Over/Under

Let's look at our basket of stocks and indexes from QRiskValue.com and see how they are ranked by the over/under based on QRV ranking. An increasing positive correlates to overvalue and a increasing negative to a undervalue. Range (+100 to -100)
AAPL +101
F +75
IBM +64
NQ100 +33
DJIA +28
S&P500 +16
GOOG +9
MSFT +9
PFE +6
GS -29
BAC -67

Be Happy and Beware

Bears in stocks and interest rates getting slapped repeatedly as the Fed leaves no doubt it will punish anyone getting in the way of their drive to preserve a recovery being threatened by a Europe known for creating world class events which affect the world badly. Fed clearly does not believe the ECU will be able to work out of this mess without some type disaster. Thus they have to create a fall back position where the world can seek refuge. The action is really just a redo of last year for stocks and, had it not been for the ECU then, indexes such as the S&P 500 would have had a great year.

What could screw up the Fed's intent? All of us participating in the markets daily know the monster never sleeps and market direction and volatility live with randomness. Just as the Fed was sure of the health of the housing market in 2006, it is sure of its ability to corner investments into selected alternatives with more risk than the 10 year. Structural price events, flash crashes, panics, and rolling downside momentum are the unpredictable side of a sure thing intervention.

For bulls, be happy and beware.

Say Anything

Got to love the Gingrich candidacy. In motions of body type and style, he looks like a caricature of an 'old pol' but without the discretion. His interesting domestic policy of asking his then now xwife to have an open marriage is one way to have it two ways in a three way. But just in case he needs a defense, he is using one reminiscent of a fallen television evangelical; do anything just ask for forgiveness. Just like the recent luxury liner captain explaining why he did not stay with his ship and instead found himself in a life boat with fleeing passengers. He tripped, and found himself in the life boat. Like Gingrich, the captain found himself in a dilemma. How do you make a "this may look odd" moment of life into a ready to apply response? You know. Say anything, and if you have to, just ask for forgiveness.

Markets say anything all the time. Remember the New Economy of the tech nineties. Old rules did not apply to speculation and capital formation. How about real estate inflation forever. Or the financial deregulation is better for everyone. Or the efficient market theory. Or gold is a currency. Or in 2012, the worst of the financial crisis is over.

Pawn Your Stocks and Indexes

Lots of talk about an upside break out in equities and that is fine. Up, down, whatever but maybe a few comments about where we sit and what things may be worth in turns of premium or discount. Now the things that have been going up for the last 4 years will get even more interest because they are proven movers. Brand name movers AAPL, IBM, and F are darlings of the risk averse. But lets look at several stocks and play pawn shop or let's find the riskvalue, the QRV, what will they be worth if things become not so bright and beautiful. Let's throw in a few of the indexes. So here is what the pawn shop will give for the list. (Data from QRiskValue.com)

AAPL 220
IBM 113
F 7
GOOG 528
PFE 20
MSFT 26
S&P 500 1140
NQ 100 1840
DJIA 9800

Oddly, only two pigs of the last 4 years have big upside, GS 152, BAC 20

Losing Wins

Lots of bad news about sovereign debt and the years it will take to resolve decades of accrued red. Interest rates still pushing ever so quietly lower. Reported hedge fund and mutual fund problems due to under performance in 2011.

Back in the early 00s I was a founding principal in a firm which looked to develop trading strategies to keep one step ahead of the market. Along with applying strategies to various markets ,we were also a market maker approved by the exchange to provide liquidity in a new contract. We were compensated in two ways ; any trading profits and payment for volume provided. We had a simple formula. Quickly pick off mispriced bids and offers. This was of coarse just as the latency arms race was picking up speed.

Now my point of telling this story is about the confusion individuals and markets make when they believe they are in control of all the important information which determines value and direction. In our trading operation, the market making desk was run primarily by a guy believed the particular market making strategy could be enhanced by his gaming the program. While the program was fully automated, he would override the system and hit bids or grab offers, anticipating the next move. When there is a larger latency spread, this works. When it closes, it does not.

His real ultimate problem however was his absolute aversion to losses. In fact, the first year there were only two or three losing days. But as the window closed on speed and other market makers step up their strategies, the firms strategy became less competitive.

Any strategy which requires less than normal distribution of losses is an eventual disaster. That goes for sovereign debt, hedge funds, and brand name stocks. Keeping things floating will eventually bring larger problems.

There is a saying which is the key to creating successful strategies and solutions. If it wasn't for the losses, you would never make any money.