Wednesday, February 20, 2013

Stocks climbing a wall of worry with lots to worry about

With stocks reaching new multi-year highs, it's time to do an update of Math and the market.  First, Bloomberg Businessweek with the headline and highlights of the trading day.

U.S. Stocks Rise to Five-Year Highs Amid Merger Optimism
U.S. stocks advanced, sending benchmark indexes to their highest levels in five years, on increasing optimism over dealmaking and a report showing rising investor confidence in Germany.
The Standard & Poor’s 500 Index increased 0.7 percent to 1,530.94 at 4 p.m. in New York. The Dow Jones Industrial Average advanced 53.91 points, or 0.4 percent, to 14,035.67. Both indexes closed at their highest levels since October 2007. About 6.5 billion shares exchanged hands on U.S. exchanges, 6.5 percent above the three-month average. U.S. equity markets were closed yesterday for the Presidents Day holiday.
The S&P 500 completed its seventh consecutive weekly advance on Feb. 15, climbing 0.1 percent for the five days amid optimism over corporate merger activity and better-than- estimated economic data. The benchmark gauge is 2.2 percent below its 2007 all-time high of 1,565.15, while the Dow is 0.9 percent from its record high of 14,164.53.
I might be wrong about what I said last time.
I'm wary of this being as good news as people think it is.  The last time I recall hearing so much optimism was in June 2005.  The news on the radio trumpted record home sales and prices.  I took it as a sign of a market top and immediately drove to the nearest real estate office to my home in the Irish Hills and listed my house for sale.  The house sold in April 2006 and closed in May 2006, just as the bottom was about to fall out.  That was good news for both me and the deer.  That experience makes me suspect we're near a market top for now and that the Dow is more likely to drop 1,000 points than it is to rise to a new nominal record.
The Dow still hasn't reached a new nominal record, so the market could still sputter out just short of the level, although I'm beginning to suspect it might just make it and then start declining as a result of the sequester that will result if the latest installment of the Satan Sandwich/Fiscal Bluff isn't resolved.

On the other hand, I still stand by my conclusion.
A lot of the fundamental issues are still there, including overconfidence, greed, and lack of regulation.
Follow over the jump for the latest research about these topics.

First, Mr. "Black Swan" himself in Wired.

Beware the Big Errors of ‘Big Data’
By Nassim N. Taleb
We’re more fooled by noise than ever before, and it’s because of a nasty phenomenon called “big data.” With big data, researchers have brought cherry-picking to an industrial level.

Modernity provides too many variables, but too little data per variable. So the spurious relationships grow much, much faster than real information.

In other words: Big data may mean more information, but it also means more false information.
Next, the expert whose articles I quoted in the previous installment.

Scientific American: Too Big to Succeed
By Chris Arnade
February 10, 2013
On December 20, 1994 Mexico’s newly installed president Ernesto Zedillo devalued the currency, the peso, by 15%. As a candidate he had said he would “defend the peso like a dog.” That day the peso went from 3.47, where it had been for a year, to 3.95 and the trading floors of Wall Street were filled with the sounds of barking dogs.

On that day I was in research working with the emerging markets trading desk of Salomon Brothers. They had invested heavily in Mexico, as had most of the major investment banks.

That afternoon the Salomon trading floor was giddy; the first drop in the peso had been profitable for the firm. That happiness was short-lived as it began to understand the complexity of its positions in Mexico.
Finally, a TEDxVienna talk by Dorian Crede that asks the question Are we smarter than credit rating agencies?

Dorian Credé is founder and chairman of Wikirating, the first non-profit community platform for credit ratings. He studied physics and mathematics and has a Master of Science from the Swiss Federal Institute of Technology (ETH Zurich), Switzerland. Since more than 12 years he is working in the IT and financial services industry.
The answer might just be yes, depending on how "we" is defined.

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