Investor.Gambler.Economist

Too Soon, Too Soon

2010-02-18T22:40:59Z

Oh chit. The Fed is raising the discount rate for emergency loans (Bloomberg). It's beginning to sound like my 2010 forecasts might be on the right track.

Too soon to call it, son.

Sometimes A Law is Not Really A Law

2010-01-29T20:18:21Z

Brad Delong has posed an excellent question. With today's release of quarterly GDP growth at 5.7%, we'd expect unemployment to go down per Okun's law. Unemployment figures, however, haven't gone down about 2% as predicted. Instead of 10% unemployment, it should be 8%. What's up?

First and foremost, I believe the relationship of Okun's law to still hold true. Calling it a law is a misnomer. It's more of a highly correlated relationship, but Okun's law sounds much better than Okun's Highly Correlated Relationship between GDP and unemployment. The lack of the predicted 2% drop in unemployment still falls well within the the range of the linear relationship. A little variance never hurt anybody.

The lack of corresponding drop between GDP and Unemployment doesn't mean Okun's Law is invalid, especially when it's still within the variance. For the same reason that the best quarterbacks still throw interceptions, we can still see figures like these. We shouldn't worry too much about such flukes unless they're systematic enough to create a pattern, or they're such complete weirdos that defy all expectations. The current GDP/unemployment relationship would not fit in either category.

Give the economy a few more quarters of growth and it would be hard for unemployment to resist falling.

2010 Forecasts

2010-01-05T14:07:14Z

My three months absence here is inexcusable. I've been trying to shake off a World of Warcraft addiction that has been detrimental to my trading. It created slippage in the neighborhood of about 25% reduction in my expected profits. I kept on playing the game ignoring my end of day signals.

The gaming addiction was that strong! It was akin to the character Sam in the movie Avatar where he was more focused on the "virtual" world than his actual word. All of that is mostly behind me now as I believe I've moved on. I feel like I've already mastered the game and there's not much out of it.

Looking back at my forecasts for 2009, I've been pretty accurate and profitable. The experts at the time, January 2009, mostly predicted our economy will not recover. The prediction markets pegged positive GDP growth for 2009 at about 33% chance.

Buying the Dow at 8500 and even 8000 as I suggested might not have been such a bad move right?

To put it simply, I do not expect the positive returns this year to be as nice as last year. You know how the S&P averages about 10% a year with a whole lot of variance year-by-year? This year feels like a 10% year.

To draw from many sports analogies, we're in a rebuilding year. We're trying to find what works and doesn't work for our team. There are a host of systematic weaknesses that need to be addressed and we need to focus on the positive aspects that grow our economy.

My general economic forecasts are great if you're managing a large sum of money or into that intellectual hot air.

To break it down into a more usable form, I predict the FOMC to set higher interest rates. The Fed doesn't exactly set rates. They have interest rate targets, but you know what I mean. Rates will go up this year. There's very little doubt in my mind about this.

To play off the higher interest rates, US dollars will be an attractive option for 2010. If you don't see the relationship between higher interest rates and currency, then there's not much I can do to help.

What I've discovered in my statistical analysis is that the price of gold is about 60% negatively correlated with the US Dollar. Correlation does not imply causality, but that's the nature of the gold/dollar relationship. Be careful though, because I lost a slight bit of money betting against gold last year, but luckily my stop loss kept me safe.

I'm going to wager this year that the rising interest rates will make the dollar rise and pop the air out of gold.

Fistful of Gold

2009-10-20T18:32:42Z

I've developed a weird addiction of sorts. I've been busy playing World of Warcraft. I've been neglecting my real life and this website. Have I mentioned that I love to play games? Maybe to the level of dependency issues. :)

There's a fistful of gaming gold in World of Warcraft. Each online gold is worth about $.01. I've spent maybe a 100 hours and I've made a total of $.15. Fistful of gold, indeed.

I've also been really making a fistful of gold in the market run up. For those who keep tab, I've been very bullish on the overall market for the past few weeks and it has paid out well. Well enough to take a nice long vacation.

I won't be writing up any meaningful evaluation of my wagers/predictions until the end of the year, but 2009 has been an unusually good year. I was wrong about there not being a V-shaped recovery. It was V-shaped. I would have predicted a more gradual ascension.

Everything is getting back to business as usual. For those concerned about the everyman unemployment, economic growth will take care of it. No need to lose that much sleep over it.

If I were to sum up any business sentiment, everything just feels like business as usual. Business as usual doesn't really make for good writing posts.

Couple of Updates

2009-10-06T09:08:42Z

*MGM slashes CityCenter condo prices by 30%. Good move. (Bloomberg)

*Just like that --poof-- I will have to officially end my two day recommendation of longing the S&P by today's closing price. I'll consider Monday's 1%+ gain good enough. According to my system (you should be suspect whenever anyone mentions system), the market inefficiency has been quickly corrected. This doesn't mean I'm short. I'm definitely still long, but that's for various reasons that I just don't want to get into right now.

*The possibility of war with Iran is very real. Intrade has a proxy-ish estimate of about 7%. By my definition, an air strike against Iran is war. That old saying about war being good for the economy was a fluke of an instance to describe World War II. Any war with Iran will be bad for this fragile market and economy.

*Fuck you Robert Benmosche. AIG's CEO is thumbing his nose at the US Government. (Money). The problems of moral hazard has just got worse. Freerolling on limited liability and government guaranteed programs has lead to an unchangeable culture of moral hazard. 2008 Credit Crisis, LTCM, Bear Stearns. We'll be seeing these events again, if Bob's attitude is representative of other executives.

Fear Coming Back to the Market

2009-10-04T23:41:11Z

Investors have more to fear besides the upcoming Halloween. The S&P is about 5% off from its short term highs. The VIX, fear index as some pundits like to call it, has gone up more than 10% in the past few weeks.

The Employment Situation and ISM numbers released on Thursday and Friday largely explain the broad based sell-off. Investors were expecting more.

I'm going to take a step away from the crowd and argue the numbers weren't bad. The ISM numbers showed growth in the service economy. It's not a large growth, but it's growth. Any growth, besides cancerous growth, is good growth. While it did not meet consensus expectations, from an economic perspective it's not too bad because it's still growth.

The unemployment figures leave me feeling a bit mixed. Until the GDP recovers about 2%-3% (Okun's Law) we can't really expect the unemployment figures to get much better. OTOH, unemployment numbers usually lag any recovery in the economy. Tricky.

The two not so stellar figures have been the catalyst for the fears of "too much too soon" to take hold and explains recent sell-off.

I'm going to officially step back from the crowd/market and put myself on the line. I believe, about 2 standard deviations believe :), the recent sell-off is a great time to get back in the markets. For obvious reasons I would rather not discuss any statistically significant patterns I discover in the market, but my contrarian system is flashing green. I love buying into fear, so I'm wagering now is a good time to long.

Disclosure: I'm long FXI and BRF. No guarantees. No refunds. You'll probably lose money from following random strangers on the internet.

MIT's Card Counting Team Business Plan

2009-10-02T20:26:58Z

The Boston Team aka MIT Team aka Strategic Investment card counting team's business plan has found its way on the internet.

Card counting teams are so 19 - 90's.

http://www.worldgameprotection.com/archive/2009-05/procedure_manual.pdf

If you scroll to the very bottom you can see the bankroll they were working with. $1.2 Million. Serious money.

College Problems With Gambling

2009-10-02T17:23:05Z

Colleges Often Turn a Blind Eye to Student Gambling Problems

The New York Times

Sometime last year, the University of Alabama got serious about raising awareness on campus of gambling addiction. For about a week, there were articles about the subject in the student paper and some talks on campus, Shannon Shorr, a business major, recalled.

After that, the campaign seemed to fade, Mr. Shorr said.

................... (NYT)

Kids in college have a lot more to worry about than studying for the calculus exam or which major to choose. Too many college students are taking a binge approach to everything including gambling.

They binge drink (well, they've always had). They binge eat. They binge spend and now some are binge gambling.

The funny thing about college is that was when I first learned how to gamble. Before I took a statistics course on blackjack card counting, I hated gambling. Even after I acquired an edge from this peculiar college course, I still adopted a negative view of the gaming industry.

I see the problems from gambling all the time. They prey on those with addictive propensities and rob them of their financial worth. Casinos wrap this distasteful behavior under the pretense of "entertainment". I can tell you right now, it's not fun to see the fish lose their rent money or money they were going to spend on clothes for their children.

I imagine it's worse for the majority of college students who pick up gambling. A little football betting or poker betting might seem harmless. Many students, I'm guessing over 95%, don't have the mental acuity and risk personality to succeed in gaming. Many will think they're smart enough to win in gambling, but that's just a disconnect with reality. The kids will lose a large portion of their young adult lives and for that, Universities should do something more.

China Takes Over the World p.15

2009-10-01T17:43:41Z

Happy 60th Birthday China.

When I watched the news clip with the massive number of people and choreography, I was a bit worried.

China's taking over of the world is a foregone conclusion. I can't say I'm not apprehensive about this, but they've decidedly earned it.

What Are My Odds?

2009-09-28T18:17:34Z

1 Day - 53%

5 Day - 55%

15 Day - 60%

30 Day - 62%

One thing winning gamblers and traders need to realize is the proliferation of fake systems. There are thousands of betting systems. My favorite system was a joke from a friend, "The secret to winning blackjack is to double after every loss".

There are even more voodoo systems for trading in the market.

The noise about fake winning strategies from television, newspapers, and books will make you deaf. The only way to be certain of a winning system is to subject it to valid hypothesis testing (i.e. avoid curve fitting, data mining, and selection bias).

A common misconception for testing systems is to assume the odds of calling the market correctly is 50/50.

50/50 is flat out wrong.

It's been said many times, "the market is a like casino rigged in your favor". If you randomly bought the S&P index on one day and sell it back the next day, you can expect to be in the black about 53% of the time. The chart above very roughly approximates the odds of the market based on the number of days. The average returns from when you're right is a lot less than from the average returns when you're wrong, but in terms of the number of times correctly the percentages above very roughly approximate the odds.

Knowing these odds, it's not surprising to find many long systems promising you the moon. Long systems should already have a built in positive advantage. It's a strong tide that already pushes you towards winning.

Odds are if someone is losing money in the markets after a few years they're doing something wrong.

MGM Bankruptcy Watch P.21

2009-09-25T18:09:57Z

Citycenter is set to open in December. Long siigghhhh. It's a tremendously wonderful thing that Citycenter is hiring thousands of new workers in these difficult times. Kudos for that.

Unfortunately, everyone seems to have the wool pulled over their eyes and think/hope the Citycenter complex can revitalize the Las Vegas market. (Time)

I'm telling you right now, it won't.

My Economist hat predicts the new development will bring a temporary spike in economic activity in the local area. Once the novelty of the grand opening wears off, Citycenter will still be susceptible to the larger downward macroeconomic forces. Any bump in the local block economy will face the greater downward pressure from changes in consumer attitude towards "Vegas Baby". People are starting to save more money, as measured by the US savings rate, and Vegas partying and gambling are the complete opposite of this trend.

How can new markets be created in a declining market? Opening more shops and more gambling tables will only serve to cannibalize the profits from the likes of Harrah's and Planet Hollywood.

I feel bad for the the thousands of people Citycenter recently hired. They should not count on any job security. I would not be surprised if there's a round of layoffs for hundreds of people within 6-9 months of the Grand Opening.

If the Las Vegas economy really wants to improve themselves without waiting years for the larger economy to recover, they should focus on other industries. Just a an idea, but Las Vegas is a giant desert with cheap labor and some minimal level of educated people. Solar power anyone?

A Glimpse of the Gambler

2009-09-20T05:27:20Z

It has been a while since The Gambler in me has been to the casino or made a wager. It's been about two weeks!

This is highly unusual considering that I make the bulk of my income from gambling. Maybe it's something to do with trading. In the past month, I've informed my higher ups that I'm giving up gambling to pursue being a full-time Investor. Giving up thousands of dollars a month to pursue an unknown is risky and dangerous, but my higher ups and I agree it's a smart move.

Being back at the casino was a recreational affair. Even though I've changed the amount of resources devoted to gambling, I still approached gambling from a professional perspective. I suppose I can never give up this way of thinking, because it's too deeply ingrained in me.

I'd like to walk my loyal readers through this professional perspective.

The first thing I do when I walk into a casino is to redeem my free slot play bonuses. This particular casino that I went to gives out free play for the stupidest things. Just go through any promotional fliers and dumpy local magazines and you'll probably find at least a $100 worth of free play a month.

Before I use my free slot play, I enter a free sports contest. The sports contest is a free weekly parlay card without any point spreads. The parlay was easy. Without any point spreads, I pick all the teams that are favored to win outright. I fill out a few more parlay cards than the casino would like, but they don't stop me. Each card is worth about $25 to $50 a week.

The funny thing about free slot play is that I never use them on slot machines. I walk on over to my favorite progressive video poker machines. The meters are pretty high today. I whip out my phone and load up my excel sheet. I punch in the values. The game is worth approximately 1.82% for about $50 an hour in addition to the free slot play that has been loaded onto my rewards card. $50 an hour isn't too bad. That's more than a lot of people make, but there's no seat available. The smarter than average local degenerates have locked down these machines. Too bad.

I walk on over to the hidden corner with the older machines. This particular video poker machine was made in the 90's and look it. There's no LCD display. The sounds sound like Nintendo midi sounds. I'm not too upset playing old machines, because I'm a bit of a retro video gamer myself. I can still beat the shit out of Mario Brothers in about 30 minutes. I run my free slot play through this particular machine and cash out the free money. The edge from this machine is about .15%, so I expected to get all my slot play out. Unfortunately, variance deals me a cruel hand and I only get half of the free money out. I'm complaining about only getting half of the free money that I'm suppose to be getting. :)

I make my rounds through the table games. While I'm doing my rounds, I'm keeping my ears open because there's a raffle contest going on every 15 minutes. The first prize is about $25000 and an extra $25000 for my trading stake wouldn't be too bad. I estimate the raffles to be only worth an extra $4. Surprisingly, this raffle was the most exciting part of the day. Little things.

I walk through the blackjack tables, the carnival game tables, and the poker tables. I'm hoping that my x-ray vision is good today and I can see some face down cards. After walking around the casino, it looks like I'll be dealing with the normal visible color spectrum. My x-ray vision isn't working and I will have to do things the hard way. Too bad. When I can see face down cards, I'm making the big bucks.

I make a quick mental note of all the blackjack tables. I hover over a freshly dealt blackjack table. I stand around and count the cards as they are being dealt. Too many low counts. Next table. Too many low counts. Next table. Okay, a few decent tables hovering around a count of +3 or +4. I win some. I lose some. The amount I win is slowly edging upwards.

One notable hand stands out. The count is +5 for a 2% return on investment. I sense this +5 hand is the last hand before the shuffle. I put a big bet out on the table. Everybody is staring at me. I am betting 30x bigger than what most of the people at this packed table are betting. Some people are holding their breaths as I'm about to play my hand. The women at the table think I'm risky. I give them my cool confident smile.

I get a a hand total of 11 and the dealer has a 4 showing. I grab an extra big bet and double down. I have two big bets on the table. The girl to the right of me shakes her head. I get a 4 for a total of 15. No problem. The dealer will bust with her 4.

The dealer flips an Ace. Draws a card. She gets a 3 for a soft 18. I lose both my bets. People at the table shake their heads at me. Too bad. I walk away in fake shame as the dealer shuffles.

I continue my card counting. Play a few more positive tables. The money again goes up and down with a slight positive upwards, so subtle that I'm probably imaging it.

I wait for the end of the raffle. I didn't win any of the raffles. I'm not surprised, because of the of the estimated 1 in 2500 chance.

I do my final accounting and I'm up a good amount today. Tired from all the walking I get back to my car and drive home alone.

Social Security is a Pyramid Scheme p.5

2009-09-12T16:43:14Z

Among the few things I genuinely detest in this world, one of them is biased news and the other is Jim Cramer. MSNBC has recent coverage about Jim's comments that social security is a ponzi scheme. (MSNBC)

Jim Cramer has called Social Security the largest Ponzi scheme in history. To an extent, he's making a valid comparison. Like a Ponzi scheme, Social Security pays its benefits out of new contributions, rather than out of investment returns.

I'd hate to agree with Jim, but he's right.

Unrelated Pause

2009-09-11T21:34:35Z

This is what's been consuming my life for the better part of the week. Well, in addition to trading, but that was backseat compared to this. Awesome game.

A little interesting fact, Ken Uston, an infamous card counter from back in the days actually wrote the strategy book on beating Pac Man. No kidding.

Whether people want to admit it or not, trading, gambling, and working are all games. It all revolves around making the right decisions.

I'll Have Some Pie

2009-09-03T16:54:47Z

Some humble pie. My stop loss on gold has been hit and I'm out of my losing position. On August 10th, I was short gold in DZZ at $20.53. Today it's at $18.72. I'll take the 9% loss on this position and cut it. My loss is much less than that, but for the sake of site consistency I'll go with the 9% figure.

Upon introspective reflection, I could have done some things differently.

I've previously backtested a number of technical systems for gold. My technical systems actually gave me a buy signal for gold. I went against these technical signals and followed a more macro approach. I am still of the firm opinion that gold is overpriced, but it can stay overpriced much longer than I have patience.

I hate technical systems with a passion. I know how the math works and I see some of the statistically significant results, but some measurements like stochastic and oscillators aren't grounded in much intuition. In this case, the technical signals were correct.

The lesson I'm taking away from this trade is that I can be right or I can make money. I might be right about gold one day, but that indeterminacy is not enough to make me any money right now.

Update: Uhh. Gold futures have just broken above their top Bollinger band. My backtests found a reversion when Gold touches either side of the band. The recent breakthroughs are technically a sell signal for Gold, with about a 1.1% expected return. Combined with my macro forecasts, now would be the better time to short gold. Would haves, should haves, and could haves. Loser talk. Even though macro and technical signals are aligned, I'd have to sleep on it.