.

I conjecture, that some level, a marginal dollar of advertising becomes a) more risky than desired, b) less effective than estimated or worse c) a complete waste of money.

There is no way, the function of ROI on marketing dollars spent, is linear.  Therefore, given the aforementioned, a finite optimum does exist.

I’m going to keep thinking about this…

Calms markets faster than Hilary Clinton can.

I’m glad I got to see Golman’s report, before I put any trades on today.  It explains the action…of course, along with the news from Aljazeera.

Between Goldman Sach’s $0.02, and the unstoppable bulls, futures are looking like Friday was yet another chance to BTFD.  I’m still betting the S&P 500 is lower than 1300 2 weeks from now…and I remain net short the 30 year.  I took all my oil off the table, the action in the next few days is sure to be anything but sane.  Gold’s going higher, but apparently, not today – oh well.

Loafs of bread have tripled in price, in Egypt.

The military, is having trouble holding back the looting.

Saudi Arabia’s stock markets fell 6% on Saturday.

If I can get an ES bid near Friday’s close, I’ll hit it hard.  Same goes for an offer on oil, gold, and bonds.

If things get much worse in the gulf, I’d advise friends and family, to keep the gas tanks topped up, some cash or gold on hand, and don’t put off getting groceries if you need ‘em.

So, i’m getting into the smart-phone business.  I started looking at the numbers, I wanted an industry snapshot.

• Growth in the smartphone market is expected to slow to 8.4 percent in 2011 from 13 percent last year, a Reuters poll of 32 banks, brokerages and research firms showed.
• Apple just sold 16.24M iphones, last quarter.
• RIM sold 14.2M blackberries, last quarter.
• Samsung, has targeted a doubling of sales to at least 50 million units in 2011.
• HTC, the world’s #4 smart-phone brand, expects to sell 8.5M units this quarter.

These are just the top 4 contenders.   Looking at time-series data, of each company, it looks tricky to seasonalize.  Using the numbers above, just those 4 companies alone will probably sell >205M units this year.

205 Million, and growing.

H/T Tyler D.

Yes. And, I have been on the losing side of that trade over the last couple sessions.

Like anytime a trade is going against me, I dive harder into the analytics.

The worst down-day for the S&P 500 in the last 32 sessions has been -0.512%, and that was 22 sessions ago.

Using 60 years of S&P 500 data, there is normally a 21.57% chance, that any given day will be worse than -0.512% or a 46.4% chance that any day the S&P will close lower than the previous.

After a run like we’ve just had, there is only an 8.62% chance that the next session will be worse than -0.512%, but a 58.4% chance it’ll be a red session. Statistially, a small red day is coming.

We’re 13 sessions of daily returns > -0.512% away, from tying records last set in the late 1960’s for longest bull-movements.

The trick here is that YTD, only 23 US companies have reported. During the next 8 sessions, 495 companies will report earnings.

Side note, the average absolute move in the S&P 500, for January is 4.08%, and we’re only up 2.83% as of Friday’s close.

This run since August, is a 2.03 sigma move. After similar bull moves, the average return two months later is +3.7%. There is a 22% chance we close lower, two months from now.

To conclude, it’s unlikely we see a crash in the next few sessions, but it is likely the momentum starts to slow down soon. So, I’m going to sell some at the money puts against my short equity positions.

Karl Denninger, and Bloomberg, can put it better than I…and here’s Goolsbee:

On Bloomberg radio (and I’m sure in the SBUX SEC filings).

Coffee will cost the company $0.08 to $0.10 per share vs previous estimates of $0.04, due to the double digit price rise this year.  That’s a delta of about 1,800, 40-hour/wk, $10/hr jobs, job years.

Oil has snuck into a state of segmented backwardation between 2012 and 2014.

Interesting.

Start Bidding on Volatility

Implied volatility on Gold, Oil, and the S&P 500 are all near multi-year lows.  Point for the optimists.

Options are saying the S&P 500 lands between 1025 and 1425 a year from now. Point for the pessimists.

Oil for 2018 last traded at $92.40, while the front month closed at $88.81.  Cost to carry is less than a 1/4 of a percent per year. Point for the deflationists.

Money is pouring from the government bond market. Point for the inflationists.

David Rosenberg is being humble. Point for the protagonists.

Magic Number 1350.

My core positions for 2011, are short out of the money calls on the S&P 500, and short nearly at the money puts on gold.  Looking at the end of 2011, with $100K account, one could short a couple 1350 calls on the S&P for 43 points, and $1350 puts on gold, for $145, for net proceeds of $18,700.

If equities hit 1400 by year end, it will likely be on the back of the dollar falling, pushing gold higher with it, making the aforementioned trade smarter than 100% equities, based on the 14.50% return from the gold put. It’s only above 1425ish on the S&P 500 where this trade starts to underperform equities.

If equities underperform cash in 2011, this trade should outperform cash, until gold hits about $1200.  But, by that point, the offset from the short equity hedge, will be fantastically timed to purchase some more gold at a cheap price.

Then, trading around, with front month hedges, on both vega and delta against the dollar exposure…basically sums up my current strategy for 2011.

Should be a good year.

Ok, not really my worst trade ever. The loss was less than 1% of my worst losing trade.

Cleary, I have no idea what I’m doing, when it comes to trading overnight bank lending rates.

I thought there would be MORE than enough catalysts over the last two weeks in Europe, to move the needle on Euribor higher. So, I purchased some ATM puts. Implied Volatility was cheap. The chart looked like it was forming a short-term top. Eric Cantona was beating his chest, while austerity measures and government budgets continue to move markets in the Fixed Income Euro Zone area. I put the trade on, thinking “Even a bad/dissapointing data-point could add 2% to my bottom line”. I was wrong.

Just paid a little tuition. And it reminded me, why I don’t buy plain vanilla.

I’m still up over 18% in 2 months…and I’ve been short domestic equities!

Ideas. Good ideas in your head are ruled by supply and demand. You need to come up with 30 ideas before the right idea comes along which there might be demand for. And even coming up with 30 halfway decent ideas is not an easy one, hence the need to exercise the idea muscle (see other posts here). (Actually, 30 is too high. Its more like 20, but I think 30 is safe).

– James Altucher

I like learning with skin in the game.

December 7th Bank Run, Anyone?

Until 3 days ago, I had never traded LIBOR or EURIBOR before.

I know it’s pretty unlikely, that Eric Cantona successfully starts a revolution. But, with the 0.1% chance that he does, I can’t think of a better way than to buy in the money puts on Euribor Futures, traded on the LIFFE.

Am I wrong? Could flight to safety, somehow screw me? Could Euribor trade flat, and I lose my premium? Likely, yes, and yes. But I admit, I’m a newbie at trading Overnight Rates. School is in session, and I’ll pay my tuition.