Monthly Archives: November 2010

This Market Sucks!! Nothing to Buy

Oh, well.  How about dinner and a movie????:

Sometimes we make this game too damn hard!!!!

Update:   Since I absolutely top-ticked both CMG and NFLX (that is extremely hard to do) let’s try again .

What I meant was, how about a new outfit from Abercrombie (ANF)?some cool kicks (DECK),  and some delicious hot coffee (GMCR)?

South Side Book Review: Stick to Your Guns

Not a bad day for the South Side book which closed up $7,000 with the market down 80 basis points.  The outperformance in our portfolio can be attributed to several key factors.  First, we decided to short an additional $1.4mm in the overnight session to hedge against market risk.  This proved to be a critical move as the futures sold off in the hours preceding the market open, allowing us to cover around S4 at 1174.75.  Next, we saw certain names in our portfolio outperform the market such as OPEN and TGT.  The day was hallmarked by strong stocks continue to rally throughout the session as money rotated out of laggards, most notably Bank of America.  Finally, we held a relatively large portfolio into the last hour of the day, expecting to see an asset allocation rally take hold.  Unfortunately, this never materialized as the futures dropped approximately 4 handles in the last half hour.  Although we gave back a sizable portion of our positive P&L, I learned that you have to be willing to take a bet when operating from a position of strength.  Had the market rallied as we expected, we would have been perfectly positioned to greatly increase our profits.  The lesson of the day is to stick to the plan you believe in, understand all of the risks, and always have a contingency plan prepared if your trade fails to materialize.

Lack of a Hacking Hiatus

It’s been all over the news. The infamous “WiKiLeaks”.

However, the U.S. Government (and other large institutions) don’t seem to be the only victims of hacking this week. Cyber Monday, which was the result of a successful “Black Friday”, seemed to open the door for Hackers as well. While consumers were out shopping for on-line deals yesterday, Hackers were out shopping for the same customers’ personal banking information and more. Trojan software, which are installed on consumer computers without them knowing, are used to mimic legitimate sites and capture log-ins, passwords, and other pertinent information.

According to some hackers, “every day is a Cyber Monday” when it comes to hacking and obtaining one’s personal information off the net. Sales for this type of information vary from as low as $1 to as high as $1,000 per name (which all include the billing information, bank account log in, address, credit card number & 3-digit code of these consumers). A higher Black Market Price is usually placed on the personal information of the wealthy and super-rich.

Fortunately, people and on-line vendors have smartened up when it comes to “phishing” and are taking additional measures to secure sites and teach consumers how to protect themselves about Cybercrime.  And although it is out there, the demand for this type of information is far less than it’s supply at this moment. One of the reasons why information is still being sold at $1-$2 a pop.

More about Me

To spice up my blog a bit, I will add a few more details about myself.

I love gambling…I play blackjack, and in learning craps and poker.  I’ve been to Vegas twice and am going again for New Years this year.  I’m not sure by how much, but I am up probably a few thousand playing blackjack over the course of my gambling career (I don’t play with a ton of money, so I would say this is pretty good).

I also play golf and tennis, and am currently assistant coaching for the Cornell Varsity Volleyball team.

I’m from St. Louis, MO (or the dirty South)…home of Nelly and the Arch!

I enjoy reading Ayn Rand, and could be described as quasi-liberatarian.

I enjoy learning about quant trading strategies, but also like doing fundamental analysis.  I really like more macro perspectives, which is why I think basic materials will be a good sector for me, as commodities seem to be very affected by macro moves.

In the future, I hope to be working in S&T in New York City.

You can also learn a bit more about me via:

Will End of Month Trading Help Boost Stocks or Push Them Even Lower?

Morning Notes
- Weakness in the pre market, erasing much of yesterday’s late day rally
- S&P futures down about 11 handles from FV and continue to press lower
- Euro seeing even further weakness today
- Eurozone debt concerns still appear to be one of the main culprits for the mkt weakness
- European markets are holding up better than Asian markets did
- Nikkei closed down nearly 2%;
- Strength in yen added pressure to Nikkei
- There are still concerns around China tightening their monetary policy
- A few items on the economic calendar today: Case Shiller @ 9a ET; Chicago PMI @ 9:45a; Consumer Confidence (CB) @ 10a
- Also note that today is the last day of the month so that may add another dimension (volatility?) to the trading session

Are they being taken out or not?

I want to discuss the action we saw in STX today and alternate action we saw once the stock was halted.  For those of you who do not know, STX is a name that has been subject to a lot of Private Equity speculation and M&A chatter for month’s and the stock was halted after the bell.   The immediate thought on the desk was Seagate is about to be taken out and we looked to buy comps.  Unfortunately when the news finally hit the tape STX said that they would be terminating private equity discussions and both STX and WDC started trading a bit lower.

How could have we foreseen this coming?

1)  The news over the past weeks was that STX had slowly been discontinuing talks with PE firms.

2)  There was a story out in the NY Post Friday that Samsung, Hitachi, or Toshiba could see STX as a strategic play.

3)  This news was sold into and the stock did not rally today.

4)  Once this news came out WDC (the only other HDD US listed pure play) was trading up less than 1%, if traders had faith or were hearing positive chatter that STX was going to be taken out WDC would have been up much more that 80 bps.

5)  You didn’t have to pay up for other rumored M&A names: YHOO, SYMC, BCSI, and ADBE were all trading within a few pennies of where they closed.

If you put the piece’s together and took a step back the fact’s did not say STX would be taken out. So for the next time, when a stock gets halted and not one of the other take out names are reacting, it’s probably best to stay off the keys.

mini Lloyd vs. mini Steve

Tickle-Me-Elmo can go suck a lemon.  The hottest dolls this holiday season are Steve and Lloyd; err maybe just Lloyd.  After an initial batch of 300 sold, Apple couldn’t stand to have their founder exploited in miniature and sent Chinese toy manufacturer, M.I.C. Gadget, a cease and desist order.  Little Lloyd, however, can still be yours for $100 at  In many ways Steve and Lloyd are each other’s foils - Steve worshiped by the masses, Lloyd not; Lloyd changes his clothes, Steve doesn’t; and maybe, as evidenced by this latest figurine fiasco, Lloyd is a little more comfortable with self-promotion.

Trading Off Correlations Between European and U.S. Markets

Tracking the European market closes is a study that I started several months ago and one that I have revisited a few times since then.  I have primarily taken a look at correlations between each of the major European indices and the S&P futures.  I did previously write a blog on this analysis back in September, but to recap and update my findings, I will start with the correlations between the European and U.S. markets over a few different time frames:

Note: The STOXX is an index of 50 blue chip European stocks and hence is a broad representation of the European market, as opposed to the FTSE (UK), DAX (Germany), and CAC (France).  The above data confirms that there is definitely a large correlation between the U.S. market and the European bourses.  One point that I will mention is that we see a noticeable breakdown in the correlation between the STOXX and the S&P since January 2010.  This drop is mostly attributable to the performance of the DAX.  I broke the 2010 data further by month:

The last time I ran this study at the end of September all of the correlations remained high, but those numbers of dropped off since and now we are hovering around the 0.80 level.  Similar to the concept of pairs trading, I believe you can use these instances when the correlations break down as trading opportunities.  For example, back in March of this year the correlations between the two regions started coming down, and this move was confirmed in the following month in April when we essentially became uncorrelated.  The last few days in April/beginning of May was the start of the sell off in the market so perhaps we could have interpreted the correlation breakdown as a leading indicator to the impending sell off.  Now shifting the focus to the past couple of months, we are beginning to see that the correlations are in fact backing off again.  The October numbers may have been telling of the pull back in the market that we saw in early November.  Having said that, looking at the month to date correlation for November, I would say that I’m more inclined to be on the short side.

I have revised my spreadsheet analysis to calculate probabilities of the S&P futures closing up or down a certain amount of basis points based on where Europe closes.  This functionality will provide more value on an intraday basis.  Below is a snapshot of the model:

Given that we are most correlated with the FTSE, I am using this index as the basis for comparison.  The yellow cells are the input fields.  There are two separate scenarios for up days and down days.  The “FTSE % Chg” denotes where the FTSE closed on the day.  If it ended green on the day, the left column (labeled “Up Days”) is used and vice versa for down days.  The “S&P % Chg” is a threshold level that is arbitrarily chosen.  The input for this field is interpreted as follows: if the FTSE closes up x%, then what is the probability of the S&P futures closing up y%?  The y variable in this case is what you would input for the “S&P % Chg” field.  So for instance, you could choose to use 0.00% to calculate the odds of the S&P closing green on the day when the FTSE closes up x%.  Perhaps more useful would be to input where the market is currently trading into this “S&P % Chg” field to view the odds of the market closing above or below its current level (the odds are given as an output at the bottom).

So in sum, I would track the European markets in order to view correlations, and particularly to look for breakdowns, between their markets and the S&P.  Trading off these correlations is parallel to the concept of pairs trading, shorting one and going long the other when we see a divergence.  Also, using this data to calculate probabilities of the S&P closing above or below a certain level based on where the European markets closed may be a useful tool to employ on an intraday basis.

Dear Cornell Bloggers

Dear Cornell Bloggers,
Over the past week or so I have read several of your blogs and I have come to a conclusion. I realized that I could have stopped after reading the first entry and I would have essentially read every single blog. They are identical. Sadly, I don’t feel as though I know any of you any better or have any idea what your goals or aspirations are. Instead of writing about what you believe is expected of you, write about a topic you are actually interested in. Don’t be afraid to be opinionated or controversial; if you need any proof of this simply read Kandace’s blog regarding the deadly effectiveness of Four Loko or witness Jeff’s nude photo of Kim Jong-Il. Recognize the fact that Hedge Fund LIVE is building a financial community and our community is strengthened by a wider variety of perspectives. I look forward to seeing your contributions to the collective intelligence and working with you in the future.

-Zachary D. Guterman

Markets Give Up Early Gains

Morning Notes

-       Ireland bailout package details finalized over the weekend (bailout for ~85B EUR, or $113B)

-       European markets down this morning; they have given up their early gains

-       Euro down as well

-       Focus still is on other nations with debt problems; yields on Spanish, Portuguese, Italian, and Hungarian sov debt have been rising

-       Nikkei was up, making five month highs in the o/n

-       Hang Seng up 1.26%

-       Tensions b/w N.Korea and S.Korea still in focus

-       Treasuries up (strength attributed to flight to safety play as European debt concerns still linger) along with the dollar

-       S&P futures down small, also giving up early gains like the European bourses have; on the R3 sell pivot signal in the pre

-       Retail stocks in focus today after the Black Friday weekend; most reports suggest positive outcome

-       Only item on economic calendar for today is the Dallas Fed Manufacturing Activity at 10:30a