A candid meeting of minds about subjects varying from making money in the markets to the vagaries of the human psyche to the philosophical aspects of man and much more...
Sunday, May 26, 2013
Sunday, May 12, 2013
Meeting Minutes
We had an enjoyable and multi-topic meeting at The Olive
Garden. We had 4 attendees: (from left
to right) Tommy Schultze, VJ Arjan, RJ Tang, and Jeff Harrington.
Sell In May?
We
started the meeting by discussing whether the age-old Wall Street adage,
"Sell in May and go away", applies to the current market environment.
Jeff
Harrington begs to differ. The upward momentum
of the market is very strong and many key economic indicators, housing for
example, are finally becoming more positive.
This is not to also mention record corporate profits which have even
spurred stock buybacks by companies like Apple, Home Depot, and IBM.
Jeff
also argues that the availability of cheap money via the easy monetary policies
by the central banks in the United States, Japan, and the United Kingdom is a
constant stimulant while it is occurring.
What may happen after the cheap money no longer floods the market and
whether the market will have strong enough legs to keep going, will have to be
seen.
Big Data
After being turned on to Big Data in the previous meeting, VJ Arjan has done some more research on this incredible phenomenon.
Big
Data is the analysis of large amounts of data to find patterns or trends that
can lead to conclusions about the data set.
There is a tremendously insightful BBC documentary called "The Age
of Big Data" (attached below for your viewing) that discussed how the Los
Angeles Police Department uses Big Data to literally predict crime before it
happens. Note this not only involves the
space component, in other words where the crime will happen, but the time
component as well, when the crime will happen.
The implications of this remarkable ability, in VJ's opinion, are
paradigm-shifting.
Tommy
Schultze went on to say how given the constant stream of information coming not
only from the internet, but from people's mobile devices, the art of using Big
Data hasn't even really taken off and the future use of this ability will be almost
frightening.
Tommy
mentioned that the logic behind Big Data is similar to that of an earthquake in
that once an earthquake occurs, there are various after shocks that occur near
the epicenter - and these after shocks can be modelled with mathematical
precision.
Tommy
went further to mention that Big Data is being used, by companies like Klout,
in social networking to specifically target a certain market.
Here is the BBC documentary for your viewing, prepare to be blown away:
VJ was explaining exactly how mortgage backed
securities work and the risks and rewards inherent in the system.
There
are principally 3 entities involved: the investor, the lender/servicer, and the
consumer. The investor we'll assume for
simplicity purposes is Fannie Mae and Freddie Mac; the lender/servicer is any
of the large banks; and the consumer is well the borrower of the money.
When
a loan is originated by a lender, it is sold on the secondary market to
investors like Fannie Mae and Freddie Mac for a few percentages of the loan as
well as rights to service the loan, which will be explained below. The consumer then pays the lender the
mortgage payment and the interest minus the small servicing fee that the lender
pockets goes to the investors. So the
investor is in a waiting period to receive $X amount of interest before
breaking even on their fee to the lender.
However,
if the consumer defaults on the loan, the lender is given a chance to prove the
loan was not lent in a negligent fashion and if they cannot prove that, (here
is the key) they have to buy back the loan from the investor.
From
a lenders standpoint, liquidity is key for them and buybacks can quickly wipe
out a lender if there are many of them.
This led to the rapid demise of many lenders and brokers during the
Crash of 2008.
If
there are no buybacks, then being in the lending business will be very, very
profitable, provided one's operational expenses are well kept. Below are the mortgage-backed security
rates. The different above 100 and the
rate is what is pocked by the lender. In
other words, in the example below, a lender that sells a 30 year fixed at 3.5%
to Fannie Mae would pocket 5.18 percent of the loan amount originated when the
loan is sold in the secondary market.
MBS/Treasury
Markets (MortgageNewsDaily.com
FNMA
3.5 105-18 (-0-18)
GNMA
3.5 107-23 (-0-19)
FHLMC
3.5 105-11 (-0-21)
»
MBS Pricing Prices as of: 05/10/13 3:30PM
Boston Marathon Tragedy
On April 15th, two pressure cooker bombs exploded at the Boston Marathon, killing 3 people and injuring 264. The suspects, one of whom later died in a gun battle with the police, were 2 young immigrants from Chechnya. It is alledged that they had no ties to any official extremist group and were self-radicalized.
The
moment this occurred, VJ was reminded of what Kevin Day once said at our
previous meetings (June 2011) that due to the ease of technological
accessibility, ordinary people who want to voice their opinion can cause
catastrophic harm, especially in public places.
It is incredible the ways in which terrorism is quickly evolving and Tommy and Jeff believe that this will only get worse. It seems that almost every month there is some major act of terrorism that is occurring.
If
there were any positive things that came out of this, one of them was the uncle of these 2
boys, now affectionately called Uncle Ruslan on the web, who unequivocally condemned
their actions and took up a stance against this as representative the
viewpoints of all moderate Muslims.
His
reaction is posted below:
RJ
Tang discussed how he thought the Federal Reserve is a sort of Ponzi Scheme in
which the current flood of easy money is essentially going into certain asset
classes which will inevitably create a bubble in that asset class. He used a wonderful expression to describe
what he sees, which is enormous loss of "moral capital."
In
fact, RJ mentioned that it is the first time in US history that the government
and the central banks are basically punishing savers with extremely low
interest rates and forcing them into the equity markets. The government is essentially encouraging its
citizens to buy stocks, which is a form of government intervention - which if
one is a student of the Austrian School of Economics, has never worked.
RJ likens the current actions of the FED to a sand castle that will eventually
crumble. Jeff added that it is the same
logic behind setting an oil well on fire on land. By setting the fire to the well, the swift consumption
of oxygen in the well puts out the fire, but at the same time destroys the oil
wellhead and equipment.
Jeff
also bought up the FED mechanism to the Second Law of Thermodynamics, which
essentially states that the larger a system becomes the more unstable it
becomes given its desire to innate reach a state of equilibrium. This is a profound thought indeed.
Generation Gap
Jeff discussed how markets adapt themselves to the change in generational thinking. For instance, apartment construction has been booming as Gen Yers (those born in the late 1970s to early 2000s, also called the Millennial Generation) don't want to stay home with their parents after high school or college.
Their
desire for independence is much greater than the Baby Boomers (1946-1964) and
is totally opposite from that of the Silent Generation (1925-1945).
VJ
mentioned the next generation as the YouTube Generation, which Jeff has dubbed
the I-Generation. The bubble of
technology that individuals have isolated themselves with seems like will
continue to develop.
(Recent fight against Floyd Mayweather Jr. and Robert Guerrero)
As
those who come to our meetings are interested in winning and being winners, it
pays to see what other big winners are doing and to study their mindset.
VJ
has made extensive studies of some of these individuals and simply observed the
methods by which they are able to win consistently and for such long periods of
time.
One
such winner is pound-for-pound number 1 boxer, Floyd Mayweather, who recently
fought the number 8 boxer in the world on May 4th, and essentially dominated
the entire fight.
He
won by unanimous decision, and that is his 44th consecutive victory. To give you an idea of how rare this
occurrence is, the only other boxer in history who has a better record than
Mayweather, is Rocky Marciano, who had a record of 49-0, but it can be argued
that he fought lesser fighters in his era.
One
of Mayweather's incredible hallmarks is his one-of-a-kind defense. It is incredible that even when the best
boxers in the world are standing two feet infront of him, they still can't hit
Floyd Mayweather.
The
reason why he has taken so much time to perfect his defensive craft:
"There is no glory in punishment."
He believes taking punishment will take time off a boxer's life (it can
be argued that this is occuring right now with former #1 fighter Manny
Pacquiao, who has taken a lot of leather in his fights).
He
has many of the mental characteristics that have led him to remain on top, and
as winners who want to keep winning, it may be prudent to take note of this.
It
can certainly be applied to our winnings in the market, for example, not to put
down good money after bad money, etc.
Avoiding punishment in the market, will lead to longevity for us as
well.
The
next meeting will be on Sunday, June 2nd, 2013.
For
those who have not attended a meeting, but would like to attend, please email
your wish to VJ Arjan at scarletkings@gmail.com
Also it seems there are many domestic and
international readers who are following our blog posts not only in the United
States but all over the world including Europe, Latin America, and Asia. If you
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