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:

Risk/Reward for MBSs

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:

Second Law of Thermodynamics and The Federal Reserve

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.

Floyd Mayweather: There Is No Glory In Punishment

(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

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