Trader’s Narrative

If you know anything about Wall St. you won’t be surprised to learn that the cyclical nature of IPO trends can be studied to gain insight into the stock market.

After all, companies don’t go public as a gesture of charity. They do so because they think that they will gain something by exchanging their shares for your money. A transaction occurs when the two sides agree on the price but disagree on the value of the asset in play.

But there is an inherent asymmetry when it comes to IPOs. Although we have put in place measures to protect the public (through circulars, public disclosures, etc.) the insiders still know much more about their company and its merit as an investment than the general public who are taking the other side of the deal.

So obviously when we have an avalanche of insiders wanting to sell to the public, they aren’t doing so because they want to hand over their hard earned capital out of the goodness of their hearts. You know that valuations are so out of whack that they are about to soon regress to the mean. This is what happened in early 2000 - when you had people taking everything short of their daughter’s lemonade stand public.

The current market environment is very different from then. That is why I’m just not persuaded by the dire predictions of mass market meltdown or financial armageddon. We are actually enduring a severe IPO drought.

To play Devil’s advocate, today’s lack of IPOs may be partially explained by the low interest rate environment. Financially strong companies can turn to the fixed income market to find funding at lower cost of capital than equity markets. But I don’t think that explains it completely.

After the jump there is a great article written by Mark Hulbert for the NY Times which goes into more detail about several research studies which look at the predictive characteristics of the IPO market:

Continue reading ‘Using IPO Trends To Time The Stock Market’

What if we are already in a recession? That is the question this article from the NY Times raised over the weekend.

Of course, this is an unanswerable riddle since the only way we know how to identify a recession is through hindsight, when it ceases to matter.

“With the core inflation rate comfortably close to 2 percent, and the Treasury market begging for ease for over a year, if it turns out to be a recession, it will also be a policy error,” said Robert Barbera, chief economist of ITG.

Amen. I’ve been saying this for a while: Bond Market Screaming For Rate Cut - Fed Listening?

But what if there was a reliable way to know ahead of time? The article showcases two variables and demonstrates how in the past they have given accurate signs of an imminent recession:

The first chart shows the difference between the yield on two-year Treasuries and the Federal Reserve’s target rate for federal funds — the rate on loans between banks. In normal times, the Treasury rate is usually higher.

The second chart shows the six-month changes in the number of people with jobs, as reported by the Labor Department’s household survey. In a growing economy, with the labor age population rising, the number of jobs almost always increases.

Click to Enlarge Graph:

Wouldn’t you love to take all your losses and combine them to magically create a profit?

Parrondo’s Paradox says this is theoretically possible. According to Parrondo’s paradox, two games guaranteed to make a player lose all his money will generate a winning streak if played alternately.

In other words, alternate between listening to Jim Cramer and listening to Richard Bernstein

Although it certainly wasn’t invented because the physics professor, Juan Manuel Rodríguez Parrondo, was seeking stock market profits, it has gone on to inspire wide ranging ramifications including the mechanics of evolution and managing investment portfolios. Before you get excited though, bear in mind that the two “games” have to be related to one another before the paradox has any effect. Here’s a visual representation of Parrondo’s Paradox.

From the New York Times article:

Economists are studying Parrondo’s paradox to help find the best strategies for managing investments. Dr. Sergei Maslov, a physicist at Brookhaven National Laboratory in Upton, N.Y., recently showed that if an investor simultaneously shared capital between two losing stock portfolios, capital would increase rather than decrease.

“It’s mind-boggling,” Dr. Maslov said.

“You can turn two minuses into a plus.” But so far, he said, it is too early to apply his model to the real stock market because of its complexity.

I do remember reading somewhere that two trades which by themselves can be unprofitable, can be combined to create a profit. I think it was in the Wizards series by Schwager where a trader was talking about options. I never quite understood how this was possible. Maybe he meant Parrondo’s paradox. Does anyone recall that excerpt? ring any bells?