Here is a photo from the Occupy Movement this month:

I am hoping this was a joke. If not, then see below.

While I can appreciate someone getting a degree in a liberal arts subject, didn’t anyone make this young lady take a class in Economics? Exactly what is the worldwide market for a degree in Hispanic, Transgender, Gay and Lesbian studies? What university took this woman’s money?

The Occupy Wall Street movement has spawned clones around the world. Unemployed adults, some families, a few Hollywood stars, all sitting in, hanging out, and complaining about the current wave of Robber Baron’s ruining their futures.

Here in Vancouver, BC, it looks like a lot of energy, with no clear message, targeting the wrong people. Cities are starting to force the protestors off of the public squares where they have been camping. Who should they be targeting?

First, who sold you this degree? If you bought a car with no engine, you would attack the automaker. If you got a $96,000 education from a university, with no clear way to repay your student loans, go protest at the university! Do they not have a stake in making sure their graduates can actually use the degree they sold them? How about a few class action law suits against the Board of Regents for allowing the school to produce worthless educations?

Second, Wall Street is a business. The finance industry operates in a regulatory environment. The governments released the tight controls from the 1930′s and built the financial system that has grown over the past several decades. The laws and meetings can all be traced back to the politicians and regulatory officials who passed the new rules. These people are NOT in Wall Street. They are all in Washington DC. Get a map and go there to protest. In the US, that means you need to talk to approximately 336 people who run the government for the people.

Third, this is a non-event. The press popularizes these gatherings like a massive wave of protest. Having gone by two sites, one in Oakland, CA and one here in Vancouver, BC, I can say, it is a small minority of disaffected people. I have seen bigger gatherings at a high school hockey game. Just be glad this isn’t a global wave of hockey fans trying to make a point. There would be a lot more blood!

Fourth, this is a sad commentary on the state of higher education. If this is a “movement”, then the universities need to get these people back in the classroom and teach them political history. Then the university should explain why they can’t get a job with the worthless degree they sold them.

Finally, while unemployment is high, capitalism is nothing but a tool, based on human nature and economic theory. Man uses tools for good or evil. Do not blame the tool for how it is used or exploited.

In defense of good old fashioned capitalism, more people are fed, clothed, and housed right now, than at any point in the history of the world. While a lot of people are still struggling, the bright shining beacon of hope is not communism, socialism, or any other failed social experiment.

The beacon of hope for the world is capitalism. With a stable financial system (this is the role for the bankers), minimal taxes (you need an incentive to work), a level playing field (this is the role of government), entrepreneurs (small business), and a strong work ethic, capitalism will allow the greatest number of people to feed their families and reach their individual dreams in life.

The Tea Party movement dwarfed this lost Occupy movement. Maybe the Occupy Movement should hire some consultants to get a clear message, and then spend some money to get there message out. Oh wait a minute…

MF Global is missing $633 million from their client accounts. The company has filed for Bankruptcy protection, and is being dismantled.

Currently, investigators are trying to take the company books apart and figure out where all of the funds are at. At the same time, the staff of over 1000 workers at the brokerage are being laid off.

http://money.cnn.com/2011/11/11/news/companies/mf_global_layoffs/

You can blame a lot of failures on the economy and the difficulties that have ensued. However, this failure is purely bad management.

http://en.wikipedia.org/wiki/MF_Global

A firm originally founded in 1783, it grew over time, and then evolved into the Man Group.

Eventually, the brokerage firm was spun off and founded as a separate company in 2007 during an IPO as MF Global. With the second largest IPO in 2007.

http://www.nyse.com/press/1184840344433.html

Now, with $42 billion in assets, and equity of $1.4 billion, it is a failed enterprise.

Some highlights are:
The Wall Street Journal reported that MF Global would seek Chapter 11 bankruptcy protection after investing $6 billion in sovereign bonds issued by European countries.

On October 25, 2011 MF Global reported a $191.6 million quarterly loss as a result of trading on European government bonds.

According to the CME Group Inc., MF Global broke rules on keeping customer money separate from its own trading accounts.

The MF Global bankruptcy was the the largest Wall Street firm to collapse since the Lehman Brothers incident in September 2008.

The biggest issue in my mind is; “Who do you trust?”

This was not a home town broker who bet big and failed. This was a large to mid-size player (depending on how you measure), that bet big and failed. A stock traded on the NYSE, and audited by PriceWaterhouseCoopers. Even if the players get their money back from the assets, it will take months (years?) to clear this mess up.

How long would your funds be tied up in court?

Could you withstand the financial blow if your investments were tied up in this type of action?

Do you trade or park all of your assets with one firm?

When we thought of diversification, we rarely thought of not using a single bank, brokerage, currency or even country. Now, in any weekend, you can wake up to the folly of a CEO having lost control of his organization and your money. You can go from a secure investment program to financial ruin in a weekend.

You have to maintain control of your investments. The facade that the major players present should not be trusted. When you are looking at the long term, remember the basics, diversity and proper risk management!

Depending on the size of your net worth, you need to ensure no single entity can bring you to financial ruin. Pain, maybe, but nobody should be able to ruin your future.

Remember, they are not watching out for you! That is your job. Only you can assume the risk, and the reward of your financial life.

The book Moneyball by Michael Lewis was a great little read. One that would normally not have been on my radar.

Author:

http://en.wikipedia.org/wiki/Michael_Lewis_%28author%29

Book:

http://en.wikipedia.org/wiki/Moneyball:_The_Art_of_Winning_an_Unfair_Game

Movie:

http://en.wikipedia.org/wiki/Moneyball_%28film%29

To add a little more to my thoughts when I was reading the book, I wanted to touch a couple of quotes from the book.

The Agitator:
First, a quote in the book from the writings of Bill James read; “Every form of strength is a form of weakness.”

“Pretty girls tend to be insufferable because, being pretty, their faults are too much tolerated.

“Possessions entrap men, and wealth paralyzes them.”

How many examples can you think of to meet these statements?

Note: You can replace “pretty girls” with any golden child in the work place.

This was written by a college graduate, Bill James, who was working as the night watchman at a Stokely Van Camp pork and beans factory. From this humble background, his self published works on baseball were going to reach out and change the game.

Bill James became one of the founders of sabermetrics. The modern statistical analysis of baseball.

http://en.wikipedia.org/wiki/Sabermetrics

The Implementers:
If you take another item from the book, Sandy Alderson, the former Oakland A’s General Manager, who Billy Beane worked under before becoming the GM himself, did some analysis of how Major League Baseball (MLB) was run. He said:

“I figured out that managers do all this shit because it is safe. They don’t get criticized for it.”

He was referring to strategies that he knew had no positive effect. Yet every MLB manager did them over and over again.

You can take that into any organization that is not at risk. Your bank, your stock brokers, politicians, school teachers. Everyone wants to avoid pain or the risk of failing and being fired. So, they don’t manage their systems properly, based on the numbers, they manage them to not make waves. To not change anything. To not raise their heads above the crowds.

Back in the 1990′s, Sandy Alderson built a set of rules that were effective, and proven to be so by the statistical analysis his team ran. He then forced his lower level managers to follow the new process. This was a drastic change from the conventional wisdom and the “play it safe like we always have” mentality.

Download here:

http://www.bobngo.com/research/blog/?cat=18

Unfortunately, until Billy Beane took over, Alderson could not get the club to change their behavior. The manager of the club would not change. This is the way they always did it kept him entrenched in old failed theories.

The EU:
Take the current Euro Crisis. The Greek’s are basically in default. However, the politicians refuse to stand up and deal with the realty of the situation. The Greek government spent more then their tax base can generate for various reasons.

Now, they cannot pay the generous benefits they have given away for the past three to five decades. And they have to keep going back to the markets to borrow more money to run the pensions and government.

The reality from the numbers is, the country needs to default. Period. Pull the bandage quickly. This should have been done last spring. Instead, they are dragging this out and throwing good money after bad. It is going to be painful, but putting the country into receivership and fixing the problem was the correct, but not easy answer.

Forget Greece for a moment. They are about as bad as the state of Rhode Island, USA going under. Not much in the overall scheme of the world. Italy, however, is a train wreck waiting to happen. That is the big money melt down that is coming in 2012 or later. Think of Greece as the canary in the coal mine. They are out of fresh air. Italy is a complete cave in when they go under.

Our Risk Exposure and Rule Set:
Quantitative analysis overthrew many industries when the computer revolution started ramping up in the 1980′s and 1990′s. The financial industry may have changed radically, but it was only one of many that computers, coders, economists and mathematic’s have turned upside down. Anything with a gap between reality and industry practices was and is ripe for a revolution.

What does that mean to us? First, the low hanging fruit has been taken in the trading arena. You have to trade knowing that big money has the resources to exploit any gap they can find. Modern computing is so cheap, everyone is pushing a tool to dissect the market and gain an edge.

To fight in the modern arena, we need to ensure our exposure is minimized. A hedge fund or bank with access to the trading center feeds can execute a sweeping trade faster than we can blink. All with the blessings of the SEC. We have to ensure we are not wiped out as most investors are.

The buy and hold strategies may apply in some situations. However, anyone who holds long term is exposed to a different risk model than someone who day trades.

Have you looked at your risk model this month or even this quarter?

Have you written out your game plan?

What is your reaction going to be when things go south?

Don’t assume the way it used to work is still going to be effective next month. If PM Merkle decides to push the Greek’s out of the Euro, what is your risk? If the Fed Chairman, Ben Bernanke, decides to inflate the US debt away, what happens to your long term holdings? If the CEO of your stock gets caught in a scandal, what happens to your nest egg (HP anyone?).

As always, your thoughts are welcome!

A movie called Moneyball came out staring Brad Pitt. I saw it in an add and then saw the book with the same name by Michael Lewis at the book store.

I decided to read the book and then see the movie. It was a very good thing I did. I barely followed the movie as the director bounced around in time and space. Brad Pitt couldn’t save this script and director from killing the story.

However, the book is at a different level. I would recommend it as a good read for anyone doing trading.

First, let me say that I am not a fan of Baseball. I only saw one major league game as a kid. Nothing excited me about it.

Second, after reading this book, I can appreciate the romance and the appeal that the sport provides.

As an engineer, the elegance of tracking a game in a fixed area, with a basis for determining probabilities is very appealing. With todays computing power, and video capability, scholars can dissect a game and analyze meaningful data using rigorous statistical analysis.

If you read the book, think of the parallels between Major League Baseball (MLB) being dragged kicking and screaming into the 21st century by Bill James and the Sabermetrics community, who later guided Sandy Alderson, Billy Beane, Paul DePodesta, J.P. Ricciardi to overthrow the existing structure of MLB.

Think of the parallels that the age of modern computing, lower entry costs and more democratic levels of access to this power, and the overthrow of the traditional stock brokerage. The brokers made a very nice living taking a cut of each of your trades. Now they have all but disappeared as eTrade and Ameritrade has allowed the masses to cut the cost of execution to incredibly low levels.

If you enjoy an underdog story, trading, and applied mathematics, this is a very nice read.

Happy Trading!
William