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Body-by-Guinness
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« Reply #100 on: January 12, 2009, 02:36:07 PM »

California Screamin’

The biggest comeback of socially responsible investing also took place in the 1990s, when elected officials in New York, Connecticut, Minnesota, and—most notably—California began to dabble in asset allocation decisions based on a growing list of social concerns. CalPERS is the 800-pound gorilla among public pension funds. At its peak value in October 2007, CalPERS and its sister fund, CalSTRS (the state teachers’ pension system), held over $400 billion in assets. Their portfolios have more global influence than the entire economies of most sovereign nations. And during just three months last fall, more than 20 percent of the funds’ combined value evaporated—a horrendous performance for public investments designed to minimize risk and protect retirees. “We have ups and we have downs,” said Pat Macht, CalPERS assistant executive officer, as the fall 2008 massacre unfolded.

CalPERS and CalSTRS began flexing their financial muscles by demanding corporate governance reform, publicly excoriating companies they deemed to be poorly managed. It was an aggressive, almost unprecedented demonstration of the growing corporate transparency and accountability movement. The state’s pension fund meddling went into high gear in 1998 with the election of Phil Angelides as California treasurer. If there is a face to pension fund activism, it’s Angelides’. As political issues go, treasury and pension fund investments are not the sort of hot-button topics that ambitious California politicians usually ride to glory. But Angelides had a vision: to use retirement dollars as a way to change the world, and the state treasurer position became his tool.

Under Angelides’ direction, CalPERS emerged as a leading voice on behalf of shareholder rights, at least as he defined them. To this day, the California funds instigate a dizzying number of proxy fights at the companies in which they invest, focusing not just on governance-related issues like executive pay but on everything from carbon taxes to divestment from companies that do business with Sudan. This social activism has acted as a model for public pension funds in other states. Laws directing funds to scrap investments in companies that invest in disfavored countries have passed or are being considered in 20 states, including Texas, Maine, Tennessee, New Jersey, Florida, and Idaho.

In 1999 Angelides’ funds committed $7 billion to a program called Smart Investments to support “environmentally responsible” growth patterns and invest in struggling communities. As in Alaska and Kansas in the 1980s, however, there were no accountability provisions to measure the impact of the venture, let alone to determine its financial consequences.

Supported by labor unions and minority groups, Angelides argued that the state had too many billions stashed away in so-called emerging markets—Third World nations where democracy is weak and wages are low—and not enough invested at home creating jobs and housing. So in March 2000, he rolled out an ambitious social investing program, dubbed the Double Bottom Line, which included dumping $800 million in tobacco stocks and persuading fund managers to shed investments in countries that Angelides thought had questionable environmental or governance practices. He claimed the initiatives would not sacrifice investment returns, saying at the time: “I feel strongly that we wouldn’t be living up to our fiduciary responsibility if we didn’t look at these broader social issues. I think shareholders need to start stepping up and asserting their rights as owners of corporations. And this includes states and their pension funds.”

How has this social engineering worked out? Angelides left his job as state treasurer in 2006 for an unsuccessful run for governor, but his legacy of politicizing pension fund investing remains. In 2003 CalPERS rejected a recommendation from its financial adviser, Wilshire Associates, to invest in the equity markets of four Asian nations—Thailand, Malaysia, India, and Sri Lanka—based on their alleged misdeeds. That was a costly decision, as their stock markets roared in the ensuing years. Another decision to shun investment in China, India, and Russia cost the fund some $400 million in forsaken gains, according to the fund’s own 2007 internal report.

Under sharp criticism and amid devastating declines, CalPERS last August finally repealed the screening policy, claiming victory in its reform efforts. “Year by year, scores [of countries and corporations that invest in them] are improving, and many countries have responded to our standards for investing,” CalPERS President Rob Feckner said in a press release.

CalPERS’ tobacco boycott was equally disastrous. With the float of most large cigarette companies so large, disgorging even a sizable fraction of one company’s shares has little impact on the stock price; it’s akin to taking a thimble full of water out of the deep end of a pool, only to have it dumped back in the shallow end when the buyer makes his purchase. Since California sold its tobacco shares, the AMEX Tobacco Index has outperformed the S&P 500 by more than 250 percent and the NASDAQ by more than 500 percent. That one decision alone cost California pensioners more than $1 billion, according to a 2008 report by CalSTRS.

Some of the most steadily performing sectors, through both good and bad times, have been the very “vice” stocks that are no-nos for most social investors. When times get tough, the sinners get sinning. “Demand for drinking, smoking, and gambling remains pretty steady and actually increases during volatile times,” says Tom Glavin, chief investment officer at Credit Suisse First Boston. Alcohol, tobacco, and gambling stocks rallied solidly during two of the last three major recessions, in 1990 and 1982. “Many of these industry groups tend to be beneficiaries of the flaws of human character,” Glavin says.

So what stocks did the California funds buy instead? High on the list were financial stocks, which have been given a green bill of health by social investors. CalSTRS recently acknowledged it had lost hundreds of millions of dollars on Lehman Brothers, AIG, and other fallen icons that were recent favorites of social investors.

But those losses may pale when the tab comes due for misplaced bets on the boom-to-bust California real estate market. According to a report released last April, CalPERS had 25 percent of its $20 billion real estate assets in the California market, which has declined faster than the real estate markets in most of the rest of the country.

In the summer of 2007, CalPERS was more than 100 percent funded. It’s now under 70 percent funded and falling, and that doesn’t fully factor in its plummeting real estate investments. Funding levels stand near a dismal 50 percent for Connecticut, where State Treasurer Denise Napier has been a vocal proponent of social investing. Both states are far below mandated minimum funding standards, and they pale in comparison to even the beleaguered ratios of corporate defined contribution plans, which have mostly avoided using social screens.

Large public pension funds have a selfish notion of risk: heads they win, tails you lose. If they gamble on risky investments that pay off, they are heroes, although the predetermined benefits don’t increase. But if those investments go south, tax dollars will have to bridge the gap. “This is adding insult to injury,” says Jon Coupal of the Howard Jarvis Taxpayers Association. “At the same time we’re seeing our own 401(k)s get hit, we’re on the hook to make up the shortfalls for public employees who are guaranteed their full pensions without any risk.”

When public funds slide in value, taxpayers get hit from all sides. The municipalities and school districts that hire firefighters, police, teachers, and other workers have to cut their staffs to recapitalize funds. Last October the Los Angeles County Board of Supervisors learned that the county would have to come up with an extra $500 million to keep its pension fund whole. That means the county may have to raise local taxes and cut services to deliver on overextravagant promises it failed to safeguard.

Unsteady Future

Public and union pension funds will be increasingly important factors in financial markets for the foreseeable future. As part of their fiduciary mandate to maximize investment returns, their trustees certainly have a right and duty to lobby for changes in corporate behavior that could result in better returns for their pension holders. But judging by the words and actions of some pension activists, “shareholder value” has become synonymous with “cause-related investing,” justifying a range of actions that may put at risk, directly or indirectly, pensioners’ retirement holdings.

If the goals of pension managers and retirees are not the same—as is often the case—then pension plans should not engage in social investing. In many instances, SRI amounts to union leaders or politicians gambling with other people’s money in support of ideological vanity.

A few politicians have begun speaking out against risking pension funds on political causes, for fear of limiting returns in a difficult investment climate. New York state and New York City public funds prohibit investing in new tobacco stocks, a policy that has drawn the ire of Mayor Michael Bloomberg, even though he is a zealous opponent of smoking. “I don’t think we should be using the city’s investment policies…to advance social goals, no matter how admirable those goals are and no matter how much I believe in it,” he has said.

Pensions are being dragged into treacherous waters by investors who consciously choose to direct their money in socially conscious ways. It’s a questionable risk for cautious times. The use of political criteria may be fine for affluent investors and activists who gamble their own money and assume the extra risk, but pension funds should be held to a higher standard.

Jon Entine is a columnist for Ethical Corporation, an adjunct fellow at the American Enterprise Institute, and a consultant on sustainability. His website is jonentine.com.
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Crafty_Dog
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« Reply #101 on: February 10, 2009, 12:13:25 PM »

A couple of major posts from David Gordon!

http://eutrapelia.blogspot.com/
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Crafty_Dog
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« Reply #102 on: February 25, 2009, 07:34:46 PM »

The brilliant blog of Scott Grannis:

http://scottgrannis.blogspot.com/

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Body-by-Guinness
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« Reply #103 on: May 31, 2009, 10:51:20 AM »

Now is a Once-in-a-Lifetime Opportunity for Income Investors
Dan Ferris
Friday, May 29, 2009
Not one investor in a hundred realizes this, but now is a once-in-a-lifetime opportunity for income investors.

Most people will never recognize this opportunity because they don't know what a truly great income investment is. Most income seekers like to buy things like commercial real estate stocks (REITs) to collect rents.

REITs have a big problem: They're required by law to pay out 90% of their distributable earnings. So if they want to grow, they have no choice but to take on debt or dilute your interest by selling more shares. That's why so many REIT dividends have been cut over the past two years. Banks are in horrible shape and getting worse all the time, so it's only going to get worse for businesses like REITs that depend on a lot of debt financing.

Take another traditional income investment: risky commodity stocks with high current yields. Investors love royalty trusts because most of them are in the energy business. These stocks paid double-digit dividends when oil was over $100 a barrel. It was great earning those big yields... until the sector fell more than 70%.

I'm not interested in those traditional income investments because right now we can buy mature, World Dominator businesses that have large competitive advantages at huge discounts. These are – and always will be – the Holy Grail of income investing.

A "World Dominator" is a company with an absolutely dominant position in its industry... like Procter & Gamble, ExxonMobil, or Wal-Mart. World Dominators can raise prices to keep ahead of inflation, get financing (or not need it) when other companies are finance-starved (like right now), and are large and well-managed enough that you can count on fewer (if any) bad surprises happening to them.

You should be looking for companies like these if you're interested in collecting large amounts of investment income for decades. Here's why...

Most World Dominators are past their capital-intensive, high-growth cycle... so they can funnel surplus cash to shareholders in the form of dividends and share buybacks. Instead of funding growth, cash goes to you.

World Dominators are also usually the lowest-cost provider of their product or service. They tend to crush the competition and have exceptional brand names. That means they often generate enormous amounts of cash. And that cash can support dividends through good times and bad.

Here's where most investors don't "get it." World Dominators aren't yielding in the eye-popping double digits. They yield 3%-5%. But that yield grows like an oak in your portfolio. ExxonMobil, for example, has raised its dividend every year for 26 years. Procter & Gamble has increased its dividend every year for 53 years.

Now is a great time to buy these stocks. Without times of great financial turmoil, it's hard to make a lot of money in stocks. We need bad times to buy stocks cheaply enough to make us rich over the long term. As I'm sure you're aware, we're in "bad times" right now. The Dow Industrials turned in the third worst year in its history... and the worst ever since the Great Depression. This has set off a fire sale in these companies. Most World Dominators go for less than 10 times annual cash flow.

If you have, say, seven or more years until you're going to need an alternative income source, you should load up on World Dominators now and reinvest the growing dividends until you need to live off them. By the time you actually need the income, the yield over your cost will be much higher, and you won't make the mistake of chasing high current yields on REITs or energy trusts.

Think about it: Which is more certain, Procter & Gamble's 53 consecutive years of dividend growth or the price of oil? It's an easy choice.

Good investing,

Dan Ferris

P.S. I've devoted months of research to finding the best deals in World Dominating stocks today. I will shout it from the rooftops that these are THE ONLY stocks you need to immediately build an income machine in the coming years. To read more about how to secure all the income you need for the rest of your life, click here.

http://townhall.com/Columnists/DanFerris/2009/05/29/now_is_a_once-in-a-lifetime_opportunity_for_income_investors
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ccp
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« Reply #104 on: October 10, 2009, 09:41:29 AM »

does anyone know how one can pull up the trades made in a particular stock for a day.
For example the list of shares that trade in sequence of trading during the day.
say 3:00 2000 shares traded
     3:05 200 traded
and so forth.
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Crafty_Dog
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« Reply #105 on: January 17, 2010, 05:37:16 AM »


http://readingthemarkets.blogspot.com/2010/01/what-could-goldman-sachs-do-for-you.html
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Crafty_Dog
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« Reply #106 on: January 29, 2010, 08:09:24 AM »

http://globaleconomicanalysis.blogspot.com/2010/01/state-of-wisconsin-goes-insane-with.html

This sounds really unpromising , , ,
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ccp
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« Reply #107 on: January 29, 2010, 11:07:37 AM »

This raises a point I have been wondering after we have had first row seats watching Goldman and the Fed, and the Treasury.
Why is it that Goldman seems to do so well?

Could it be that they have the inside skinny on all the government wheeling and dealing that the rest of us are not privy to?

Are they really all that brilliant or is it they keep getting their guys appointed to the top gov financial positions and always get the inside scoop before anyone else?

This certainly has the appearance of being the real answer.

This is a great topic for a real investigative reporter.

I can hear it from 100 miles away - "oh it may be a bit unethical but nothing illegal was ever done".  Or something to the effect "while it has the appearance of conflicts of interest and GS may have had some gains from this, in reality it was good for the country and 'main street' overall".

And all the other excuses and rationalizations we hear thrown out there....

 
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Crafty_Dog
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« Reply #108 on: January 29, 2010, 11:11:12 AM »

See my post today on the "Fascism, Liberal Fascism" thread.
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Crafty_Dog
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« Reply #109 on: April 17, 2010, 01:18:42 PM »

NY Times reports speculators have begun to zero in on another small member of Europe's troubled monetary zone, highlighting the same economic flaw that brought Greece to the verge of insolvency: a chronically low savings rate that forces a reliance on the now-diminishing appetite of foreign investors to finance persistent deficits.

Just as investors turn their attention to the next vulnerable country, Greece moved a step closer on Thursday to activating a $61 billion rescue package, as Prime Minister George A. Papandreou asked the European Union and the International Monetary Fund to meet in Athens next week. The aid package agreed on last weekend — aimed at calming fears of a Greek default — has not yet had its desired effect. The yield on Greek 10-year bonds briefly topped 7.3% Thursday, not far from the 7.5% it was at before the rescue package was announced.

Interest rates on 10-year government bonds for Portugal have also been rising, hitting a high of 4.5% on Thursday.
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Crafty_Dog
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« Reply #110 on: May 08, 2010, 09:39:18 AM »

Origin of Wall Street’s Plunge Continues to Elude Officials
By GRAHAM BOWLEY
Published: May 7, 2010
NYT
 
A day after a harrowing plunge in the stock market, federal regulators were still unable on Friday to answer the one question on every investor’s mind: What caused that near panic on Wall Street?


Through the day and into the evening, officials from the Securities and Exchange Commission and other federal agencies hunted for clues amid a tangle of electronic trading records from the nation’s increasingly high-tech exchanges.

But, maddeningly, the cause or causes of the market’s wild swing remained elusive, leaving what amounts to a $1 trillion question mark hanging over the world’s largest, and most celebrated, stock market.

The initial focus of the investigations appeared to center on the way a growing number of high-speed trading networks interact with one another and with venerable exchanges like the New York Stock Exchange. Most investors are unaware that these competing systems have fractured the traditional marketplace and have displaced exchanges like the Big Board as the dominant force in stock trading.

The silence from Washington cast a pall over Wall Street, where shaken traders returned to their desks Friday morning hoping for quick answers. The markets remained on edge, as the uncertainty over what caused Thursday’s wild swings added to the worries over the running debt crisis in Greece.

In a joint statement issued after the close of trading, the S.E.C. and the Commodity Futures Trading Commission said they were continuing their review. And the two agencies indicated they were looking particularly closely at how different trading rules on different exchanges, which temporarily halted trading on some markets while activity in the same stocks continued on other markets, might have contributed to the problem.

“We are scrutinizing the extent to which disparate trading conventions and rules across various markets may have contributed to the spike in volatility,” the statement said.

A government official who was involved in the investigation said regulators had moved away from a theory that it was a trading mistake — a so-called fat finger episode — and were examining the links between the futures and cash markets for stocks.

In particular, this official said, it appeared that as stock trading was slowed on the New York Exchange when big price moves started, orders moved automatically to other, electronic exchanges that did not have pricing restrictions.

The pressure in the less-liquid markets was amplified by the computer-driven trades, which led still other traders to pull back. Only when traders began to manually respond to the sharp drop did the market seem to turn around, said the official, who spoke on the condition of anonymity because the investigation was not complete.

On Friday evening, another government official directly involved in the investigation said that regulators had not yet been able to completely rule out any of the widely discussed possible causes of the market’s gyrations.

This official, who also spoke on the condition of anonymity, said that regulators had collected statistical and trading data from stock and futures exchanges, and had begun cross-analyzing that with trading reports from brokerage firms and large market participants. Regulators have also gathered anecdotal accounts of what happened from hedge funds and other trading firms.

The two major regulatory agencies — the Securities and Exchange Commission and the Commodity Futures Trading Commission — have generated multiple memos detailing what they have found and offering possible causes for the market events. Among the issues discussed in the memos, the official said, were the disparate rules that different stock exchanges have for dealing with large price movements on the same securities and how prices on futures markets and stock exchanges appeared to lead or follow each other’s movements down and back up.

The lack of a firm answer, more than 24 hours after the market’s plunge Thursday, left some on Wall Street frustrated.

“The problem is you don’t come in and find out what the clear answer is,” said Art Hogan, the New York-based chief market analyst at Jefferies & Company. “We don’t have the clear explanation for how it happened.”

Others, however, said it would take time to pinpoint what happened given the increasingly complex nature of modern stock trading.

Over the last five years, the stock market has split into a plethora of new competing hubs and trading outlets, a legacy of deregulation earlier this decade and fast-paced technological change. On Friday, the rivalry between the two main exchanges erupted into view as each publicly pointed the finger at the other for being a main cause of the collapse on Thursday, which sent shockwaves around the globe.

“This is the sort of situation that has been a worry for a long time, but the markets have changed in a way that has made things more difficult,” said Robert L. D. Colby, former deputy director of trading and markets at the S.E.C. “They’ve become more fragmented, so it’s harder for any one exchange to see the full picture and take action.”

On Friday, President Obama sought to provide reassurance that regulators were working to find the root of the problem.

“The regulatory authorities are evaluating this closely with a concern for protecting investors and preventing this from happening again,” the president said.

The absence of a unified system to halt trading in individual stocks led to bitter accusations between exchanges on Friday. Robert Greifeld, chief executive of Nasdaq OMX, appeared on CNBC to criticize the New York Stock Exchange for halting trading for up to 90 seconds in half a dozen stocks on Thursday.

“Stopping for 90 seconds in time of crisis is exactly equivalent to not picking up the phone,” Mr. Greifeld said.

A few minutes later, Duncan L. Niederauer, chief executive of NYSE Euronext, responded in an interview on CNBC, blaming Nasdaq’s computers for continuing trading while the market was in free fall.

“These computers go out and just find the next bid they can find,” he said.

Mr. Niederauer acknowledged the need to introduce circuit-breakers along the lines of those already in place on the Big Board, and his views were echoed by some chief executives of the new exchanges.
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Rarick
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« Reply #111 on: May 12, 2010, 04:55:06 AM »

remember 1987 when they had the computers start running away with the trades and the panic that caused?  This is probably a similar glitch in the system. As long as we the imperfect keep on developing imperfect machines and turning them lose we will have these moments.  the market bounced back pretty quickly didn't it?  So we had a busy day at the office rather than any crisis.
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CanisLatrans
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« Reply #112 on: December 03, 2010, 03:48:49 PM »

Has anyone looked at actually studying stock investing?  The Investors Business Daily (IBD) paper supports a method by the founder O'Neill called CAN SLIM that is a momentum system.  But "reading" the chart and turning it into a quantified result seems like voodoo to me.

I'm a BogleHead, but maybe only because I can't do the Quant math.
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Beep Beep
CanisLatrans
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« Reply #113 on: December 29, 2010, 05:58:54 PM »

Is the bond market undergoing a secular change?  The last 20-40 years have been characterized by a steady direction of interest rates that increased the value of bonds over time.  Now they say its changing.  That would mean that all of the retirement calculators, as well as the training & personal experience (= habits & biases) of professional investment advisors, are no longer correct.

I'm really wondering if everything I know about how to adjust my ratio of stocks : bonds over time is still statistically useful.

Bonds are used to adjust your "risk" element down to a variance that you can sleep with.  You re-balance your mutual fund allocation yearly or quarterly or when it goes outside of a "band."

I wonder also if buying option puts or LEAPs might be a cost effective way to hedge downside variance, at least during periods when its difficult to sleep.  If you have a portfolio that has a calculated return of say 9% with a variance of 25%, could you pay something reasonable like 1% of your portfolio value to limit any losses to say 15%.  So your resulting numbers would be 8% with 15% downside variance.  I've never seen anything talking about that sort of risk management for long term, retirement portfolios.

PIMCO says (of course, its their business) that investors will need to use actively managed bond funds instead of passive.  OTOH the Vanguard/Bogle camp of statistical analysis proves that extra gains from active management over long periods is no better than luck.
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Crafty_Dog
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« Reply #114 on: December 30, 2010, 01:29:35 PM »

Some excellent questions there CL.

Opinions are like noses, everyone has one.  FWIW IMHO the long run bond bull market is over.   IMHO interest peaks are going to rise faster and further than anticipated.  If this is so, then bonds are no longer a safe investment.  Gold may well not be a safe investment at this point either.  Working from memory, the gold bubble of the Carter years burst when Volcker drover up interest rates.  The idea you raise about puts, LEAPS, etc. is an interesting one, but as you note, the empirical track record does not support the notion.
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CanisLatrans
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« Reply #115 on: December 30, 2010, 04:10:44 PM »

If you can't use bonds to reduce volatility risk... I don't know what to do.

I just spent the whole day reading this guy's 500 pg book (I got the hardcopy, but at the moment you can download a PDF for free)
Jim Otar:
http://www.retirementoptimizer.com/

It didn't make my eyes glaze over.

He points out that retirement portfolios fail when they are overdrawn during the first 4 years due to the random (bad luck) of retiring at the start of a sideways or bear market.  He focuses on planning to prevent the worst 10th percentile outcomes using historical market backtesting.  He says that the Monte Carlo, Gaussian calculators are not correct models for the distribution phase because it is not true that asset allocation is responsible for 90% of performance in a _distribution_ portfolio.  He says the _sequence of yearly returns_ and inflation rate are the major drivers of failure.

So maybe keeping a lot more in the cash "bucket,' to cover more years of bad markets, might be necessary in the future.  Which means that your safe withdrawal rate from the equity/bond portfolio will be much lower.
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Crafty_Dog
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« Reply #116 on: December 31, 2010, 06:49:05 PM »

Canis:

I just took a quick look at that page.  Thanks for the tip, it looks interesting. 

In general, I note that common assumptions of 8% average returns are looking pretty fg fantastical.
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CanisLatrans
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« Reply #117 on: December 31, 2010, 09:01:13 PM »

I just realized that the Crash of 2008 is 100% the fault of Roosevelt.

If the vast amount of money owed by Social Security was instead invested (real money, not phantom money replacing the real money stolen by the Govt to use for accounting trickery to hide inflation over the decades) by private insurance companies -- the financial greed of the 2000's would not have occurred.  Insurance companies would have placed all that money in truly rational, safe investments.  The percentage of the economy in whacky derivatives etc would have been small.
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CanisLatrans
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« Reply #118 on: December 31, 2010, 09:19:08 PM »

WRT hedging downside variance -- This guy Milevsky theorizes a sort of annuity which does exactly that.  Other intersting papers on the site too:

A Different Perspective on Retirement Income Sustainability:
Introducing the Ruin Contingent Life Annuity (RCLA)

http://www.ifid.ca/pdf_workingpapers/WP2007SEPT15_RCLA.pdf

He's of the same school as Otar apparently; talking about the main risk being a bad sequence of returns in the first years of retirement.

This product would be a "reverse" index, based on a particular year matching your year of retirement.  If the index goes to zero, it means your portfolio probably has become unsustainable as well.  So the product would then begin paying out a defined amount to you for the rest of your life.  Very clever idea; it separates the growth and the risk components of Immediate Annuities.  You keep ownership of the growth part and export the risk to the policy.  Its cheaper if you are older (because you live for fewer years, if it needs to pay out).


worth quoting:

IN SUM
The creation of a stand-alone ruin contingent life annuity (RCLA) would be a triumph of
insurance and financial engineering. On the one hand it is a type of long-term equity put
option, but it also provides true longevity insurance. Indeed, it is currently embedded
within an assortment of GLiBs on variable annuities, but we believe they should be
given a separate life of their own and sold on a stand alone basis.

Another use of such a concept product is that it provides us with a mark-to-market (or at
least mark-to-model) value for one’s retirement income plan. If a 7% spending rate is
truly unsustainable, then the cost of 7% RCLA would tell us by how much – exactly.

If mom and dad are spending too much, the relevant x% RCLA value would provide the
beneficiaries with a rough (average) estimate of what it will cost them – in value terms –
to cover their anticipated spending if and when they run out. The children
might want to set this sum of money aside now, in a risk free saving account, to cover
the cost of a life annuity if-and-when mom and dad ever run out of money.

At the very least, the creation of such products would enable retirees and their financial
advisor to put a market price – as opposed to just simulation values -- on the risks they
are running by spending too much, not investing appropriately or simply living too long.
In this case, market prices would function as economic signals or even warning signs.
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« Reply #119 on: January 01, 2011, 02:01:34 PM »

Canis: 

I really like what you are bringing to this thread!
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ccp
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« Reply #120 on: January 01, 2011, 06:31:57 PM »

06.01.2010
Interview in late May 2010 with journalist Elizabeth Corcoran
Venture capitalist Vinod Khosla is investing in energy projects from nuclear power to cheap battery chargers. His biggest bet: that all the energy pundits are dead wrong.
Leading clean-tech investor, Vinod Khosla, stepped up his game this week when he announced that former U.K. Prime Minister, Tony Blair, signed on to advise venture fund, Khosla Ventures. Blair will provide strategic advice about navigating the international politics surrounding energy production as well as make introductions between energy entrepreneurs and world leaders. Beyond the usual solar, wind and efficiency investments, Khosla's firm has been investing in a diverse and eclectic mix of ventures from precision agriculture, internal combustion engines, water, satellites to nuclear technologies.

Khosla, who began investing in clean technology deals in 2004 using his own funds, broadened his reach last year when his venture firm raised $1.3 billion from private investors. On the eve of announcing his alliance with former PM Blair, Khosla invited journalist Elizabeth Corcoran to speak with him about his investment philosophy, his belief in technology and his search for the elusive but powerful "black swans."

Q: You started Khosla Ventures as a private operation with your own money. Now it's a $1.3-billion fund with private investors. What's driving you?
Khosla: Six years ago, I didn't know how much innovation and renovation could be done to the energy infrastructure. Larger change is possible than I had ever imagined. We're working on everything from a nuclear reactor to a $4-cell phone charger for rural Africa built in an Altoid mint box that charges when you throw it into a cooking stove. That diversity boggles my mind. What's very, very clear is that when creative minds start working on problems, there are many more solutions than experts and pundits ever predict.

Q: You say the experts are wrong -- and wrong a lot. Can't we learn anything from the past?
Khosla: I personally only like to look forward.

Q: But surely there's something we learn from the past?
Khosla: What makes me a better mentor—a genuine "venture assistant"--to an entrepreneur, is that I have probably made more mistakes in building technology companies than most people on this planet. But I try not repeat past mistakes.

The problem with forecasts are the embedded assumptions. We make assumptions based on extrapolations of what exists today. Inventing the future is about upending those assumptions.

In 1995, there were billions of dollars investing in the existing telecommunications infrastructure. I was told by almost every major telecom company that the combination of that investment and other forces -- from the unions to the fact that the latest technology had to work with the most outdated switch in rural Iowa -- meant there was no way the Internet would change telecom. Less than 10 years later, the companies that hadn't adjusted to change were severly depressed. Even stalwarts like Lucent and Nortel were facing bankruptcy. AT&T itself was sold for a song to a wireless company. Invention drives that kind of change.

I have an almost religious belief that we're about to see that kind of invention and change in the field of energy.


Q: We had great predictions for alternative energy back in the 1970s. Those fizzled. Why will now be different?
Khosla: The underlying technology wasn't mature enough. The ecosystem wasn't there to support significant entrepreneurial activity. Nobody would fund a nuclear reactor as a startup. And most importantly, the intellectual horsepower wasn't there.

For the last 30 years, there were no fresh candidates for PhDs interested in energy. Today it's the hottest topic at schools like CalTech, MIT and Stanford. Five years after those students graduate, we'll see an explosion of innovation. So getting the attention of the smartest minds is key—and we've never had that in energy.


On black swans—and loons
Q: You say you're looking for intellectual "black swans," those rare ideas that can turn the world upside down. But how do you tell the difference between a black swan and a crazy loon?
Khosla: You don't. Arthur C. Clarke who said: "Any sufficiently advanced technology is indistinguishable from magic." You can't tell what's crazy and so we encourage crazy. I often suspend disbelief and listen to a story that sounds crazy and impossible. The answer lies in taking more shots on goal -- not trying to predict which shots will go in.

Black swans are extremely rare. We have something like 75 potentially revolutionary technologies in our portfolio. If there were 100 such investment portfolios around the world - 10,000 ideas - then five or six would succeed in changing the world's energy picture.


On Tony Blair and world politics:
Q: Energy policy, especially worldwide, is deeply political. How are you grappling with that?
Khosla: Creating new technology is a necessary but not sufficient condition for creating global change. Understanding local and global politics is now important for us, techie nerds. This is where our relationship with (former U.K. Prime Minister) Tony Blair can really help us. Tony understands far better than I ever will the political and geopolitical forces, as well as organization behavior and social behavior and change.

Q: Your former venture firm, Kleiner Perkins Caufield & Byers, has relationships with former U.S. vice president Al Gore and former U.S. secretary of state, Colin Powell. Is this association with Tony Blair just trophy hunting?
Khosla: Absolutely not. If I'm going to build a new technology, I look for the world's experts in that technology. If we're going to interact with policy makers in Europe or Asia, I need a world expert in politics. I'm particularly looking forward to his advice about China, Europe and Africa because of my personal ignorance on the topic. This is about gaining a perspective we don't usually get in Silicon Valley. And that's become critically important in this industry.

Tony and I have a shared passion for the topic of climate change. That's our bond. He was one of the first world leaders to embrace climate change as a priority. He also has a serious interest in Africa, in China, in the Mid East -- all areas critical to the energy infrastructure. I think he's excited about using the lever of innovative technology in the global fight against climate change and in understanding how innovation and policy interact. I've seen his eyes light up when I put him in front of a young PhD student with an idea about how to make a battery that's ten times better than lithium ion batteries. This isn't about making money but about catalyzing change. I expect Tony's contributions to be significant.


On subsidies and the 'Chindia test':
Q: You say you're not a fan of government subsidies. But aren't some of your biofuel companies helped by government support and subsidies?
Khosla: I don't have a problem with taking advantage of subsidies if the government offers them. I'm a capitalist.

But we will not ever invest in a company just because it operates in a subsidized marketplace. Subsidies, quotas, incentives all help new technologies get started. They can be very good policy tools. But if the technology can't achieve unsubsidized market competitiveness within five to seven years of starting production, we won't invest. We believe we're working on global companies. Technology has to work in countries where there are no subsidies or supportive policies.


Q: Do you consider yourself an environmentalist first and an investor second?
Khosla: No. I call myself a "pragmentalist." You can't ask people to buy the more expensive product just because it's "green." Sure, you'll get 5% of wealthy San Franciscans or Germans to buy but you won't have that great sucking sound of massive technology adoption if the economics doesn't work.

Economic gravity always wins. I call it the "Chindia test"— what's the price that will convince people in the developing world to adopt these technologies? Nothing that takes more than 12 months to pay for itself works in India. Electric cars wont be broadly adopted in India anytime soon.

This is something that environmentalists just don't get. They've done a very good job of raising awareness of the problems. But most of the solutions they've proposed are poor, naive, and uneconomic. And they may, in pushing for such solutions, may have hurt more than helped.


The downside of environmental activism
Q: What's an example?
Khosla: Look at electric cars. We'll ship 1 billion cars on this planet in the next 15 years. But the chances that people will pay an extra $5,000 to $25,000 more per car are very slim so a majority will be gasoline or diesel engine cars. And if we do have electric cars, chances are they're be essentially fueled by coal (which is still supplying most of the power for the electric grid).

The focus on electric cars has reduced technologist's interest in reinventing the common gasoline or diesel internal combustion engine even if a new internal combustion engine could reduce carbon emissions far more than a hybrid can. By the way, we are aggressively investing in radical battery technology too.

So instead of supporting "electric cars," we should have policy calling for a certain level of emissions per mile. That would be a technologically neutral policy. Or in electricity—instead of calling for "renewables," policy could set a goal of so much carbon emissions per kilowatt-hour of electricity generated. That policy would open the door for innovations in nuclear power, in "clean coal" power and other areas.


Q: But I thought you said early subsidies could help a new idea get started.
Khosla: And I want to emphasize that the policy maker's job is very complex.

It's even hard to know when you're saying "geologic sequestration" that a more general form of it would be "permanent sequestration," which should have been the policy. No other form of sequestration was on the table at the time. Our transportation policy should be around "low carbon" transportation. That would let every type of technology—from electric cars to novel internal combustion engines—compete against each other. And competition is always good.


Game changing technologies:
Q: Some of these are technologies you're supporting. For instance, you have just invested in a nuclear startup, right?
Khosla: Yes. We just invested in a nuclear reactor technology. It is an unusual bet for us but we got convinced it could be a good rate of return.

Q: What are other investments that you've made that could be game changers?
Khosla: There's a company in Houston called KiOR that can make crude oil from a wide variety of biomass including wood. We are not talking ethanol, but crude oil, which can be dropped into any refinery in the world, just like oil out of the ground. Our cellulosic biofuel investments are all doing well too.

Q: How?
Khosla: The Kior plant uses a standard technique called the fluid catalytic cracking (FCC) process. The innovation—the magic—lies in the catalyst technology. The resulting crude oil can be processed in existing facilities, moved through existing pipelines and mixed into regular crude in any proportion. Unlike an oil refinery, which takes about seven years to build, we are just starting construction on a plant that we hope will be online by mid next year. By the time we build our third or fourth plant, we expect that the cost of this fuel - unsubsidized - will be competitive in a market where crude costs $65 a barrel.

It has no carbon footprint because we're taking wood chip waste as an input. You will get carbon emissions when you burn the fuel. But if the feedstock was naturally grown and harvested locally, then the carbon emissions are balanced by the carbon absorbed when the plants grew.

That's just one. After coal and oil, cement and steel companies are the largest emitters of carbon. We are investing in a cement plant here on the coast of California built by a startup called Calera, that captures massive volumes of carbon dioxide and other emissions from electricity plants and turns it into cement like building materials and aggregate. This company has the potential to lower the lifecycle carbon emissions of a coal plant to below zero, making it "cleaner" than solar, by capturing the emissions from the plant in addition to offsetting the emissions created in existing cement manufacturing. Today it isn't applicable to every coal plant but our technology matrix at Calera is expanding rapidly making more and more plants viable candidates.

A company in Troy, Mich., called EcoMotors, is reinventing the combustion engine. They have an engine that they've run for hundreds of hours that improves efficiency by 30-50%. And then there's New Pax, with an HVAC design that uses 75% less than current technology, and Soraa in Santa Barbara, Calif., that has been working on semiconductors to come up with a light bulb that uses 80% less power than conventional incandescent bulbs, which pays for itself in less than a 12 months. Soraa expects to start selling its light bulbs in 2011. There's no reason not to save power with those kinds of economics.

We're talking about innovations that are one or two years -- not 20 years -- out. I can't even imagine what kinds of answers we'll invent in the next 20. That's the power of entrepreneurship.
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ccp
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« Reply #121 on: January 01, 2011, 06:32:24 PM »

Unintended consequences:
Q: Policy choices can have unintended consequences—but so, too, can technologies. You are clearly a technology champion.
Khosla: A technology bigot. A religious, technology bigot.

Q: Are you comfortable with the unintended consequences of your investments?
Khosla: I'm fine with that.

Q: But what if those consequences fall on other people's shoulders?
Khosla: Look: I sincerely believe there are risks with technology. But I also believe that doing business as usual and not taking any risks may be the biggest risk we take. I don't believe we have the option of being conservative, of continuing to do what we've done. The only choice we have is which risks we choose to take. And generally, technology risks are more controllable risks: they're patchable.

Q: Do you want to make money doing this?
Khosla: Absolutely.

Q: Aren't you rich enough already?
Khosla: No, it's not that. I have come to the view that unless somebody makes money at doing something, the idea won't be deployed broadly or quickly. Competition keeps ideas fresh and draws improvements. Almost every well-intentioned effort fails in the face of human characteristics. So I do believe capitalism is the only way to solve the world's problems.

I am definitely an optimist-- a technology optimist. Hopefulness is a key part of my message. We don't just need to grapple with inconvenient truths—we need to keep our minds open to radical solutions, the more convenient truths.



05.24.2010
Khosla Ventures Announces Tony Blair Associates as Senior Advisors
Former British Prime Minister to help innovative cleantech startups achieve a global impact
MENLO PARK, Calif., May 24, 2010 — Khosla Ventures, a venture assistance firm that focuses on cleantech and information technology startups, today announced a strategic partnership with Tony Blair Associates. Former British Prime Minister Tony Blair and his team will leverage his advocacy for environmental issues and his global relationships to help Khosla's broad portfolio of clean technology companies maximize their effectiveness in achieving their environmental goals. Founded by Vinod Khosla in 2004, Khosla Ventures is developing one of the largest, most diverse, and eclectic cleantech portfolios. Khosla Ventures views partnerships with large corporations, environmental and governmental organizations essential to maximizing its environmental impact. As part of the relationship, Mr. Blair accompanied Vinod Khosla yesterday to tour the Calera green cement demonstration plant in Moss Landing, Calif.

Tony Blair Associates will offer strategic advice to Khosla Ventures' green portfolio companies, drawing on his considerable geopolitical, political, organizational and environmental expertise. With Mr. Blair's support, Khosla Ventures will continue to foster innovations that can cost-effectively reduce carbon emissions — in areas that include solar, batteries, biofuels, lighting, mechanical and energy efficiency, and building materials. Mr. Khosla dubs their area of focus "maintech" rather than "cleantech," as he believes the infrastructure of society will be substantially impacted by technologists and entrepreneurs supported by his and other similar portfolios.

"Solving the climate crisis is more than just a political agenda item — it's an urgent priority that requires innovation, creativity, and ambition," said Tony Blair. "I share a clear vision with Vinod, one of the earliest leaders in cleantech investment, that entrepreneurs in Silicon Valley and beyond will have a tremendous impact on our environmental future. Vinod's portfolio companies are galvanizing scientific and technological know-how into businesses that can make a huge difference in reducing carbon and other emissions, and I look forward to dedicating a portion of my time to help them move us toward a more sustainable tomorrow. The Khosla Ventures organization is particularly effective in assisting entrepreneurs to develop and deploy their technologies all over the world."

Mr. Blair has long led on climate change issues, both in the U.K. and worldwide. He was the first major head of government to bring climate change to the top of the international political agenda at the 2005 Gleneagles G8 summit. He is a proponent of pursuing practical solutions to tackle climate change through technology and energy efficiency. Tony Blair now leads the Breaking the Climate Deadlock initiative, a strategic partnership with The Climate Group, working with world leaders to build consensus on a new comprehensive international climate policy framework.

"I have always admired Mr. Blair's early and consistent commitment to addressing climate change," said Mr. Khosla. "His goals align so well with our own mission to support disruptive startups in the cleantech space and to find technology solutions that can achieve unsubsidized market competitiveness for green technologies. We believe in attempting to achieve the 'Chindia price point,' the price at which even developing countries will voluntarily adopt these carbon efficient technologies. It's a price that is either cheaper than fossil alternatives or can achieve less than one year payback for efficiency investments, and is the key to scalable global adoption of environmentally beneficial technologies. With Tony's advice and influence, we will create opportunities for entrepreneurs and innovators to devise practical solutions that can solve today's most pressing crisis at a global scale while creating new jobs, new businesses and new sources of sustainable growth. Many more Google, Apple and Facebook-like new companies will be created in the environmental space based on breakthrough black swan technologies."

Mr. Blair's appointment was announced today as a part of the Khosla Ventures Limited Partner Summit near San Francisco, Ca. While on location, Mr. Blair will participate on a panel with Vinod Khosla and executives from selected cleantech startups in Khosla Ventures' green portfolio. Featured companies include Calera, which creates carbon-negative building products; Cogenra, developer of highly efficient solar solutions; EcoMotors, developer of high-efficiency internal combustion engines; KiOR, a leading biofuels company that converts biomass to high-quality bio-crude oil; New PAX, Inc., an inventor of high efficiency HVAC technology; and Soraa, innovator of highly efficient and affordable LEDs. Later that evening Mr. Blair and Bill Gates will speak to the Khosla Ventures entrepreneurs and limited partners.

About Khosla Ventures
Khosla Ventures helps entrepreneurs deliver lasting change through technological innovation. The firm, founded in 2004 by Vinod Khosla, co-founder of Sun Microsystems, offers venture assistance, strategic advice and capital to entrepreneurs with the audacity to take on what others may call insoluble dilemmas. Khosla Ventures' team members have known the stress of working through a crisis and the thrill of growing an idea into a multi-billion dollar company. The firm leverages that experience to help entrepreneurs turn technological risk into new opportunities. Today Khosla Ventures has one of the largest and broadest clean technology portfolios (including solar, energy storage, nuclear power, wind and high-efficiency engines), as well as holdings in traditional technology sectors such as mobility, Internet and silicon. Copyright © 2010 Khosla Ventures.
All Rights Reserved.
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CanisLatrans
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« Reply #122 on: January 01, 2011, 09:10:50 PM »

Is Khosla Ventures something ordinary people can buy stock in?  What is the utility of 6 month old articles?
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« Reply #123 on: January 02, 2011, 11:23:56 AM »

a) It read like venture capital to me.

b) Six months presents no issues for me when the subject matter is not transient.

Here's an interesting piece from today's NYTimes.
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A SUBSTANTIAL part of all stock trading in the United States takes place in a warehouse in a nondescript business park just off the New Jersey Turnpike.

Few humans are present in this vast technological sanctum, known as New York Four. Instead, the building, nearly the size of three football fields, is filled with long avenues of computer servers illuminated by energy-efficient blue phosphorescent light.

Countless metal cages contain racks of computers that perform all kinds of trades for Wall Street banks, hedge funds, brokerage firms and other institutions. And within just one of these cages — a tight space measuring 40 feet by 45 feet and festooned with blue and white wires — is an array of servers that together form the mechanized heart of one of the top four stock exchanges in the United States.

The exchange is called Direct Edge, hardly a household name. But as the lights pulse on its servers, you can almost see the holdings in your 401(k) zip by.

“This,” says Steven Bonanno, the chief technology officer of the exchange, looking on proudly, “is where everyone does their magic.”

In many of the world’s markets, nearly all stock trading is now conducted by computers talking to other computers at high speeds. As the machines have taken over, trading has been migrating from raucous, populated trading floors like those of the New York Stock Exchange to dozens of separate, rival electronic exchanges. They rely on data centers like this one, many in the suburbs of northern New Jersey.

While this “Tron” landscape is dominated by the titans of Wall Street, it affects nearly everyone who owns shares of stock or mutual funds, or who has a stake in a pension fund or works for a public company. For better or for worse, part of your wealth, your livelihood, is throbbing through these wires.

The advantages of this new technological order are clear. Trading costs have plummeted, and anyone can buy stocks from anywhere in seconds with the simple click of a mouse or a tap on a smartphone’s screen.

But some experts wonder whether the technology is getting dangerously out of control. Even apart from the huge amounts of energy the megacomputers consume, and the dangers of putting so much of the economy’s plumbing in one place, they wonder whether the new world is a fairer one — and whether traders with access to the fastest machines win at the expense of ordinary investors.

It also seems to be a much more hair-trigger market. The so-called flash crash in the market last May — when stock prices plunged hundreds of points before recovering — showed how unpredictable the new systems could be. Fear of this volatile, blindingly fast market may be why ordinary investors have been withdrawing money from domestic stock mutual funds —$90 billion worth since May, according to figures from the Investment Company Institute.

No one knows whether this is a better world, and that includes the regulators, who are struggling to keep up with the pace of innovation in the great technological arms race that the stock market has become.

WILLIAM O’BRIEN, a former lawyer for Goldman Sachs, crosses the Hudson River each day from New York to reach his Jersey City destination — a shiny blue building opposite a Courtyard by Marriott.

Mr. O’Brien, 40, works there as chief executive of Direct Edge, the young electronic stock exchange that is part of New Jersey’s burgeoning financial ecosystem. Seven miles away, in Secaucus, is the New York Four warehouse that houses Direct Edge’s servers. Another cluster of data centers, serving various companies, is five miles north, in Weehawken, at the western mouth of the Lincoln Tunnel. And yet another is planted 20 miles south on the New Jersey Turnpike, at Exit 12, in Carteret, N.J.

As Mr. O’Brien says, “New Jersey is the new heart of Wall Street.”

Direct Edge’s office demonstrates that it doesn’t take many people to become a major outfit in today’s electronic market. The firm, whose motto is “Everybody needs some edge,” has only 90 employees, most of them on this building’s sixth floor. There are lines of cubicles for programmers and a small operations room where two men watch a wall of screens, checking that market-order traffic moves smoothly and, of course, quickly. Direct Edge receives up to 10,000 orders a second.

Mr. O’Brien’s personal story reflects the recent history of stock-exchange upheaval. A fit, blue-eyed Wall Street veteran, who wears the monogram “W O’B” on his purple shirt cuff, Mr. O’Brien is the son of a seat holder and trader on the floor of the New York Stock Exchange in the 1970s, when the Big Board was by far the biggest game around.

But in the 1980s, Nasdaq, a new electronic competitor, challenged that dominance. And a bigger upheaval came in the late 1990s and early 2000s, after the Securities and Exchange Commission enacted a series of regulations to foster competition and drive down commission costs for ordinary investors.

These changes forced the New York Stock Exchange and Nasdaq to post orders electronically and execute them immediately, at the best price available in the United States — suddenly giving an advantage to start-up operations that were faster and cheaper. Mr. O’Brien went to work for one of them, called Brut. The N.Y.S.E. and Nasdaq fought back, buying up smaller rivals: Nasdaq, for example, acquired Brut. And to give itself greater firepower, the N.Y.S.E., which had been member-owned, became a public, for-profit company.

Brokerage firms and traders came to fear that a Nasdaq-N.Y.S.E. duopoly was asserting itself, one that would charge them heavily for the right to trade, so they created their own exchanges. One was Direct Edge, which formally became an exchange six months ago. Another, the BATS Exchange, is located in another unlikely capital of stock market trading: Kansas City, Mo.

Direct Edge now trails the N.Y.S.E. and Nasdaq in size; it vies with BATS for third place. Direct Edge is backed by a powerful roster of financial players: Goldman Sachs, Knight Capital, Citadel Securities and the International Securities Exchange, its largest shareholder. JPMorgan also holds a stake. Direct Edge still occupies the same building as its original founder, Knight Capital, in Jersey City.

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The exchange now accounts for about 10 percent of stock market trading in the United States, according to the exchange and the TABB Group, a specialist on the markets. Of the 8.5 billion shares traded daily in the United States, about 833 million are bought and sold on Mr. O’Brien’s platforms.

As it has grown, Direct Edge and other new venues have sucked volumes away from the Big Board and Nasdaq. The N.Y.S.E. accounted for more than 70 percent of trading in N.Y.S.E.-listed stocks just five years ago. Now, the Big Board handles only 36 percent of those trades itself. The remaining market share is divided among about 12 other public exchanges, several electronic trading platforms and vast so-called unlit markets, including those known as dark pools.
THE Big Board is embracing the new warp-speed world. Although it maintains a Wall Street trading floor, even that is mostly electronic. The exchange also has its own, separate electronic arm, Arca, and opened a new data center last year for its computers in Mahwah, N.J.

From his office in New Jersey, Mr. O’Brien looks back across the water to Manhattan and his former office on the 50th floor of the Nasdaq building at One Liberty Plaza, and he reflects wistfully on the huge changes that have taken place.

“To walk out of there to go across the river to Jersey City,” he says. “That was a big leap of faith.”

His colleague, Bryan Harkins, the exchange’s chief operating officer, sounds confident about the impact of the past decade’s changes. The new world is fairer, he says, because it is more competitive. “We helped break the grip of the New York Stock Exchange,” he says.

In this high-tech stock market, Direct Edge and the other exchanges are sprinting for advantage. All the exchanges have pushed down their latencies — the fancy word for the less-than-a-blink-of-an-eye that it takes them to complete a trade. Almost each week, it seems, one exchange or another claims a new record: Nasdaq, for example, says its time for an average order “round trip” is 98 microseconds — a mind-numbing speed equal to 98 millionths of a second.

The exchanges have gone warp speed because traders have demanded it. Even mainstream banks and old-fashioned mutual funds have embraced the change.

“Broker-dealers, hedge funds, traditional asset managers have been forced to play keep-up to stay in the game,” Adam Honoré, research director of the Aite Group, wrote in a recent report.

Even the savings of many long-term mutual fund investors are swept up in this maelstrom, when fund managers make changes in their holdings. But the exchanges are catering mostly to a different market breed — to high-frequency traders who have turned speed into a new art form. They use algorithms to zip in and out of markets, often changing orders and strategies within seconds. They make a living by being the first to react to events, dashing past slower investors — a category that includes most investors — to take advantage of mispricing between stocks, for example, or differences in prices quoted across exchanges.

One new strategy is to use powerful computers to speed-read news reports — even Twitter messages — automatically, then to let their machines interpret and trade on them.

By using such techniques, traders may make only the tiniest fraction of a cent on each trade. But multiplied many times a second over an entire day, those fractions add up to real money. According to Kevin McPartland of the TABB Group, high-frequency traders now account for 56 percent of total stock market trading. A measure of their importance is that rather than charging them commissions, some exchanges now even pay high-frequency traders to bring orders to their machines.

High-frequency traders are “the reason for the massive infrastructure,” Mr. McPartland says. “Everyone realizes you have to attract the high-speed traders.”

As everyone goes warp speed, a number of high-tech construction projects are under way.

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One such project is a 428,000-square-foot data center in the western suburbs of Chicago opened by the CME Group, which owns the Chicago Mercantile Exchange. It houses the exchange’s Globex electronic futures and options trading platform and space for traders to install computers next to the exchange’s machines, a practice known as co-location — at a cost of about $25,000 a month per rack of computers.

The exchange is making its investment because derivatives as well as stocks are being swept up in the high-frequency revolution. The Commodity Futures Trading Commission estimates that high-frequency traders now account for about one-third of all volume on domestic futures exchanges.
In August, Spread Networks of Ridgeland, Miss., completed an 825-mile fiber optic network connecting the South Loop of Chicago to Cartaret, N.J., cutting a swath across central Pennsylvania and reducing the round-trip trading time between Chicago and New York by three milliseconds, to 13.33 milliseconds.

Then there are the international projects. Fractions of a second are regularly being shaved off of the busy Frankfurt-to-London route. And in October, a company called Hibernia Atlantic announced plans for a new fiber-optic link beneath the Atlantic from Halifax, Nova Scotia, to Somerset, England that will be able to send shares from London to New York and back in 60 milliseconds.

Bjarni Thorvardarson, chief executive of Hibernia Atlantic, says the link, due to open in 2012, is primarily intended to meet the needs of high-frequency algorithmic traders and will cost “hundreds of millions of dollars.”

“People are going over the lake and through the church, whatever it takes,” he says. “It is very important for these algorithmic traders to have the most advanced technology.”

The pace of investment, of course, reflects the billions of dollars that are at stake.

The data center in Weehawken is a modern building that looks more like a shopping mall than a center for equity trading. But one recent afternoon, the hammering and drilling of the latest phase of expansion seemed to conjure up the wealth being dug out of the stock market.

As the basement was being transformed into a fourth floor for yet more computers, one banker who was touring the complex explained the matter bluntly: “Speed,” he said, “is money. “

THE “flash crash,” the harrowing plunge in share prices that shook the stock market during the afternoon of May 6 last year, crystallized the fears of some in the industry that technology was getting ahead of the regulators. In their investigation into the plunge, the S.E.C. and Commodity Futures Trading Commission found that the drop was precipitated not by a rogue high-frequency firm, but by the sale of a single $4.1 billion block of E-Mini Standard & Poor’s 500 futures contracts on the Chicago Mercantile Exchange by a mutual fund company.

The fund company, Waddell & Reed Financial of Overland Park, Kan., conducted its sale through a computer algorithm provided by Barclays Capital, one of the many off-the shelf programs available to investors these days. The algorithm automatically dripped the billions of dollars of sell orders into the futures market over 20 minutes, continuing even as prices started to drop when other traders jumped in.

The sale may have been a case of inept timing — the markets were already roiled by the debt crisis in Europe. But there was no purposeful attempt to disrupt the market, the regulators found.

But there was a role played by some high-frequency machines, the investigation found. As they detected the big sale and the choppy conditions, some of them shut down automatically. As the number of buyers plunged, so, too, did the Dow Jones Industrial Average, losing more than 700 points in minutes before the computers returned and prices recovered just as quickly. More than 20,000 trades were ruled invalid.

The episode seemed to demonstrate the vulnerabilities of the new market, and just what could happen when no humans are in charge to correct the machines.

Since the flash crash, the S.E.C. and the exchanges have introduced marketwide circuit breakers on individual stocks to halt trading if a price falls 10 percent within a five-minute period.

But some analysts fear that some aspects of the flash crash may portend dangers greater than mere mechanical failure. They say some wild swings in prices may suggest that a small group of high-frequency traders could manipulate the market. Since May, there have been regular mini-flash crashes in individual stocks for which, some say, there are still no satisfactory explanations. Some experts say these drops in individual stocks could herald a future cataclysm.

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In a speech last month, Bart Chilton, a member of the futures trading commission, raised concerns about the effect of high-frequency trading on the markets. “With the advent of ‘Star Trek’-like, gee-whiz H.F.T. technology, we are witnessing one of the most game-changing and tumultuous shifts we have ever seen in financial markets,” Mr. Chilton said. “We also have to think about the myriad ramifications of technology.”

One debate has focused on whether some traders are firing off fake orders thousands of times a second to slow down exchanges and mislead others. Michael Durbin, who helped build high-frequency trading systems for companies like Citadel and is the author of the book “All About High-Frequency Trading,” says that most of the industry is legitimate and benefits investors. But, he says, the rules need to be strengthened to curb some disturbing practices.
“Markets are there for capital formation and long-term investment, not for gaming,” he says.

As it tries to work out the implications of the technology, the S.E.C. is a year into a continuing review of the new market structure. Mary L. Schapiro, the S.E.C. chairwoman, has already proposed creating a consolidated audit trail, so that buying and selling records from different exchanges can be examined together in one place.

In speeches, Ms. Schapiro has also raised the idea of limiting the speed at which machines can trade, or requiring high-frequency traders to stay in markets as buyers or sellers even in volatile conditions. just as human market makers often did on the floor of the New York Stock Exchange. .

“The emergence of multiple trading venues that offer investors the benefits of greater competition also has made our market structure more complex,” she said in Senate testimony last month, adding, “We should not attempt to turn the clock back to the days of trading crowds on exchange floors.”

MOST of the exchanges have already eliminated a controversial electronic trading technique known as flash orders, which allow traders’ computers to peek at other investors’ orders a tiny fraction of a second before they are sent to the wider marketplace. Direct Edge, however, still offers a version of this service.

The futures trading commission is considering how to regulate data centers, and the practice of co-location. The regulators are also examining the implications of so-called dark pools, another product of the technological revolution, in which large blocks of shares are traded electronically and without the scrutiny exercised on public markets. Their very name raises questions about the transparency of markets. About 30 percent of domestic equities are traded on these and other “unlit” venues, the S.E.C. says.

For Mr. O’Brien, the benefits of technology are clear. “One thing has surprised me: people have looked at this as a bad thing,” he says. “There is almost no other industry where people say we need less technology. Fifteen years ago, trades took much longer to execute and were much more expensive by any measure” because market power was more concentrated in a few large firms. “Now someone can execute a trade from their mobile from anywhere on the planet. That seems to me like a market that is fairer.”

For others who work at the company or elsewhere in the financial ecosystem of New Jersey, it has been a boon.

“A lot of my friends work here or in this area,” says Andrei Girenkov, 28, one of Direct Edge’s chief programmers, over lunch recently in Dorrian’s restaurant in Direct Edge’s building. “It changed my life.”

But some analysts question whether everyone benefits from this technological upending.

“It is a technological arms race in financial markets and the regulators are a bit caught unaware of how quickly the technology has evolved,” says Andrew Lo, director of the Laboratory for Financial Engineering at M.I.T. “Sometimes, too much technology without the ability to manage it effectively can yield some unintended consequences. We need to ask the hard questions about how much of this do we really need. It is the Wild, Wild West in trading.”

Mr. Lo suggests a need for a civilizing influence. “Finally,” he says, “it gets to the point where we have a massive traffic jam and we need to install traffic lights.”

« Last Edit: January 02, 2011, 11:57:21 AM by Crafty_Dog » Logged
Crafty_Dog
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« Reply #124 on: January 02, 2011, 11:59:02 AM »

For every flash crash caused by high-speed or automated trading, you can expect to find new automated trading programs that work the opposite way, to take advantage of arbitrary declines in prices. That is the role of speculators, after all: buy when everyone else is selling, and vice versa. I think the concerns over automated trading are overblown. The market will adapt, as smart people look to things like flash crashes as great opportunities to make money.
===========
Marc:  This is true, but little folks like me cannot tell when a dramatic decline is arbitrary and momentary or is a real excrement storm. 
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ccp
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« Reply #125 on: January 03, 2011, 03:58:50 PM »

Yes it is venture capital.

I wish I had listened to Khosla when he predicted 90% of tech stocks would fail before the tech crash of 2000.
I thought it interesting that he feels the climate change pundits are totally off base by predicting that solar, wind electric cars will dominate.

He thinks it will more likely be a major advance in some already established energy not a whole new source that will be the big winner.
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G M
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« Reply #126 on: January 03, 2011, 04:20:26 PM »

For every flash crash caused by high-speed or automated trading, you can expect to find new automated trading programs that work the opposite way, to take advantage of arbitrary declines in prices. That is the role of speculators, after all: buy when everyone else is selling, and vice versa. I think the concerns over automated trading are overblown. The market will adapt, as smart people look to things like flash crashes as great opportunities to make money.
===========
Marc:  This is true, but little folks like me cannot tell when a dramatic decline is arbitrary and momentary or is a real excrement storm. 

**I'm reminded of the military use of robots. I had always assumed that we would always have a human to make the decision to employ deadly force, however I found that the thinking in military circles is that if one side of a conflict had effective AI in it's weapon systems, a opponent that relied on decision making by humans would be unable to compete because of a gap in response time (OODA loop). The unintended consequence of being dependent on automated systems is the classic "humans destroyed by their own creation".

Skynet Trade-1000?
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« Reply #127 on: January 03, 2011, 09:09:24 PM »

Bothered by outing the locations of these places.  Yea there is backup, but its not instant.

Remember the Star Trek episode with the two planets at war controlled by computers?  The people in the destroyed sectors just walked to the disintegrator machines.  Their culture was never destroyed until Kirk broke the machine & instigated real nuclear retaliation.
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« Reply #128 on: January 03, 2011, 09:15:48 PM »

Gotta love the silly putty-like flexibility of the prime directive.  rolleyes
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« Reply #129 on: January 03, 2011, 09:58:18 PM »

Doh! Didn't know about this forum or thread...loads of catching up... seems like everyone on the thread are very knowledgeable... i'm still learning

Didn't read thread completely yet... MCP (Molycorp) + 15% today ... yesterday up like 5%... rare earth metals used e.g. in batteries powering the IPad (or IPod)... most rare earth metals are found in China.... MCP is the only non-Chinese co in China ... do the homework on this... decide for yourself if there is still upside

http://finance.yahoo.com/news/Molycorp-climbs-as-analyst-apf-2111880290.html?x=0
http://data.cnbc.com/quotes/mcp

dahlman rose analyst has his target prx of $85

A few mos ago I was looking at this... could've gotten in at $30... but no... more important to save and buy a new convertible tablet/laptop... stupid me... anyway, it swung and was a little scary

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"A good stickgrappler has good stick skills, good grappling, and good stickgrappling and can keep track of all three simultaneously. This is a good trick and can be quite effective." - Marc "Crafty Dog" Denny
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« Reply #130 on: January 04, 2011, 05:05:50 PM »

ugh on me...would've doubled my money in ~3 mos time. up 7% today - closed $61.80 -- c'est la vie

http://data.cnbc.com/quotes/mcp
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« Reply #131 on: January 04, 2011, 08:02:42 PM »

Hell, I doubled MCP when I sold at 30. (good profits in REE too)  I'd have a four bagger now if I had held.

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« Reply #132 on: January 05, 2011, 11:55:45 AM »

Hell, I doubled MCP when I sold at 30. (good profits in REE too)  I'd have a four bagger now if I had held.



Awesome!
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"A good stickgrappler has good stick skills, good grappling, and good stickgrappling and can keep track of all three simultaneously. This is a good trick and can be quite effective." - Marc "Crafty Dog" Denny
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« Reply #133 on: February 18, 2011, 07:58:45 AM »

In spite of some recent predictions on this site that the market might fall to 6000,  evil   to the contrary, the Stock Market today is over 12,300.
Interesting to note, most consider the stock market a leading economic indicator.  Good news for our economy's future.
However, as this article points out, although most of the news is good, let's not get too optimistic, (not a problem on this forum).  smiley

http://money.cnn.com/2011/02/17/markets/thebuzz/index.htm
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G M
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« Reply #134 on: February 18, 2011, 08:15:23 AM »

Yes, it only got down to 6500 or so.....

Pay no attention to all the cities, states and possibly the USG defaulting. Happy days are here again!
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« Reply #135 on: February 18, 2011, 08:32:33 AM »

hmmm
In the past two years, despite continuing dire economic predictions on this site, the market has almost doubled.
Sounds like a pretty rosy leading indicator to me...

Double your money in two years.  I guess happy times ARE here again for SOME people.  Not everyone.........
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« Reply #136 on: February 18, 2011, 08:56:04 AM »

http://www.europac.net/commentaries/financial_disconnect

Financial Disconnect
February 14, 2011 - 10:28am — europac admin
By:
John Browne
Monday, February 14, 2011

Despite last week’s confusing employment data, the increasing threat of another decline in home values, political uncertainty in Egypt and the broader Middle East, and sharp pullbacks in some emerging markets such as Brazil, US stock markets continued to rise. It sometimes seems that Wall Street exists in a bubble that is well-insulated from the rough and tumble of the outside world. But, in what may be a harbinger that America’s era of prosperity is winding down, the hallowed New York Stock Exchange, long the epicenter of American economic might, is expected to be bought by Germany’s Deutsche Boerse. When the king is so unceremoniously uncrowned, it can't be long before investors notice how shabbily dressed he really is.   

Earlier this month, the Bureau of Labor Statistics revealed that the unemployment rate had fallen from 9.4 percent to 9.0 percent. Many in the financial media seized on the report and bundled it together with recently released data on improved consumer sentiment as great news for the economy. However, the report only showed 36,000 new jobs created, far less that the 146,000 that economists estimate need to be created to bring down unemployment significantly. Regardless, US stock markets continued to rise.

One must remember that the unemployment figure excludes those who have given up looking for jobs altogether. The percentage of Americans who have jobs continues to shrink. By factoring back in those who have left the work force over the last few years, many economists have concluded that the real unemployment rate is closer to 20 percent.

The housing market also shows fresh signs of enduring stress. Based on a report released last week, using data as of November 2010, nearly one third of US houses are now worth less than the amount owed on their underlying mortgages. Not surprisingly, given this harrowing statistic, defaults continue to rise. The price of the average house is now at a ten-year low and still falling.

In view of this evidence of increased unemployment and continued erosion in the housing sector, it is hard to see any likely recovery in consumer demand in the short term. Without such a rise, it is hard to justify any short-term run up in consumer sentiment and stock prices. But both have done just that. From my perspective, this represents a major financial disconnect.

Serving under former Fed Chairman Greenspan, Ben Bernanke helped to engineer the largest asset boom in history. The natural result was the credit crunch of 2008, from which we now are still trying to recover. However, Bernanke has been unwilling to accept continued recession. Clearly, he is determined to stimulate the economy, not by encouraging consumer demand, but by inflation.

The stimulus packages and quantitative easing programs have created a massive injection of liquidity. Furthermore, the Fed’s manipulation of interest rates has pushed investors into riskier assets, such as equities and commodities, and out of relatively secure investments, such as bank deposits and bonds. This abundance of cheap money is creating an artificial asset boom, and it is the main reason why equity prices have risen.

Meanwhile, the political problems in Egypt have caused smaller investors to temporarily fear political risks in emerging markets, despite their having better fundamentals than the US. I expect this dynamic to quickly reverse as the protests settle in Cairo.

In short, the continued rise in US equities appears to be stimulated not by sustainable US consumer demand, but by cheap government-supplied liquidity, and a temporary diversion away from emerging markets. This qualifies more as a splash than a wave. The tide is still drawing capital to the developing world.

The big question investors should ask themselves is: for how long can the rise in US stock prices continue when consumers are still faced with stagnant employment and falling house prices?

The printing of fiat money is likely to be able to sustain a false economic recovery for some time. But, eventually, the cost will be a rapid erosion of the value of the US dollar – not just in real terms, but also against almost every other foreign currency. Despite possible short-term corrections, gold and silver holdings are likely best to shield investors from the perils that lie ahead.


This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivs 3.0 Unported License. Please feel free to repost with proper attribution and all links included.
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DougMacG
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« Reply #137 on: February 18, 2011, 09:44:47 AM »

More money chasing fewer companies.  The reversing of expansionary monetary policies is a certainty, we just don't know when.  The revitalization of entrepreneurial capitalism is uncertain and unlikely (?)

Do people remember when markets always contracted on inflation news.  Not because of inflation but because of the expectation/fear of the Feds reaction to it.  For the time being, that check and balance is gone.  The longer they wait to respond, the more severe the correction will need to be.
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Crafty_Dog
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« Reply #138 on: February 18, 2011, 01:17:33 PM »

FWIW, the brief version of my take on this:

As JDN notes, the market is generally considered to be a leading indicator. (Contrarily it is sometimes said the market can be wrong longer than you can stay solvent, but I digress , , ,).   If that is so here, let us see what was on the horizon when the market crashed, and what has been on the horizon as is has "returned" to roughly where it was.

The market dived when BO decisively passed McCain in the polls.  Coincidence?  Look at all the deranged possibilities that were on the horizon:  Obamacare, Cap & Trade (!!!), high and higher taxes, mad spending, regulations, mortgage boondoggles, bailouts, takeover of the auto industry, crony facism, defeaet in Iraq and the mid-east and much, much more--this group here needs no complete list to get my point.  Multiply the movement in market prices by computer trading by hedge funds and other mo-mo players.

What was on the horizon when the market began to climb?

The possibility, then the probability that BO and the Demogogues would get crushed in the polls.  Cap & Trade? Dead in the water.  Expiration of the Bush rates and other tax increases?  Dead.  More stimulus boondoggles-- less clear, but certainly far less than would be the case had the Dems retained control of the house.  Chance of defunding Obamacare.  BO himself?  Now forced to pretend to be a centrist. etc etc.  With these things, money that had been sitting on the sidelines (and there was a lot of it due to BO generated uncertainty) began coming back into play.

As GM notes in his way, a very good case can be made that the current moves of the market are essentially the market being "wrong" due to gamers playing with easy money sloshing around the system, hedge fund momentum computer trading (a big  majority of trades now if I am not mistaken) and those being fooled by what is essentially a quintessential bear trap.

QE2 is spending $600B for a claimed 3M jobs saved-- i.e. $200,000 per job!!!  The Fed govt is borrowing some 35-40% of every dollar it spends.  The deficit is some 9-10% of GDP (some claim 8, but whatever) The % of the budget that must go to cover interest payments, even at these articially low level interest levels, is some 12%.  What happens if/when interest rates double? Triple? Quadruple? (and note a large % of our borrowings are short term) This can happen!  Look at what happened in the late 70s under Carter-- and having lived through then and now, IMHO we are in FAR, FAR worse shape now.  BO's budget numbers are even more criminal than the usual baseline budgeting numbers.  The demographic chickens of SS, Medicaid, and Medicare are coming home to roost.  Many state governments are essentially bankrupt.  All of us here are familiar with the unemployment data.

The hazy fibology of the progressives aside, the reality is that FDR's programs created a market pattern similar to the one we see now-- minus the late 30s seeing things turn down again badly.  Like the 30s, the possibility of a world wide conflict looms.

To call the market's wild government induced ride a doubling from the bottom, as JDN does, while mathematically correct, IMHO misses most of the picture.
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« Reply #139 on: February 18, 2011, 04:28:24 PM »

OTOH, here's Wesbury:

http://www.ftportfolios.com/Commentary/EconomicResearch/2011/2/18/no-bubbles,-sugar,-or-dead-cat-bounces
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G M
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« Reply #140 on: February 18, 2011, 09:21:07 PM »

Worried that their son was too optimistic, the parents of a little boy took him to a psychiatrist. Trying to dampen the boy’s spirits, the psychiatrist showed him into a room piled high with nothing but horse manure. Yet instead of displaying distaste, the little boy clambered to the top of the pile, dropped to all fours, and began digging.

“What do you think you’re doing?” the psychiatrist asked.

“With all this manure,” the little boy replied, beaming, “there must be a pony in here somewhere.”
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« Reply #141 on: February 19, 2011, 12:49:02 PM »

"the market is generally considered to be a leading indicator"
 - Amazingly the market has predicted 13 of the last 4 recessions.

200k per (imaginary) job saved?   - I can't find the total numbers, but I believe Bernanke was referring to the entire QE (trillion and a half, more ?) and 3 million jobs saved of course is pure fabrication.  What economic theory believes that devaluing our currency makes us wealthier?

"To call the market's wild government induced ride a doubling from the bottom, as JDN does, while mathematically correct, IMHO misses most of the picture."

 - Right, you can't buy only at the exact trough or sell only at the exact peak.  One would not meaningfully measure ocean level at the top or bottom of a tidal wave.  'Smoothing' the data is an imperfect science, otherwise pick points in time where policy or events changed to judge how the markets responded (as Crafty did).  
-----

Wesbury is empirically optimistic.  These are modest predictions of growth.  Then they compare their predictions with actual results.  Sometimes they are wrong.  He will still tell you I believe that we are missing out on half the growth available with our excessively anti-growth policies.  I posted Kudlow recently saying that average growth when Reagan's policies took effect was 7.7% for 6 quarters, then he won 49 states.  Wesbury is not saying anything like that.  He is telling his investors that his analysis says to stay invested.  Predicting the future has (obvious) risks.  That's why I judge these economists by how well they can explain the past.  I hadn't seen Wesbury in a video before.  He speaks well.  Instead of Fed chair, I think I would like him to be VP.  I wonder if he could hold his own debating Joe Biden on economic policy.

There is an honesty there for a supply-sider to predict growth under the opponent's regime.  I think he just tells you wherever his analysis takes him, although there may be a bias in his business of wanting investors to stay in.




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G M
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« Reply #142 on: February 20, 2011, 10:59:27 AM »

http://www.businessinsider.com/charts-debt-unemployment--2011-2#

There has to be a pony in here somewhere.....
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« Reply #143 on: February 20, 2011, 01:13:09 PM »

Several of these charts do something that irks me greatly.  They massively increase the visual impression given by how they label the axis.

For example, a movement of 400 from 400 to 800 in 1980-1985 a movement of 100%, is given the same visual as a movement today from 3,200,000 to 3,600,000, a movement of 12.5%. 

The situation is godawful, no doubt about it, but visually misleading charts do not help our understanding.
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« Reply #144 on: February 20, 2011, 01:25:08 PM »

Good point.
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« Reply #145 on: March 03, 2011, 08:06:10 AM »

I took a good size position in PAAS at around 8.50.  It is now nearly 4x that, so this article was of great interest to me.
========================

POTH

As Americans know all too well by this point, commodity prices — for corn, wheat, soybeans, crude oil, gold and even farmland — have been going through the roof for what seems like forever. There are many causes, primarily supply and demand pressures driven by fears about the unrest in the Middle East, the rise of consumerism in China and India, and the Fed’s $600 billion campaign to increase the money supply.

Nonetheless, how to explain the price of silver? In the past six months, the value of the precious metal has increased nearly 80 percent, to more than $34 an ounce from around $19 an ounce. In the last month alone, its price has increased nearly 23 percent. This kind of price action in the silver market is reminiscent of the fortune-busting, roller-coaster ride enjoyed by the Hunt Brothers, Nelson Bunker and William Herbert, back in 1970s and early 1980s when they tried unsuccessfully to corner the market. When the Hunts started buying silver in 1973, the price of the metal was $1.95 an ounce. By early 1980, the brothers had driven the price up to $54 an ounce before the Federal Reserve intervened, changed the rules on speculative silver investments and the price plunged. The brothers later declared bankruptcy.

Accusations that JPMorganChase and HSBC allegedly manipulated precious metal markets are worth looking into.
.The Hunts may be gone from the market, but there are still plenty of people suspicious about the trading in silver, and now they have the Web to explore and to expand their conspiracy narratives. This time around — according to bloggers and commenters on sites with names like Silverseek, 321Gold and Seeking Alpha — silver shot up in price after a whistleblower exposed an alleged conspiracy to keep the price artificially low despite the inflationary pressure of the Fed’s cheap money policy. (Some even suspect that the Fed itself was behind the effort to keep silver prices low, as a way to keep the dollar’s value artificially high.) Trying to unravel the mysterious rise in silver’s price is a conspiracy theorist’s dream, replete with powerful bankers, informants, suspicious car accidents and a now a squeeze on short sellers. Most intriguingly, however, much of the speculation seems highly plausible.
The gist goes something like this: When JPMorgan Chase bought Bear Stearns in March 2008, it inherited Bear Stearns’ large bet that the price of silver would fall. Over time, it added to that bet, and then the international bank HSBC got into the market heavily on the bear side as well. These actions “artificially depressed the price of silver dramatically downward,” according to a class-action lawsuit initiated by a Florida futures trader and filed against both banks in November in federal court in the Southern District of New York.

“The conspiracy and scheme was enormously successful, netting the defendants substantial illegal profits” in the billions of dollars between June 2008 and March 2010, according to the suit. The suit claims that JPMorgan and HSBC together “controlled over 85 percent the commercial net short positions” in silvers futures contracts at Comex, a Chicago-based exchange on which silver is traded, along with “25 percent of all open interest short positions” and a “a market share in excess of 9o percent of all precious metals derivative contracts, excluding gold.”

In the United States, trading in precious metals and other commodities is regulated and closely monitored by a federal agency, the Commodity Futures Trading Commission. In September 2008, after receiving hundreds of complaints that silver future prices were being manipulated downward by JPMorgan and HSBC, the commission’s enforcement division started an investigation. In November 2009, an informant, described in the law suit only as a former employee of Goldman Sachs and a 40-year industry veteran, approached the commission with tales of how the silver traders at JPMorgan were bragging about all the money they were making “as a result of the manipulation,” which entailed “flooding the market” with “short positions” every time the price of silver started to creep upward. The idea was that by unloading its short positions like a time-released capsule, JPMorgan’s traders were keeping the price of silver artificially low.

Soon enough, the informant was identified as Andrew Maguire, an independent precious metals trader in London. On Jan. 26, 2010, Maguire sent Bart Chilton, a member of the futures trading commission, an e-mail urging him to look into the silver trading that day. “It was a good example of how a single seller, when they hold such a concentrated position in the very small silver market can instigate a sell off at will,” Maguire wrote.

On Feb. 3, 2010, Maguire gave the futures trading commission word about an impending “manipulation event” that he said would occur two days later, when the Labor Department’s non-farm payroll numbers would be released. He then spelled out two trading scenarios about which he had been told. “Both scenarios will spell an attempt by the two main short holders” — JPMorganChase and HSBC — “to illegally drive the market down and reap very large profits,” Maguire wrote in an e-mail to a trading-commission investigator.

On Feb. 5, Maguire took a victory lap, writing in another e-mail to the trading commission that “silver manipulation was a great success and played out EXACTLY to plan as predicted.” He added, “I hope you took note of how and who added the short sales (I certainly have a copy) and I am certain you will find it is the same concentrated shorts who have been in full control since JPM took over the Bear Stearns position … I feel sorry for all those not in this loop. A serious amount of money was made and lost today and in my opinion as a result of the CFTC’s allowing by your own definition an illegal concentrated and manipulative position to continue.”

In March 2010, Maguire released his e-mails publicly, in part because he felt the trading commission’s enforcement arm was not taking swift enough action. He was also unhappy over not being invited to a commission hearing on position limits scheduled for March 25. Then came the cloak and dagger element: the day after the hearing, Maguire was involved in a bizarre car accident in London. As he was at a gas station, a car came out of a side street and barreled into his car and two others; London police, using helicopters and chase cars, eventually nabbed the hit-and-run driver. Reports that the perpetrator was given a slap on the wrist inflamed the online crowds that had become captivated by Maguire’s odd story.

In any case, the class-action lawsuit contends that between March 2010 and November 2010, JPMorgan Chase and HSBC reduced their short positions in the silver market by 30 percent, causing the metal’s price to rise dramatically, but leaving them still with a large short position. Now, with the value of silver rising nearly every day, the two banks are caught in a “massive short squeeze,” according to one market participant, that appears to be costing them the billions they made originally plus billions more. Whether these huge losses will show up on the books of JPMorgan Chase and HSBC remains to be seen. (Parsing through the publicly filed footnotes of derivative trades is no easy task.)

Nonetheless, the conspiracy-minded have claimed that the Fed must have somehow agreed to make JPMorgan and HSBC whole for any losses the banks suffered if and when the price of silver rose above the artificially maintained low levels — as in right now, for instance. (About all this, a JPMorganChase spokesman declined to comment.)

Some two-and-a-half years later, the Commodity Futures Trading Commission’s investigation is still unresolved, and at least one commissioner — Bart Chilton — thinks that after interviewing more than 32 people and reviewing more than 40,000 documents, there has been enough investigating and not enough prosecuting. “More than two years ago, the agency began an investigation into silver markets,” Chilton said at a commission hearing last October. “I have been urging the agency to say something on the matter for months … I believe violations to the Commodity Exchange Act have taken place in silver markets and that any such violation of the law in this regard should be prosecuted.”

What’s more, Chilton said in an interview last week, that “one participant” in the silver market still controlled 35 percent of the silver market as recently as a few months ago, “enough to move prices,” he said, and well above the 10 percent “position limits” the commission has proposed to comply with Dodd-Frank financial reform law. Since that law’s passage last summer, the commodities exchanges have issued waivers permitting the ownership of silver positions above the limits the C.F.T.C. has proposed, and which were supposed to be in place by January of this year. Yet the waivers remain in place, and the big traders have not been penalized, much to Chilton’s frustration And the mystery deepens: last Thursday, the price of silver fell $1.50 per ounce in less than an hour before recovering. “This was robbery at its most obvious and most vindictive,” wrote Richard Guthrie, a London-based trader, in an e-mail to Chilton. “How many investors lost money and positions to the financial benefit of an elite few?”

It’s getting harder and harder to continue to brush off Andrew Maguire’s claims as the rantings of a rogue trader with a nutty online following. The Commodities Futures Trading Commission should immediately release the files from its investigation into the supposed manipulation of the silver market so the public can determine whether JPMorganChase and HSBC did anything illegal, with or without the help of the Fed. In addition, the commission should start enforcing the 10 percent threshold on silver positions it has proposed to comply with Dodd-Frank law. Basically, the other commissioners must join with Bart Chilton to do the job they are required to do: Protecting the sanctity of the markets and preventing the sorts of manipulation we’ve seen all too often.

.
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« Reply #146 on: May 16, 2011, 09:28:44 AM »

economist:

 Print edition Internet businesses
Another digital gold rush
Internet companies are booming again. Does that mean it is time to buy or to sell?
May 12th 2011 | BEIJING AND SAN FRANCISCO | from the print edition
 
PIER 38 is a vast, hangar-like structure, perched on San Francisco’s waterfront. Once a place where Chinese immigrants landed with picks and shovels, ready to build railways during California’s Gold Rush, the pier is now home to a host of entrepreneurs with smartphones and computers engaged in a race for internet riches. From their open-plan offices, the young people running start-ups with fashionably odd names such as NoiseToys, Adility and Trazzler can gaze at the fancy yachts moored nearby when they aren’t furiously tapping out lines of code.

“The speed of innovation is unlike anything we’ve seen before,” says Ryan Spoon, who runs Dogpatch Labs, an arm of a venture-capital firm that rents space to young companies at Pier 38. Like many other entrepreneurs, the tenants would love to follow firms such as Facebook and Zynga, a maker of hugely popular online games including Farmville, that have been thrust into the internet limelight in the space of a few short years.

Some of the most prominent start-ups are preparing for stockmarket listings or are being bought by big firms with deep pockets. On May 9th LinkedIn, a social network for professionals that took in revenue of $243m last year, set the terms of its imminent initial public offering (IPO) on the New York Stock Exchange (NYSE), which value it at up to $3.3 billion. The next day Microsoft said it was buying Skype, an internet calling and video service, for $8.5 billion (see article).
Start-ups
New York Stock Exchange
Other firms such as Groupon, which provides online coupons to its subscribers, are likely to go public soon. The return of big internet IPOs, rarities since a bubble in telecoms and internet stocks burst in 2000, and the resurgence of large mergers and acquisitions among technology firms is dividing opinion in the industry. Some veterans see a new bubble forming in the valuations of start-ups and a handful of more mature firms such as Twitter, which is still hunting for a satisfactory business model five years after the first tweet. More sanguine voices retort that many young companies have exciting prospects and that there are plenty of corporate buyers, such as Microsoft, with the money and confidence to snap up older internet firms still in private hands.

Technology, finance and China

Yet both sides agree that the internet world is being transformed by a number of powerful forces, three of which stand out. First, technological progress has made it much simpler and cheaper to try out myriad bright ideas for online businesses. Second, a new breed of rich investors has been keen to back those ideas. And, third, this boom is much more global than the last one; Chinese internet firms are causing as much excitement as American ones.

Start with technology. Moore’s law, which holds that the number of transistors that can be put on a single computer chip doubles roughly every 18 months, has continued to work its magic, leading to the proliferation of ever more capable and affordable consumer devices. Some of today’s tablet computers and smartphones are more powerful than personal computers were a decade ago. IDC, a research firm, estimates that around 450m smartphones will be shipped worldwide this year, up from 303m in 2010.

Moore’s law also underpins the growth of “cloud” services, such as Apple’s iTunes music store, which can be reached from almost any device, almost anywhere. Such services are hosted in data centres, the factories of the cloud, which are crammed with hundreds of thousands of servers, whose price has plunged as their processing power has soared. Everything is connected ever faster, with ever fewer wires.

These technological trends have given rise to new “platforms”—computing bases on which other companies can build services. Examples include operating systems for smartphones and social networks such as Facebook and LinkedIn. Some of them are used by hundreds of millions of people. And the platforms are generating oceans of data from smartphones, sensors and other devices.

These platforms are vast spaces of digital opportunity. Perhaps the most striking example of the innovation they have sparked is the outpouring of downloadable software applications, or “apps”, for smartphones and computers. Apple’s App Store, a mere three years old, offers more than 300,000 of them. Users of Facebook are installing them at a rate of 20m a day. Services such as Skype have also benefited from the spread of smart devices and lightning-fast connectivity.

Some excited people have likened this technological upheaval to the Cambrian explosion 500m years ago, when evolution on Earth speeded up in part because the cell had been perfected and standardised. They may be exaggerating. Even so, creating a web firm has become much easier. By tapping into cheap cloud-computing capacity and by using platforms to reach millions of potential customers, a company can be up and running for thousands of dollars rather than the millions needed in the 1990s.

Guardian angels

Thanks to the boom’s second driving force, finance, these companies have no shortage of eager backers. Although too small to interest many venture-capital firms, they are being fought over by wealthy individual investors, or “angels” in the venture industry’s jargon. Many of these financiers made their fortunes during the 1990s bubble and are eager to put their know-how and cash behind today’s tiny companies.

Some “super angels”, such as Aydin Senkut, a former Google employee who runs Felicis Ventures, and Mike Maples, a software entrepreneur who oversees a firm called Floodgate, are occasionally making bets comparable to those of conventional venture funds, which gather and invest money from a wide range of institutional investors. Individual investments of up to $1m are not uncommon. Sometimes angels are clubbing together to provide young firms with even larger sums.

Their cumulative impact is staggering. According to the Centre for Venture Research at the University of New Hampshire, angel investors in America pumped about $20 billion into young firms last year, up from $17.6 billion in 2009. That is not far off the $22 billion that America’s National Venture Capital Association says its members invested in 2010. Much of the angels’ money has gone to consumer-internet firms and makers of software apps.

The financing of more mature tech start-ups has also changed. Elite venture-capital firms such as Andreessen Horowitz and Kleiner Perkins Caufield & Byers have raised billions of dollars in new funds in the past year or so. Some of this money has been pumped into “late-stage” investments (eg, in Twitter and Skype), allowing companies to remain private and independent for longer than used to be the norm.

Venture firms are not the only ones with internet companies in their sights. Some would argue that it was DST, a Russian holding company now renamed Mail.ru, and a related investment fund, DST Global, that set off the boom. In 2009, when most investors in America were sitting on their hands, both poured hundreds of millions of dollars into fast-growing prospects there such as Facebook and Groupon. Those investments seem likely to pay off handsomely.

American hedge funds, private-equity firms and even some mutual funds have followed, falling over one another in pursuit of the shares of popular internet companies. Investment banks including Goldman Sachs and JPMorgan Chase have also set up funds to help rich clients buy stakes.

Their task has been made easier by the advent of secondary markets in America, such as SharesPost and SecondMarket, that allow professional investors to trade the equity of private companies more efficiently. They have also made it simpler for employees and angel investors to offload some shares—and have enabled the world at large to observe a remarkable rise in valuations (see chart 1).

American consumer-internet companies have not been the only beneficiaries of this flood of cash. The boom’s third driving force is the rapid globalisation of the industry. Europe, which has at long last developed an entrepreneurial ecosystem worthy of the name, is home to several impressive firms. These include Spotify, an Anglo-Swedish music-streaming service with more than 10m registered users, and Vente Privée, a French clothing discounter with annual revenue of some $1 billion.

Much more striking, however, is that the latest round of euphoria involves emerging markets that were mere spectators during the last one, above all China. The country boasts not only the world’s biggest online population, but also its fastest-growing. The number of internet users there will rise from 457m last year to more than 700m in 2015, according to the Boston Consulting Group (BCG). And the Chinese are no longer mostly playing games, but are diving into lots of other online activities, notably shopping. Between 2010 and 2015, predicts BCG, China’s e-commerce market will more than quadruple, from $71 billion to $305 billion—which could make it the world’s largest.

Such forecasts have stimulated plenty of venture capital, both foreign and domestic. Albeit with a dip in 2009, the amount raised by Chinese venture funds has grown sharply, rising from nearly $4 billion in 2006 to more than $11 billion in 2010 according to Zero2IPO, a research firm. The sum invested increased from $1.8 billion to nearly $5.4 billion. Much of this went into internet start-ups.

Investors have also been desperate for shares in Chinese companies listed on American stock exchanges (see table). Since the start of the year the share prices of the biggest of these firms have risen by more than a third, according to iChina Stock, a website. Baidu, China’s largest search engine, has seen its share price climb from about $60 to $150 in the past 12 months, taking its market capitalisation to nearly $50 billion. Tencent, which makes most of its money from online games, is worth about the same. Both are among the world’s top five internet firms by stockmarket value. The ten biggest Chinese companies have a combined worth of $150 billion, not much less than Google’s.

They tend to sparkle on their debuts. When Youku, China’s largest online-video company, listed its shares on December 8th its stock jumped by 161%, the biggest gain by a newcomer to the NYSE for five years. The share price of Dangdang, an online retailer floated on the same day, almost doubled. And on May 4th Renren, a social network, saw its share price rise by 29% on the first day of trading, though it has fallen back almost to where it started.

The experience of Chinese firms in America has encouraged other emerging-market internet companies to consider IPOs there. On the day LinkedIn revealed the terms of its offering, Yandex, a Russian search engine, said it would soon raise $1.1 billion by listing its shares on the tech-heavy NASDAQ stockmarket.

Those who think that talk of a new tech bubble is misleading point out that firms such as LinkedIn and Renren have proven business models and healthy revenues. Many internet firms that went public in the late 1990s could not say the same. Moreover, the price-earnings multiples at which other public companies in the technology sector are trading are nowhere near as frothy as they were before the last bubble burst in 2000. That should limit excesses in valuing private firms.

Bubble in the making?

This has led some venture capitalists to argue that 2011 may be more like 1995 than 1999: if a bubble is inflating, it is a long way from popping. So investors who shun internet firms now may be missing a great chance to mint money. Jeffrey Bussgang of Flybridge Capital Partners, a venture firm, notes that venture funds raised between 1995 and 1997 enjoyed stellar returns.

Others point to signs of bubbliness. For instance, some start-up firms are dangling multi-million-dollar pay packages in order to tempt star programmers from Google, Microsoft and other big companies. They are chasing scarce skills when the broader technology industry is on a roll. The NASDAQ index may be far below the heights of March 2000, but it has bounced back from the global downturn; and the Federal Reserve Bank of San Francisco’s Tech Pulse Index, which measures the vibrancy of America’s tech industry, is near its peak of 11 years ago (see chart 2).

There are also signs of irrational exuberance among some investors. Color, a photo-sharing and social-networking start-up, has been reportedly valued at around $100m by venture firms, even though it has an untested product in a crowded market. Competition among angel investors has helped drive up valuations of social-media start-ups by more than 50% in the past 12 months. Financiers are sometimes skimping on due diligence in the scramble to win deals. In China, too, the purported worth of young firms has risen breathtakingly fast—to an average of $15m-20m in first-round venture financings, which is expensive even by Silicon Valley’s standards.

The danger in all this is that investors lose sight of the risks to the value of internet companies. These are greatest in China. Competition there is intense and users are fickle. Moreover, Chinese firms must wrestle with thorny regulatory and political issues. The government has yet to shut down a listed web company and firms are usually masters of self-censorship. But any move against them could have broad repercussions for all Chinese internet stocks.

European and American internet start-ups do not face a similar threat. But they are still vulnerable to inflated expectations. “Every bubble is a game of musical chairs,” says Steve Blank, a former serial entrepreneur who teaches at Stanford. The trick is to sell or float companies just before the music stops and the bubble bursts. If some of the hopefuls of Pier 38 can do just that, they may one day be able to afford a yacht or two of their own.

from the print edition | Briefings2

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Crafty_Dog
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Posts: 29587


« Reply #147 on: April 08, 2012, 12:17:07 PM »

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CanisLatrans
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« Reply #148 on: April 08, 2012, 01:11:34 PM »

Anything that does not try to quantify the risk-adjusted return is bullshit.  Define the benchmark you are trying to meet or beat.

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If your object in INVESTING is to accumulate enough money to retire at a reasonably young age, then pay attention at Bogleheads.org.

« Last Edit: April 08, 2012, 01:15:37 PM by CanisLatrans » Logged

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