Archive for December, 2008

Kevin’s Five Themes for 2009

Five more themes for the New Year, courtesy of Kevin Depew, at Minyanville.

Five Themes You Need to Know for 2009

Kevin Depew’s Five Things You Need to Know to stay ahead of the pack on Wall Street:

Before we get to 2009, first, think back to a year ago. Deflation was barely on the radar of mainstream economists and financial media. Most viewed it as an impossibility, focusing instead on what was supposed to be the resurrection of the commodities bull market.

Even today, while paying deflation minor lip service here and there, the vast majority of economists and financial media are ill-prepared for just how severe this ongoing deflationary credit contraction and debt unwind is going to be. Consequently, if there is one theme that stands above all else in 2009, it will be this: The despair that unfolds as the point of recognition emphasizes the "de-" in deflation. The fat is in the fire.

"In my hour of darkness, in my time of need, O Lord grant me vision, O Lord grant me speed."
- Gram Parsons & Emmylou Harris, "In My Hour of Darkness"

1. The Point of Recognition

What is "the point of recognition" and why is it the most important theme for this new year?

Think of it this way:

It’s a warm summer night and you’re driving a 1976 Cadillac Sedan De Ville, alone, on a dark interstate highway, halfway between towns and just past the decent side of midnight.

The windows are down and the car stereo is on, but not too loud, the warm breeze whipping around through the wide open, sprawling car interior and mixing with an old Brewer & Shipley tune: "One toke over the line, Sweet Jesus, one toke over the line. Sitting downtown in a railway station, one toke over the…" twelve-point mule deer slumped sideways across your shattered windshield, the entire weight of your body pressing the brake pedal to the floor, the interior of the car filling with the smell of burning rubber tossed with the hideous, sickly sweet smell of radiator fluid.

There’s really no accurate way to describe the sound a vintage, American luxury automobile makes when it hits a 250 pound…
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Edge, Execution, Allocation

Here’s a note from Condor Options discussing the essential building blocks of a successful trading system.   

Edge, Execution, Allocation: Pieces of the Trading Puzzle

Courtesy of Condor Options.
 
We spend a fair amount of time on this blog looking for trading systems that have some discernible and consistent edge over the market averages.  And edge is important: if you don’t know where your profits will come from, you certainly shouldn’t expect to have any.  But an empirically demonstrable edge is just one of the three components that comprise any good trading system.  The other two, execution and allocation, are also essential to the success of any trading program or system. This is an admittedly basic, big-picture approach to thinking about trading.  But it sure beats a vague or unreflective stance.

Edge

Edge, again, just refers to whatever it is about your system that generates positive expectancy or, hopefully, market-beating returns.  We’re not dogmatic about alpha generation, but we don’t do faith-based trading, either.  The key rule of thumb for claiming an edge is: if you can’t quantify it, it doesn’t exist.  Ideally, finding an edge should be the least difficult part of developing a trading system, in the sense that cognitive biases, emotions, and human error can in principle be entirely eradicated.

The process of finding an edge tends to go something like:

  1. Intuition – some hunch or probing question arises about a relationship or tendency among various products, indicators, timeframes, etc.;
  2. Quantification – the intuition is formulated as precisely as possible so that it can be evaluated.  What was previously a jumble of notions becomes an array of variables and conditional statements;
  3. Testing and optimization – both walk-forward and traditional backtesting are essential to ensure robustness and avoid curve-fitting, and there are plenty of other key constraints;
  4. Application – even the most cautious testing procedures aren’t a substitute for application under live conditions.

The quantification criterion (”if you can’t quantify it, it doesn’t exist”) isn’t negotiable.  That criterion may exclude approaches to fundamental analysis in which the “story” of a stock or company plays a non-redundant role beyond the balance sheet review; and it may exclude large swaths of what passes for technical analysis, especially when it comes to non-classifiable pattern recognition and ill-defined support and resistance specifications.  But the good news


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More Great Ideas

Time for something new?  

More Great Ideas

Courtesy of Adam Warner at Daily Options Report.

Amazingly, this piece comes from an economics professor writing in The Financial Times, not The Onion.
 

So where do we go from here? The only actor large enough to restore confidence in the US market is the US government. The current policy of quantitative easing by the Fed is a move in the right direction but it does not, as yet, go nearly far enough.

It is time for a greatly increased role for monetary policy through direct intervention of central banks in world stock markets to prevent bubbles and crashes. Central banks control interest rates by buying and selling securities on the open market.

A logical extension of this idea is to pick an indexed basket of securities: one candidate in the US might be the S&P 500, and to control its price by buying and selling blocks of shares on the open market.

Even the credible announcement that a policy of this kind was being considered should be enough to boost the markets and restore consumer and investor confidence in the real economy.

Critics will argue that this policy is dangerous socialist meddling. But I am not arguing that the government should pick winners and losers: only that it should stabilise a broad basket of stocks.

Hat tip Clusterstock. Who also adds this.

Before you laugh, keep in mind that this is quite the crackpot proposal it seems to be. Professor Roger E. A. Farmer, the economist who wrote those paragraphs, is vice chair for graduate studies in the department of economics at the University of California Los Angeles. And is his proposal really all that more radical than having the government buy up mortgage securities, recapitalize auto companies or ban short selling?

I still say this has to be a spoof, but agreed, it’s no more ridiculous than anything else from 2008.

If this comes to pass, it would make me inclined to short every index put known to man.

 





A Look Ahead

Thoughts on the market for the New Year.  And another plea for TARP help; will it ever end?  Courtesy of Joe, Upsidetrader.

Happy New Year and a Look Ahead

I’m still waiting for the Fed to completely forgive my mortgage, auto loans and credit card debts-hasn’t happened yet. GMAC has just announced that they are going to ring in the new year by giving credit to the credit unworthy and we are on the road to truly getting "saved by zero". I am also waiting for Capital One to start handing out $10,000 Mastercards to high school kids, as that should help retail which is about to go bankrupt. An IPhone in every pot should be the new mantra. Shouldn’t everyone "always" have nice things even if they have no way of paying for it?

I am considering a fund raiser through this platform for the full page Wall St Journal that I still may take out naming the names of the pundits that have been wrong on every tick in 2008. They need to be accountable and they all need to be fired or even shot on sight. They could find work cold calling for stock brokers or maybe they can become counselors at Hope Now or debt collectors at Capital One. They might even become mortgage brokers because I heard that whole house thingy has bottomed.

If that thing called Christmas didn’t get in the way, retail would have fallen into the deep blue sea already, now the inevitability has just been slightly delayed. No one is buying $120 jeans at Abercrombie and even Prada is 50% off. Challenger believe 75,000 retail stores will lose in 2009 and one million job losses alone could come from that sector. JoJo Banks will give you two suits free if you buy one, but things are just swell. Let’s not forget the commercial real estate companies that lease space to these failing companies. I believe commercial real estate will look like the set of "I Am Legend" before it’s all done.

Home prices will drop further, still too much inventory and unemployment will go parabolic. Everything else is nonsense, as it is all about jobs. Obama’s plan is thoughtful but it’s too little too late. Bridges don’t get put up in a week and it’s too late for the


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2009 Predictions…Stop the Insanity!

What are the generous, prolific, insightful writers who contribute so much excellent material to our Favorites Section thinking now, as this horrendous year for the markets comes to a close?

Let’s start with Howard Lindzon contemplating the New Year, suggesting no more predictions.  Instead, get out there and sell something (no, he didn’t say stocks).  – Ilene

2009 Predictions…Stop The Insanity!

At 12-01 AM January 1, 2008, my pal Andy Swan Twittered that ‘2008 was not living up to all the hype’. Priceless and how right he was.

Here is a perfect look back at 2008 . All great but my fave part:

We bailed out everybody in 2008 and I think it’s only fair that we have two S&P’s, the nationalized one and the free market one. After all the largest institutions took money, note to self, call my Congressman and Chairman Cox in the morning and make suggestion. The banks bellied up to the bar and if you weren’t a bank you just filled out a simple form and became a bank. Piece of cake, even Goldman Sachs did it. Who’s the schmuck that tore down Glass-Steagall in he first place? I need to find that guy. I remember saying as a green kid that banks know nothing of the brokerage business and that it would fail miserably.

Because of the bailout I am now a proud owner of all the big banks, I hedge my position almost everyday by being short, and will continue to be through 2009. John Thain was at Goldman, went to the NYSE, went to Merrill diluted the begeezus out of it, said everything was grand, sold to Bank America and then acted like a brat last week demanded a $10 million bonus. Great job Biff, I have your back. He’s another one.

The year 2008 was in a word…PATHETIC! Actually, F#$@#*king PATHETIC!

The worst run brand in the world is now…AMERICA!

I have made predictions in 2006 , 2007 and 2008 . I KILLED it all three years. BUT, the year 2008 was a trainwreck for my stock portfolio though because I am a trend follower. By the end of January, my picks were ALL worthless and I had completely gone into retreat. That saved my year, but my ghastly stock…
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We’re In For Stormy Weather

Musical Introduction: Bad Moon Rising

 

We’re In For Stormy Weather

Overshadowed by the economic headlines, serious climate trouble looms ahead.

Ban Ki-Moon, NEWSWEEK
 
The past year will be remembered for the global financial crisis. But next year will be no less dangerous, albeit for a different reason. Lost among the economic headlines is an even more important fact: emissions of carbon dioxide, the leading greenhouse gas, rose by an unexpected 3 percent in 2007.
 
This revelation means that the 50 percent targets for carbon cuts set by Europe and elsewhere by 2050 are already out of date. Scientists now say reductions of 60 to 80 percent will be needed to avoid a catastrophe.
 
There is other bad news. Everyone knows about the accelerated melting of Arctic sea ice. Now recent U.N. reports offer evidence of less visible but equally troubling changes. Our planet’s species are going extinct at an unprecedented rate, according to the U.N. Environment Program. Massive "dead zones" are multiplying in the oceans as pollutants are absorbed, killing off coral reefs and decimating fisheries. Incidents of extreme weather, such as the hurricanes that devastated Haiti and Myanmar, have grown more frequent. Insurers predict that 2008 will set yet another record for economic losses. Meanwhile, U.N. refugee agencies believe that as many as 50 million people will be displaced by climate-related disasters by 2010, and the figure could hit 200 million by 2050.
 
All this points to a stark truth: though we can overcome the financial shocks of 2008, we will not overcome the climate-change crisis unless we act fast. This means 2009 will be the critical year for the critical challenge of our era…
 
Nothing can happen without global leadership and unity of purpose. So far, however, we have fallen short. Narrow differences paralyze us. The United States and other developed nations insist that no accord is possible without the participation of rising powers such as China, India and Brazil. Yet many in the developing world blame the industrialized nations for creating the problem—and insist that they should therefore solve it.
 
This impasse is a prescription for disaster. To break it means


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TGI 2009!

Happy 2009!

Not too many investors are going to be sorry to see 2008 go – it's been a disastrous year for the markets and, of course, the global economy as all our 2007 bubbles popped one by one: Housing, Construction, Mortgages, Investment Banking (including LBOs and IPOs), Retail Banking, BRIC and, finally Commodities all fell apart one by one.  These were all the "new paradigms" that would never end and would infinitely grow in the new global economy

Perhaps they would have kept growing if they did not, one by one, get caught up in the speculative bubble that began and ended with home speculation.  It can be argued that this was all just one big bubble, with housing carrying the others along, creating a mania of easy money and heavy leverage that overvalued commodities which, for quite some time, went into building more and more homes and buildings that, ultimately, no one actually wanted.  The same thing happened to the Auto industry as more people buying more homes and more families refinancing their own homes felt rich enough to go from 2 cars to 3 or 1 car to 2 but now that's a luxury that has also been scaled back and once again, as it was until only recently, when a teenager wants to go out they will need to borrow THE car.

The same goes for the BRIC countries, where kids were leaving the farms in record numbers to start a life in the big city.  This led to "demand" for new housing as YUM, MCD, WMT et al raced over to build stores to welcome the new consumers who were able to readily find jobs building new YUM, MCD and WMT stores and working for the banks that were financing the construction and the electrical companies putting in the wiring and the countless other TEMPORARY industries that spring up to support the construction of entire cities.  Those temporarily employed people needed housing and that led to another boom in home construction and the demand for the limited amount of current housing led to skyrocketing prices which made all the people who bought early feel rich and they traded up and fed the boom and PRESTO – another housing bubble!


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Borrowing From Peter to Pay Paul

Ellen Brown, at the Web Of Debt, writes about Fractional Reserve Banking and how it leads to boom and bust cycles.

BORROWING FROM PETER TO PAY PAUL:
THE WALL STREET PONZI SCHEME CALLED FRACTIONAL RESERVE BANKING

Cartoon in the New Yorker:
A gun-toting man with large dark glasses, large hat pulled down, stands in front of a bank teller, who is reading a demand note. It says, “Give me all the money in my account.”
 

Bernie Madoff showed us how it was done: you induce many investors to invest their money, promising steady above-market returns; and you deliver – at least on paper. When your clients check their accounts, they see that their investments have indeed increased by the promised amount. Anyone who opts to pull out of the game is paid promptly and in full. You can afford to pay because most players stay in, and new players are constantly coming in to replace those who drop out. The players who drop out are simply paid with the money coming in from new recruits. The scheme works until the market turns and many players want their money back at once. Then it’s game over: you have to admit that you don’t have the funds, and you are probably looking at jail time.

A Ponzi scheme is a form of pyramid scheme in which earlier investors are paid with the money of later investors rather than from real profits. The perpetuation of the scheme requires an ever-increasing flow of money from investors in order to keep it going. Charles Ponzi was an engaging Boston ex-convict who defrauded investors out of $6 million in the 1920s by promising them a 400 percent return on redeemed postal reply coupons. When he finally could not pay, the scam earned him ten years in jail; and Bernie Madoff is likely to wind up there as well.

Most people are not involved in illegal Ponzi schemes, but we do keep our money in accounts that are tallied on computer screens rather than in stacks of coins or paper bills. How do we know that when we demand our…
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$6B Foot in Door

Here’s Mish’s take on the $6B gift to GMAC — $5B stake in GMAC, plus a $1B loan to GM.  

Paulson’s $6 Billion Foot In The Door Play

The US Treasury continues to throw $billions around like peanut shells. Bloomberg is reporting Treasury to Buy $5 Billion GMAC Stake, Expand GM Loan.

The U.S. Treasury committed $6 billion to support GMAC LLC, the financing arm of General Motors Corp., the latest step in the government’s widening effort to keep the largest U.S. automaker out of bankruptcy.

Treasury said it will purchase a $5 billion stake in GMAC, and lend $1 billion to GM so the automaker can participate in a rights offering at GMAC to support the lender’s reorganization as a bank holding company. The loan is in addition to $13.4 billion the Treasury agreed earlier this month to lend to GM and Chrysler LLC.

“This is a good start by the federal government,” said Thomas Atteberry, who helps manage $3.5 billion in fixed-income assets at First Pacific Advisors in Los Angeles. Still unknown, he said, is whether the government cash will “make it palatable for new investors to come in.”

My Question: How much GM and GMAC bonds is First Pacific Advisors sitting on?

A Treasury official said there is no cap or deadline for aid to automakers under the TARP. Congress “will need to release” the second half of the $700 billion TARP under Treasury’s rescue plan, the official said on condition of anonymity during a conference call with reporters.

Separately, GMAC said it has accepted all bonds tendered in a debt swap designed to reduce its debt load.

“Once the offers are settled, which we expect to do promptly, results will be disclosed,” said spokeswoman Gina Proia in an e-mail.

GMAC joins more than 190 regional banks, commercial lenders, insurers and credit-card issuers seeking funds from the Treasury’s bailout program for financial firms. American Express Co., the biggest U.S. card company by sales, and CIT Group Inc., the biggest independent commercial lender last year, won capital infusions last week after converting into banks.

The Fed has since granted approval before the swap was finished.

GMAC, which had 26,700 employees as of Dec. 31, 2007, had about $161 billion of unsecured and secured debt as of…
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Growing Unrest in Russia

Leo Tolstoy once wrote "Happy families are all alike; every unhappy family is unhappy in its own way." Anna Karenina, Chapter 1. 

Perhaps, the same is true of countries. twilight, Russia Ilene 

Growing Unrest In Russia Amidst Economic Crisis 

Courtesy of Mish 
 
Falling oil prices, a collapsing Ruble, and a souring economy have Russia in the worst crisis in over a decade. The Financial Times is talking about this in Russian economy: The Putin defence.
When a top economic adviser to Vladimir Putin approached his boss in September to argue that the rapid fall in the oil price meant he would have to devalue the rouble, the answer was a firm nyet. “He said he would not be the prime minister of devaluation,” one insider said.
 
But even before the oil price failed to recover on output cuts by the Opec producers’ cartel earlier this month, Mr Putin’s room for manoeuvre was running out. As crude has fallen from $147 a barrel this summer to less than $40, Russia’s oil-fuelled economic boom has come abruptly to an end. A country that was growing at a rate of 7 per cent only six months ago now faces a looming recession – and Mr Putin, almost exactly nine years since Boris Yeltsin handed him the presidency on New Year’s Eve, is stalked by the same prospect of economic failure as his ill-fated predecessor.
 
He must also contend with growing unrest. This month has seen thousands of Russians protest against the government’s handling of the crisis in a series of demonstrations across the country. With some 400,000 losing their jobs in November alone and around 2 per cent of those in work facing wage arrears, tensions are likely to rise further.
 
As well as suffering from a marked drop in demand for commodities, Russia’s economy is also being choked by Mr Putin’s rouble policy. His decision to stave off a sharp devaluation is starting to look to some economists as ill-advised as Yeltsin’s similar attempt in 1998. The central bank has already lost more than a quarter of its foreign currency reserves as a result of its efforts to


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Phil's Favorites

How Does the Stock Market Bottom?

 

How Does the Stock Market Bottom?

Courtesy of 

Despite the recent selloff, things are still relatively fine. I know nobody wants to hear this right now, but the S&P 500 is still up double digits over the last year and 36% over the last three years. What has people shook, understandably, is the speed of this decline.

Depending on where stocks close today, we could be looking at a 10% haircut in just five sessions. Over the last 20 years, this only happened during the Yuan devaluation in 2015, the Eurozone crisis in 2011, the GFC (global financial crisis) in ’08 and ’09, and the dotcom bubble in ’00, &rsqu...



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Zero Hedge

NYSE Announces Disaster-Recovery Test Due To Virus Fears

Courtesy of ZeroHedge View original post here.

In a somewhat shocking sounding move, given administration officials' ongoing effort to calm the public fears over the spread of Covid-19, The New York Stock Exchange has announced it will commence disaster-recovery testing in its Cermak Data Center on March 7 amid coronavirus concern, Fox Business reports in a tweet, citing the exchange.

During this test, NYSE will facilitate electronic Core Open and Closing Auctions as if the 11 Wall Stree...



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ValueWalk

Cities With The Most 'New' And Tenured Homeowners

By Jacob Wolinsky. Originally published at ValueWalk.

Homeownership is a major investment. Not just financially, but when a person or family purchases a home, they’re investing years – if not decades – in that particular community. 55places wanted to find out which real estate markets are luring in new homebuyers, and which ones are dominated by owners that haven’t moved in decades. The study analyzed residency data in more than 300 US cities and revealed the top 10 cities with the most tenured homeowners – residents who’ve lived in and owned their home for more than 30 years – are sprinkled across ...



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Kimble Charting Solutions

Financial Crisis Deja Vu: Home Construction Index Double Top?

Courtesy of Chris Kimble

Most of us remember the 2007-2009 financial crisis because of the collapse in home prices and its effect on the economy.

One key sector that tipped off that crisis was the home builders.

The home builders are an integral piece to our economy and often signal “all clears” or “short-term warnings” to investors based on their economic health and how the index trades.

In today’s chart, we highlight the Dow Jones Home Construction Index. It has climbed all the way back to its pre-crisis highs… BUT it immediately reversed lower from there.

This raises concerns about a double top.

This pr...



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Insider Scoop

A Peek Into The Markets: US Stock Futures Plunge Amid Coronavirus Fears

Courtesy of Benzinga

Pre-open movers

U.S. stock futures traded lower in early pre-market trade. South Korea confirmed 256 new coronavirus cases on Thursday, while China reported an additional 327 new cases. Data on U.S. international trade in goods for January, wholesale inventories for January and consumer spending for January will be released at 8:30 a.m. ET. The Chicago PMI for February is scheduled for release at 9:45 a.m. ET, while the University of Michigan's consumer sentime...



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Biotech & Health

Could coronavirus really trigger a recession?

 

Could coronavirus really trigger a recession?

Coronavirus seems to be on a collision course with the US economy and its 12-year bull market. AP Photo/Ng Han Guan

Courtesy of Michael Walden, North Carolina State University

Fears are growing that the new coronavirus will infect the U.S. economy.

A major U.S. stock market index posted its biggest two-day drop on record, erasing all the gains from the previous two months; ...



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The Technical Traders

SPY Breaks Below Fibonacci Bearish Trigger Level

Courtesy of Technical Traders

Our research team wanted to share this chart with our friends and followers.  This dramatic breakdown in price over the past 4+ days has resulted in a very clear bearish trigger which was confirmed by our Adaptive Fibonacci Price Modeling system.  We believe this downside move will target the $251 level on the SPY over the next few weeks and months.

Some recent headline articles worth reading:

On January 23, 2020, we ...



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Promotions

Free, Live Webinar on Stocks, Options and Trading Strategies

TODAY's LIVE webinar on stocks, options and trading strategy is open to all!

Feb. 26, 1pm EST

Click HERE to join the PSW weekly webinar at 1 pm EST.

Phil will discuss positions, COVID-19, market volatility -- the selloff -- and more! 

This week, we also have a special presentation from Mike Anton of TradeExchange.com. It's a new service that we're excited to be a part of! 

Mike will show off the TradeExchange's new platform which you can try for free.  

...

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Chart School

Oil cycle leads the stock cycle

Courtesy of Read the Ticker

Sure correlation is not causation, but this chart should be known by you.

We all know the world economy was waiting for a pin to prick the 'everything bubble', but no one had any idea of what the pin would look like.

Hence this is why the story of the black swan is so relevant.






There is massive debt behind the record high stock markets, there so much debt the political will required to allow central banks to print trillions to cover losses will likely effect elections. The point is printing money to cover billions is unlikely to upset anyone, however printing trillions will. In 2007 it was billions, in 202X it ...

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Members' Corner

Threats to democracy: oligarchy, feudalism, dictatorship

 

Threats to democracy: oligarchy, feudalism, dictatorship

Courtesy of David Brin, Contrary Brin Blog 

Fascinating and important to consider, since it is probably one of the reasons why the world aristocracy is pulling its all-out putsch right now… “Trillions will be inherited over the coming decades, further widening the wealth gap,” reports the Los Angeles Times. The beneficiaries aren’t all that young themselves. From 1989 to 2016, U.S. households inherited more than $8.5 trillion. Over that time, the average age of recipients rose by a decade to 51. More ...



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Digital Currencies

Altcoin season 2.0: why bitcoin has been outgunned by crypto rivals since new year

 

Altcoin season 2.0: why bitcoin has been outgunned by crypto rivals since new year

‘We have you surrounded!’ Wit Olszewski

Courtesy of Gavin Brown, Manchester Metropolitan University and Richard Whittle, Manchester Metropolitan University

When bitcoin was trading at the dizzying heights of almost US$2...



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Lee's Free Thinking

Why Blaming the Repo Market is Like Blaming the Australian Bush Fires

 

Why Blaming the Repo Market is Like Blaming the Australian Bush Fires

Courtesy of  

The repo market problem isn’t the problem. It’s a sideshow, a diversion, and a joke. It’s a symptom of the problem.

Today, I got a note from Liquidity Trader subscriber David, a professional investor, and it got me to thinking. Here’s what David wrote:

Lee,

The ‘experts’ I hear from keep saying that once 300B more in reserves have ...



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Mapping The Market

How IPOs Are Priced

Via Jean Luc 

Funny but probably true:

...

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About Phil:

Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...

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About Ilene:

Ilene is editor and affiliate program coordinator for PSW. Contact Ilene to learn about our affiliate and content sharing programs.