Reader Request - Black Box Trading

A reader of my blog, (JJ) who I would like to thank has taken time to read at least one of my posts, brought up a request for me to write about Black Box Trading and Statistical Arbitrage (Stat Arb). Now, I must be fully honest, my level of understanding under these two techniques is limited so I did a lot of research for this blog. I only dealt with a type of Black Box Trading once while working. It was primarily an "iceberg" trade. Black Box Trading, properly known as Algorithmic Trading, is the use of computers to enter buy and sell orders in the equity markets through electronic triggers. For any reader who was interested in starting up Black Box Trading, you may already see the first hurdle. This style of trading is commonly used by hedge and quantitative funds because they manage millions or billions of dollars in assets and have the practicalities of capturing small movements in regular trading. It may be used to enter orders before information has been fully received by human traders or to create liquidity by market makers. It may also be used to "iceberg" orders, a technique used by firms who require to buy or sell a large quantity of shares but want to limit market impact, thus divide the orders into smaller units and prevent volatility. The idea that one program can run a successful Algorithmic Trading style for many years is also false. According to an online post, the systematics of setting it up is enormous. The steps in the link will be costly, which present a second hurdle for start up for retail investors. The author of the post also points out that a regular PC does not have the capabilities to handle these tasks. Algorithmic Trading has also been quite controversial. High-Frequency Trading may require Black Box Trading systems and accounted for almost 75% of volume in the U.S. Markets in 2009. Many blame High-Frequency Trading for the volatility and crashes of 2008, as computer models sold off large quantities of stocks as markets and indices would touch key order entry levels. As these key levels were breached, computers would sell and eventually reach more key order entry levels, creating more selling by computer models. I could continue further with more points in my research about its advantages and disadvantages, but my main point throughout this blog was to inform my readers that Black Box Trading is not realistic for retail investors. JJ also wanted me to write about Statistical Arbitrage, but again, it requires a lot of data mining and is not practical. To quickly summarize Stat Arb, it requires a trader to purchase and short many securities (sometimes hundreds) in the same sector, region, industry, etc. This is done to eliminate beta, which is a numerical value that measures a stock's relative return against the market (A beta of 1 means the stock moves almost parallel to the market. A beta of 2 means the stock moves double the market. Negative beta occurs when a stock typically moves in the opposite direction), and other risks. Once this is done, the trader may go long the basket that is under performing and short the basket that is over performing. The theory is that stocks under performing will catch up to the rest of the market, and vice versa, and hopes that the profit on one side is better than the loss on the other side.

Economic Recovery Imminent

March 9,2009: The world's financial barometer, known as the stock market, would reach multi-year lows and all signs pointed to the Apocalypse. Major financial companies, such as Bear Sterns, Lehman Brothers, and Merril Lynch were all wiped off the face of the earth, and many other firms were close to bankruptcy as well. It took a huge bailout to save the rest back in the fall of 2008. Signs of a second Depression were here. Fast forward to March 9, 2010; there is emerging hope that an economic recovery is on the horizon, with many indicators already showing improved figures, such as retail sales and GDP growth. The markets in Asia, Europe, and Americas are now up at least 60 per cent since the fallout and investors who sold a year ago are grieving at the missed opportunities everyone knew existed. It is hard for the average person, especially in America, to see that a recovery has been in the works for nearly three quarters, with jobs still unattainable, income being slashed, and so much negativity all around, but the signs are here. When Obama took the reigns as President, he inherited a mess of an economy, and give him credit, he has made many controversial decisions which seem to be helping. Many people denied the economy would ever recover and that it would take years. However, those people discounted one major difference today compared to the Great Depression: The world is much more global and China and India are now major players in the world. I've written a few times since I started my blog that things are looking good. Rising commodities alongside a rising US dollar is a very strong indicator. GDP is up, manufacturing data positive, retail sales up, job cuts down, and just about anything else looking a little better. Although jobs have not yet been created to substantially reduce the unemployment rate, we have seen signs that employers are ready to invest in human and technological resources. To my readers who are in a bit of a rut, be patient. I may not have been alive for the Great Depression nor old enough to remember the Asian crisis, but I know that humanity never changes and history always repeats. Keep a positive outlook and have confidence in who you are. Retail sales will jump start hiring and I predict this will happen in the summer. Yes, it is a while away, but this is a slow recovery that requires human endurance. The strong will stick through it and have something proud to talk about. Monitor major leading indicators to stay informed. Pay attention to the stock market trends, consumer expectation reports, and housing permits. Remind yourself that employment is a lagging indicator and generally lags the economy's state about two or three quarters. The recession was considered over, by definition, at the end of 2009, so hopefully we are halfway through the lag.

Is Wayne Brady Racist?

Last fall, when I heard "Let's Make A Deal" would return, with Wayne Brady to host, I was ecstatic. Ever since "Whose Line Is It Anyways?" Brady has been one of my favourite television celebrities. The show itself is a re-make of Monte Hall's classic with a theme of audience members dressing up to win money, cars, trips, and furniture. But as I started to watch the show on a nearly daily basis, I noticed a common trend: The contestants were most often African-American females. Now, with Brady being African-American, I understand he may be more subconsciously inclined to choose contestants with the same ethnicity, after all, I am Asian-Canadian and attract myself to Asians as well, but the large difference was something I could not ignore. I went on the Internet to see if any other viewers made the same observations, and stumbled on a forum thread on Wayne Brady's Website. In the thread, the author provides evidence that Wayne Brady may be unknowingly racist. The author taped the last 14 episodes of the show prior to January 25, 2010 and noticed a startling statistic. "Wayne [chose] blacks and other ethnic groups (per capita) 92% of the time over whites," the author writes, "[W]e started counting the number of whites per blacks sitting on the program and he nearly every time chooses the blacks over the whites 9 to 1. (Per capita) Not only that, but when there is a CAR or Major prize involved, it is ALWAYS offered with the best odds to the black race!" One contestant on the show also offered support of this belief and posted the opinions of many hopefuls in line hoping to get tickets. "[E]veryone standing in the line the day that I was on the show was buzzing about how if we were black we'd have a much higher chance of getting picked for one of the good prizes." The show has received numerous boycotts from many viewers and the seemingly blatant prejudice has not yet stirred any controversy, but with more and more people having the same opinion, and the show celebrating its 100th episode today, we may see some major changes to the show in the near future. CBS has built a reputation on quality programming and is now number one in America. I am certain that CBS will make alterations to appease viewers. Keep the host; change the contestants system - Maybe a lottery system, like "The Price is Right."

Drivers and Investors Buy Ford

February U.S. auto sales were released today with major surprises. The most predictable surprise was Toyota's drop in sales, the only automaker to have a drop. This comes on the heels of a massive recall and halt in sales of many of its most popular vehicles. But, this was not the major story that headlined. Ford [F:NYSE], for the first time in 12 years, outsold General Motors and sales gained 43 per cent. For the record, they outsold GM by only about 300 vehicles. Ford's dramatic increase in sales stems from an increase in fleet sales (rental car companies). They represented 40 per cent of the sales for Ford this month, 10 per cent higher than Ford's 2009 average. The company was hit hard during the automaker crisis, with the stock dropping below $2 a share, but when the American car maker told the government it did not need a bailout, the stock rebounded and has continued to climb to over $12. Ford has released many new popular vehicles that are better on gas mileage and are eye-appealing. With the car-buying season approaching, Toyota, GM, and Chrysler offered 0% financing for 60 to 72 months to entice buyers, but Ford did not follow suit, indicating Ford's confidence in their product. CNBC analysts said that Ford's turn around presents a good investment, with guidance of $1.00 a share, and even as high as $1.35 by some analysts. If these figures can be sustained, the company's stock price should be near $20 in the next year. Profit-taking is expected this week, but buying opportunities for long-term holders is now.

The Toyota Conspiracy Theory

A few weeks ago I was watching BNN and in the final twenty minutes of trading, they had a panel discuss an interesting topic: A Toyota Conspiracy Theory. Oddly enough, the conspiracy theory had nothing to do with the cover-up, but the highly scrutinized media frenzy that has resulted from the recall. They mentioned an article that was brought up by a USA Today columnist. Compelling might be an overstatement, but the article brought forward some interesting points. The idea of this conspiracy theory is that US Government and Detroit is involved in a smear campaign, with hopes that GM usurps Toyota and regains their number one status. Blogging Stocks posted their own interpretation of the theory and have also brought up some strong evidence. The site writes "[T]he U.S. government is the majority shareholder in two auto companies, and is charged with regulating all auto companies... a successful turnaround of the U.S. auto industry that leads to minimal losses for taxpayers is an important political goal, not just a business one." Taxpayers have been upset about the bailout of the banks and automakers for quite some time, and a positive return would definitely calm the mood. The USA Today blog also points out that both Toyota and LaHood (US Transportation Secretary) believe that the recalled cars are safe to drive, yet Toyota must stop selling their vehicles. "Imagine a drug recall where the government stops sales in stores, but doesn't tell people to throw away the bottles in their medicine cabinets." Other components of the conspiracy theory is the unprecedented coverage by the US media and the attention of the US Government. The recall actually first occurred on November 7, 2009, yet coverage did not hit the front pages until January 2010, nearly two months after. Toyota's vehicles had been halted from sales in mid-December, according to December auto sales data released. I decided to check the current vehicle recall list and was able to obtain the January 2010 report from the The National Highway Traffic Safety Administration (NHTSA) website. There are currently 30 recalls, in which ten contain the phrase "could cause death." And yes, Toyota's recall is one of the ten, yet Toyota has received a lot of heat from the media and government for something that is considered user problematic. The idea of a conspiracy is far-fetched. I'm not a fan of conspiracy theories, but the three points above do make me question the motive of the Obama administration. Is it truly for consumer protection?