Oil beginning to threaten SIFs

nitro · Mar 4, 2008

On an esoteric note, I have come to the conclusion that the hardest part of modeling is transitivity, transitivity in the mathematical term.

You can either make the model non-linear, or you can "flatten" (linearize) the model and synthesize non-linear correlates. Both assume that transitive relations hold.

That is why only the most expert modeler can make neural networks work, imo.

nitro

nitro · Mar 6, 2008

I would like to share something that Emanual Derman wrote.

This post really resonates with me:

Why Models Work [?]
Posted At : August 8, 2006 3:37 AM | Posted By : Emanuel Derman
Related Categories: Models
A student at another university recently sent me a question which I've often wondered about myself:

"Any introductory economics course in college will introduce the student to simple supply and demand curves; the forces of the market that determine the price of a good. If that is the case, why is there such an effort in pricing financial instruments or (as you mention in one of your interviews) trying to understand the price of a stock? Shouldnât these prices simply be dictated by the supply and demand of the market?"

Off the bat, I had two answers.

1. The world, physical or mental, doesnât just have to have a description on only one level. You can describe water as a bunch of molecules or as a liquid or as something without which your body dies. All descriptions are true. Similarly you can think of a person as chemistry or biology or as a mind and a body, and all of those have some validity. It depends what facets of the person you want to talk about. So far this argument isnât an argument about why the financial laws are right, but rather about why they donât have to be wrong.

2. More deeply, people who supply or demand often themselves use various kinds of models to figure out value. For example, when you buy a house you first look at the market's implied cost per square foot and then see if that produces a reasonable estimate of the value of the house you're interested in. Then you adjust the price about that theoretical value. In other words, price per square foot is a model, like yield to maturity for bonds, that many of the participants in the market are using, some more rigorously, some more intuitively.

In the same way, the supply and demand for options probably depend on intuitive estimates of future volatility, and then those prices lead to an implied volatility that does indeed reflect estimates of future volatility. People, even naÃ¯ve people, are often using some version of the financial strategists sophisticated model too.

Supply and demand is one way of looking at things; models are a complementary view of the same phenomenon. Often, but not always, they are related, not in conflict. Fischer Black once said that the market is efficient when prices are with a factor of 1/2 and 2 of the fair value.....

One other thing I came back to add: Models are very useful when they are the only way to communicate value, and then drive supply and demand for financial assets. The value of an option is hard to estimate, almost impossible, without a model. Black-Scholes takes a linear quantity like volatility, which you can estimate with intuition and thought, and translates it into a nonlinear price, which you couldn't.
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nitro · Mar 6, 2008

SPX in grave grave danger of retesting lows of ~1270.

I would not want to be long into tomorrow morning, and certainly not the weekend.

For the longer term investor, buy tiny shares of good companies the whole way.

nitro

nitro · Mar 6, 2008

Taking profits in FCX here is prudent imo, on at least 1/2.

nitro

nitro · Mar 7, 2008

The reaction of NQ to the job loss number is interesting. NQ has been resisting the selloff. There is some rotation from some commodities to tech.

Imo, even as (especially as ? ) an investor, you have to put substantial buy orders at 1275 SPX in those companies that you have been adding with tiny shares the whole way down. It is the disciplined thing to do. You may get run over, but that can happen at any time, and you don't get odds like this every day.

SIFs will probably bounce pretty hard back on the open maybe even go green. But the time from 1:30 CST to the close, watch out.

If we lose 1270, Aooooooooga, Aooooooga, DIVE, DIVE.

nitro

nitro · Mar 7, 2008

Odds approaching 100% of a retest of 1270 SPX. Buy orders in at 1275 SPX. If we lose 1270, we all get run over, and I take my loss.

FCX a bit overdone to the downside.

nitro

nitro · Mar 7, 2008

"To GLOBEX traders:
Fri Mar 7 14:48:29 2008 EST

Globex is reporting market data problems, they are currently working to resolve the issue"

nitro

nitro · Mar 10, 2008

Rumors of non-scheduled rate cuts floating around. While the market would likely initially rally on that news, imo it would realize that most of the bullets the FED has in that coordinate would be close to zero. It would likely then selloff, probably very hard and very fast.

Watch out for stocks like IBM. It has been very strong recently, but in a selloff, IBM will get pulverized because it is trading far above fair value. It is in the cross hairs of the index programs.

SPX at Fridays low. In grave danger of retest.

nitro

limitdown · Mar 10, 2008

Quote from nitro:

IMO, oil at $72 now has a affect-the-FED delta that has to be strongly considered. Imo every dollar higher for oil from here on raises the implied rates as measured by FFFs.

If we get inflationary numbers from the jobs report, and bonds sell off, SIFs may run into a strong headwind, even into earnings.

Put QM and ZN on your screens.

nitro
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care to update these projections,

now that oil is approaching $110 US/bbl, with the blessings of the Oil Administration (not necessarily the same as the Bush Administration)....?

nitro · Mar 10, 2008

Quote from limitdown:

care to update these projections,

now that oil is approaching $110 US/bbl, with the blessings of the Oil Administration (not necessarily the same as the Bush Administration)....?
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Oil goes to $110 at this point, or a touch below. Then first support is 106, then 100. I think it sells off into both of those once the $110 target is reached, unless the FED hints that rates go to zero, in which case it goes to 115-120.

Oil is going higher not so much on supply/demand, as it is a place to hide money that is affected by US inflationary pressures created by FED cuts, imo.

People have been selling the short end of the IR curve and making easy money. That dance is close to being done. Imo, expect the long end of the curve to come in a little bit as inflation pressures ease, and the short end of the curve to stabilize or go higher in the next six months as the FED past rate cuts start to take effect to stimulate the economy, and the FED starts talking about taking back some of the cuts.

IBM's success in particular and tech in general has been on the back of FED easing. Be careful with IBM and tech in general when the FED starts taking those cuts back.

nitro