Archive for Dave

Brain Droppings – Markets In Turmoil

I’m told by several people much younger and wiser than me that the bottom is most certainly in. Perhaps – but being old and slow I tend to ponder these things. Alas, to have the certainty of youth is greatly missed after one’s long term memory fades and while one’s arteries become sclerotic with age.

It’s no surprise to me that the market has come off the highs as I have said repeatedly that I think the market is “expensive.” I was, however, surprised by speed of which it all happened this week. It’s not often we see 3% down days these last few years.

It makes sense we see a relief rally – perhaps as early as Monday. The $SPX RSI(14) closed in oversold territory at 24.84 and a host of other technical indicators support a bounce.

Still, after the carnage we haven’t made a lot of progress on getting valuations in line.


I’m very aware that paying attention to valuation is an activity reserved for only the old and infirm. I’m also really sure that when the market abandons valuation metrics they seem to all-of-a-sudden matter one day.

I don’t want to make an aggregation error here either. After all, it’s a market of stocks. The good news is that finally we’re seeing value in sectors that everyone seems to hate.

I was scolded today because I’m building a position in $MU. I think it’s cheap. Maybe it’s a value trap. That’s the problem with being old. You just can’t keep your wits about you. Still, there are more stocks I like today than I did a week ago.

The tone seems to have turned in this market. The reaction to the rather benign Fed minutes would have sent the market up 1% plus 3 months ago. For the record I don’t think this downdraft has anything to do with Fed policy. I think it’s a pure fundamental story – slowing growth, commodity deflation, earnings growth deceleration, etc.  Crazy growth stocks have been pummeled this week as well. I had the temerity to sell $NFLX call spreads after the stock hit $127. My only regret so far is that I didn’t do it in size. Oh well, you can’t hit ’em all.

It’s also noteworthy that the more times BTFD fails the less previous practitioners believe in it.

A fellow (a really old fellow) for whom I have great regard thinks that what we’re witnessing is a “time correction.” I’m not so sure. Usually a sideways correction happens when stocks trade in a range and wait for earnings to catch up. I’m not seeing that at all.  As always, I reserve the right to be wrong.

Anyhow, I’m thinking we have more work to do on the downside. Market moves are never in a straight line and the most violent rallies usually come in corrections or bear markets. We’ll see. In the mean time I’m nibbling on stuff many of you would think horrible. I’m looking to do more of it.

That’s how I do.


$AMZN – Back of the Bar Napkin Valuation

Of course it will be wrong but let’s take (generous) go at it.


Revenue CAGR for 10 years 17% (matches 2015 H1)

Net Margin in year 10 (up from the current .5% and otherwise completely pulled out of my ass) 3%

P/E at Year 10 30X

NPV discount rate 8%

2025 Estimated Net Income $9.87B

Market Cap at 30X $296.1B

NPV of Market Cap $137.2B

Present Fair Value of Stock $294.


Market Cycle Reflexivity Poll for 11/21/14 – 11/28/14

Last week’s poll results are here.

Here’s the poll covering the coming week. Remember that you need to vote each week for a good baseline to be developed to establish trend. Please forward this to as many people you know that are market participants. If you came here via a Twitter or Stocktwits link it would be a big help if you RT’s those to help us get the sample size up.

Also, this is specific to the U.S. equities market so please keep that in mind as you’re casting your vote.

Updates are periodically available on my Twitter feed @davebudge

Thanks for voting.

web polls

Market Cycle Reflexivity Poll Results for 11/20/14

The bears increased their lead this week. Here are the stats:

Poll ending 11/20 – Mean = 4.02 Median = 4.5 Mode = 5.

Poll ending 11/14 – Mean = 3.75 Median = 3.5 Mode = 5.

The sample size is still small with the N = 120 but  roughly a 47% increase in participation from last week.

I’m not sure what to make of the numbers and probably need several more weeks of data. Progress with participation needs to improve as well so tell your friends. I’ll have the new poll up sometime today.

Click the graph below to enlarge.



The General Theory of Reflexivity: A Primer For Today’s Market

The last two years of the U.S. stock market’s relentless bid has been, to say the least, at thing of wonder – especially for traders who have been around for more than a couple of decades. From the vantage point of many fundamental/macro analysts, it has repeatedly pushed the upper bounds of value and has yet to take time to even catch its breath. One can argue that the fundamentals looking forward combined with a very low interest rate environment and reduced share float through buybacks have efficiently discounted the risk premium.

That said, it’s hard to reconcile the momentum of this market in the context of 2% – 2.5% economic growth with virtually flat median household income and shallow consumer credit growth. The market has also walked straight through any and all geopolitical risks as “noise”. I cannot remember a market performing so strongly with such a backdrop. To the extent it is or is not supported by fundamentals, it seems appropriate to look to other theories which support the market’s recent momentum.

The basis of The General Theory of Reflexivity

Although Reflexivity Theory is widely attributed to George Soros, it was originally developed as a sociological construct by William Thomas in the 1920s, known as the Thomas theorem, and built upon by sociologist Robert Merton in the late 1940s. The outcome of their work was to define the idea of the “self-fulfilling prophecy” where in predictions often lead component actors to behave in ways that make the “prophecy” become true. As defined in Wikipedia:

“…that once a prediction or prophecy is made, actors may accommodate their behaviours and actions so that a statement that would have been false becomes true or, conversely, a statement that would have been true becomes false – as a consequence of the prediction or prophecy being made. The prophecy has a constitutive impact on the outcome or result, changing the outcome from what would otherwise have happened.”

In the 1950s, philosopher Karl Popper took up the idea in his treaties on fallibility (the uncertainty of knowledge) where the act of studying a scientific phenomenon can affect the outcome. That is where a young George Soros was introduced to the construct while Popper acted as his mentor at the London School of Economics.

Here is how Soros explained it in his speech at the Central European University in 2009:

“I can state the core idea in two relatively simple propositions. One is that in situations that have thinking participants, the participants’ view of the world is always partial and distorted. That is the principle of fallibility. The other is that these distorted views can influence the situation to which they relate because false views lead to inappropriate actions. That is the principle of reflexivity. For instance, treating drug addicts as criminals creates criminal behavior. It misconstrues the problem and interferes with the proper treatment of addicts. As another example, declaring that government is bad tends to make for bad government.”


The influence of Popper was profound on Soros’ thinking about economics putting into question the General Equilibrium Theory (GHT) that price is determined to move to equilibrium at the intersection of supply and demand. In modern finance, GHT is the underpinning of the Efficient Market Hypothesis and as well as the foundation of Modern Portfolio Theory. Conventional economics views markets as generally efficient in price discovery. Soros’ theory of economic reflexivity sees quite the opposite.

Equilibrium vs. Reflexivity

  • An increase in demand will lead to higher prices which will decrease demand
  • … rising prices is a sign to buy, hence further increasing price
  • A drop in supply will lead to higher prices which will increase supply
  • A falling price will lead many investors to sell, thus further reducing price

Source “Reflexivity in Social Systems, the Theories of George Soros, Stuart A. Umpleby, the George Washington University.


Feedback loops – the basis of all market reflexivity.

Soros defines both positive and negative feedback loops but the names are somewhat misleading. Positive loops work in moving prices both up and down. The defining characteristic is that they work to amplify disequilibrium. That is to say they move prices further from intrinsic value. Negative feedback loops are, as one can guess, actions that bring prices closer to intrinsic value or reality. Soros believes the common state of feedback is in positive loops.

There are several parts of human activity which contribute to positive feedback loops:

  • Humans act on imperfect information (fallibility.)
  • Bias reinforces bias and effects the course of events (bias can change the fundamentals.)
  • Positive feedback loops continue until such time as the deviation from the fundamentals are no longer tenable (causing instability before collapse.)

Soros often cites these historic phenomenon as his best examples:

  • The conglomerate boom of the 1960s and 1970s
  • The venture capital boom of the 1990s
  • The high tech bubble of 2000
  • FX markets over several time frames
  • The mortgage and housing bubble of 2006

There is a certain simplicity and common sense to all of this and, one can suppose, that trading strategies have been built upon this construct since the Buttonwood Agreement. The notion of fading a “crowded trade” is old and time tested. On the other hand, our human nature tends for us to ignore this in the heat of the market. So even with its simplicity it’s both hard to do and harder to replicate.

From an investing strategy it probably makes more sense to apply reflexivity principles to individual sectors since, usually, there are constant rotations.

In follow pieces I plan to look at reflexivity implications in other behavior models such as the shift from fundamental analysis to technical analysis, the notion of central banks effect on share values, the current “buyback” boom and the commodities markets.

In the meantime, it’s of great interest to me (and I hope others) where traders/investors think we might be in the overall stage of the broad market reflexivity cycle. I have created an ongoing poll that I plan to re-run each week to see if a trend can be established. For lack of a better description I think of it as a first derivative sentiment survey (but lets understand the irony of the reflexivity of the survey itself.) The sample sizes have thus far been too small to be very meaningful but, if it participation grows we may learn something from it.

You can find the survey here. I’ll also post periodic updates on my Twitter feed @davebudge.
Trade ‘em well this week.

Originally published at on 11/18/14

Market Cycle Reflexivity Poll for 11/14/14 – 11/21/14

Last week’s poll results are here.

Here’s the poll covering the coming week. Remember that you need to vote each week for a good baseline to be developed to establish trend. Please forward this to as many people you know that are market participants. If you came here via a Twitter or Stocktwits link it would be a big help if you RT’s those to help us get the sample size up.

Also, this is specific to the U.S. equities market so please keep that in mind as you’re casting your vote.

Updates are periodically available on my Twitter feed @davebudge

Thanks for voting!

web polls

Weekly Reflexivity Poll Results

Watching the votes come in over the week was interesting simply that in the small sample size I could see the various bull/bear camps vote when certain people would retweet my appeals to get people to vote. With a total vote count of 83 it’s rather to hard to divine any statistical meaningfulness other than how my limited following thinks about the subject matter.

I wonder if the lack of voting, given the push from some pretty high-profile traders, indicates a general lack of understanding of reflexivity or if people really don’t care. I assume that day traders are less inclined to think about market cycles than those with longer time frames.

There was also some mention of peoples’ dislike for George Soros. I assume that has to do with his politics – which is a rather silly logical fallacy as to the validity of the theory (not that I like much of Soros’ political thinking – but that’s another subject.) We’ll see if we can get better participation over the coming weeks.

Just as a reminder though, You need to vote every week in the new poll for a good baseline to be established. I’ll have a separate post up for that soon.

Still, as my friend Andrew Kassen pointed out:

Here are the numbers for what ever they’re worth.

mean = 3.75

median = 3.5

mode = 5


Comments are open if you care to say anything but to keep the trolls out you have to have one approved comment in the past for your words to show up. Ergo, if you write something it may take me a few hours to approve it. After that you’ll be able to comment freely. Be patient.

And thanks for participating.

Soros Market Reflexivity Cycle

George Soros developed theory on market cycles and sentiment where he describes what he calls “reflexivity.” I’m interested in understanding the trend of where traders and investors think we are on this scale regardless of their trade discipline. I plan to run a new poll every week starting on Fridays and ending on Thursdays of each week. Then I’ll plot the results against the $SPX.

It may take a few months to get the sample sizes meaningful so early results might be weak gauges. But I plan to keep doing it for a while to see if it catches on.

So, regardless of the the folly you might think of this. Please vote. I’m looking to establish a long term trend to gauge shifts in market sentiment.

I’ll put out a reminder on Twitter and Stockstwits.

A few things about the poll

1 – The system tries to let only one vote per poll (but this can be gamed.) Please don’t vote more than once.

2 – The poll is completely anonymous if you’re worried about trolls on Twitter, etc. giving you crap about your views.

3 – Don’t kill yourselves trying to come up with a correct answer. There isn’t one.

4 – Would love for you to share this with your friends.

5 – Thanks for voting.

Below are the market stages as Soros describes them. I have included a few in between levels for those how can’t quite decide. Please select one.


Extemporaneous Random Brain Seepage

I worry about shit.

Domestic Macro

I keep hearing that the US economy is on a solid growth trajectory but, frankly, I see a mixed picture at best. Yes, unemployment claims are down and (shitty) job creation looks good. Industrial capacity utilization is up and so is sentiment. So we have that.

On the other hand, CapEx is still not doing much except in commercial RE and, so far, the oil patch. But with pressure on oil prices the latter might fade off quite a bit. That needs to be watched pretty closely since YTD it has been about $200B and 1/3 of total domestic CapEx.

Wage growth still is crap and I don’t see reason to think it’s going up in any meaningful way. We seem to have become an economy selling each other burgers. I don’t think this is a permanent condition, yet I don’t see the corner we need to turn on in the immediate horizon.

Still, good economic news tends to come out of the penumbra (edge of shadows for the unfamiliar) of the economy so I might be surprised to the upside. For now I give the domestic outlook a big “meh”.

Global Macro

I’ve been saying since its inception that the Euro has a fatal design flaw. Nothing has changed my mind on that.  The lack of political unity of the EZ will continue to cause member nations to be at odds with each other. The clown candidate Grillo is pushing for the reinstatement of the Lira (let’s hope they divide the old currency by 10,000 if it ever comes back). Not that the joker pol has any real clout but it certainly speaks to the social mood that A) this guy is taken seriously and B) Italy’s re-adoption of a sovereign currency actually makes sense on some level.

And then there’s the Germans with the constant teutonic refrain of “No” to the ECB.

I can’t predict the outcome of if/when the whole EU experiment fails but I’m inclined to think it comes with a shit storm if it does. Just something to keep an eye on.

In the mean time almost the entire EU economy could be headed into a triple-dip recession. I can’t image that there’s not some significant spill-over into the US economy.

While all this is going on the Abe economy continues to suck. Sure, like everywhere else in the world, it’s a mixed picture. But putting up a big tax increase while trying to QE your way into lift-off velocity seems deeply conflicted. And the BOJ’s Kuroda is starting to worry about the hammering of the Yen even though he has more than a large hand in making it. Once a bolder starts rolling downhill it can be hard to stop.

China has been telling us that they have a handle on defusing the trigger on their shadow banking debt bomb. Reminds me a lot of “the sub-prime crises is largely contained” kind of talk. The good thing is that the Chinese don’t need Congress to approve any bail-out.  The Chinese government is the greatest Keynesian machine in the history of the world (if you know me you’ll understand that’s not a complement) insofar as they figure out ways to build unproductive assets on a magnificent scale. Off the top of my head I can’t remember the hedgie who said (Chanos?) that China is the only country in the world that knows their annual GDP on January 1st. At some point, though, it shows up as a dead weight loss and kills productivity. I think Chinese debt is a bigger issue than the market has discounted for. Time will tell.

Please Shut the Fuck Up!

I spent the better part of Thursday and Friday scraping my brains off the wall as the various central bankers were shooting their mouths off and confusing the market. I wasn’t alone and it’s good to see some actual smart person confirm my outrage. Kevin Ferry at The Contrarian Corner went ape shit on douche-bag Fed backtracking. Read the whole thing but here’s a bit that sums up the mood.

Remarkably, we are to believe that a sudden 100 BP shift in the color coded Eurodollars over a month and a 450k drop in open interest -IN A DAY ! – resulted in no P/L damage to anyone. We are going out on a limb here..Somebody got hurt…BAD. We’ll find out who and how bad over the next few months.

Dysfunctional markets are driven by liquidation and It’s always about the positions. I’d love to see a damaged speculator sue the Fed for following their guidance. Now lets see who wants to come back and play again.

I’d love to see it too but it’s little more than the fanciful thoughts of the angry.

By now the market is starting to learn that the term “Forward guidance” means part “we have no fucking idea what we’re going to do” and part “we think we can jawbone our way out the the structural imbalances we’ve created.”

The problem with the those people talking at all is that their thinking out loud isn’t guidance it’s bullshit and little more than speculation sauced up with a large serving of unearned credibility.  What we’re left with is a market that is confused and makes far too many fucking decisions on the moves of monetary policy instead of plain old supply/demand business modeling.

I’m not smart enough to know what the outcome of this big money experiment will be (and anyone who says they do is quite full of shit.) But I do know that sending conflicting signals to the market is probably the opposite of what they (only?) imagine to be the benefits of “forward guidance.”

As polemics go I’m probably only getting started on this screed. I’ll save you all and stop here. Understand, though, I’m a long-time seasoned Fed watcher and I’ve never seen this type of communication incompetence in my life.


The question remains whether the markets will go up or down from here. The answer is “yes.” I’ve made my bets to the downside but if I had a nickle for every time I’ve been wrong I’d be rich.

All I can do is what I do best and outline the risks, buy cheap assets and sell expensive ones.

My TA pals are doing yeoman’s work these days trying to find an edge in a market structure we haven’t seen for a couple of years. There are enough on both sides of the trade that I’m forced to pay less attention to technicals here since I get conflicting opinions from people for which I have major respect.   As my friend Andrew Kassen points out, sometimes TA causes apophenia. Too many ink blots does little more than confuse my feeble mind so I’m going back to my (often wrong) big picture stuff.

To sum it all up I have just to quote Hill Street Blues; Be careful out there.

The Power Of Saving

I love that the term YOLO (you only live once) has become part of the modern zeitgeist. Yes, by all means, carpe diem! The problem, of course, is that the one time you live may end up being a very, very long time.

Members of the financial community take for granted time value of money mathematics. My experience, however, informs me that a striking minority of people really understand it’s power.

If you or your kids have a long time horizon, little spending choices can make a huge difference to long term savings.

Here are some examples to play with to show how saving will reflect in the long run with just a wee bit of sacrifice. Plug them into the savings calculator.

1 latte a day at $3.50 = $105/mo
1 pack of cigarettes a day at $6 = $180/mo.
1 cocktail a day at a bar at $5.00 = $150/mo.
A $300/mo reduction on housing expense

You can think of more (lots more) I’m sure. If I had young kids I’d be pounding this stuff into their brains starting at about age 10 (OK, I have but only with limited success.) You should too.

For any time horizon over 20 years I think 7% is a good estimate for a stock portfolio. Play with it. Then forward it to every kid on the planet.

[calc id=2110]