Posts Tagged ‘John Hussman’

RISK MANAGEMENT ISN’T GOING OUT OF STYLE

Courtesy of The Pragmatic Capitalist 

(Digital Composite) New York City, New York, USA

It’s interesting how risk appetite’s have changed so dramatically in the last two years.  Why is this interesting?  Because, when you look under the hood at the Global economy you’ll notice that the problems that caused the car to veer off the road are all still in place. Nothing has really changed. We still have the same global imbalances that caused the crisis.  The Chinese are still causing imbalances within their economy via a flawed currency peg.  The single currency system with the  Euro is still causing imbalances throughout much of Europe.  And the financialization of the US economy is continuing along its merry way.

But, from an investor’s perspective there has been a distinct “risk on” trade in place.  This is not surprising because asset prices are rising and the economy really is improving, however, you probably would have felt the same exact way in 2006 or in 1998 when everything appeared just fine.  The truth was, risk management was probably more important at these two points in history than ever.  John Hussman elaborated on this in his most recent letter:

“I recognize that investors are eager to move on to the thesis of sustained economic recovery, with no need for any risk management at all. However, it appears unwise for investors to rest their financial security on faith in a recovery that relies on the government running a deficit of 8.5% of GDP, simply to keep the existing 6.3% gap between actual and potential GDP from widening further. It appears equally unwise to rely on Fed purchases of Treasury bonds to sustain ever greater exposure of investors to risk, when the creation of financial bubbles does nothing to increase the underlying cash flows deliverable by the securities that are increasing in price.”

This sort of herd mentality might make the entire herd feel a bit more safe.  The only problem is, the issues that caused this crisis to begin with are still stalking the herd. They’ll catch up with it sooner or later.  It might happen in the next few weeks, months, years or even decade.  No one can be sure exactly when, but they will catch up with it.  And when they do the herd will disperse in panic and once again investors will have wished they’d been more aware of the potential…
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“THE MOST IGNORANT REMARKS EVER MADE BY A CENTRAL BANKER”

“THE MOST IGNORANT REMARKS EVER MADE BY A CENTRAL BANKER”

the fed, bernanke Courtesy of The Pragmatic Capitalist 

As usual, the latest Hussman letter is an honest and realistic perspective on what is going on today.  This week’s letter is a scathing criticism of Federal Reserve policies and their blatant manipulation and counterproductive policy responses.  The primary target of this week’s letter is quantitative easing.  In discussing Mr. Bernanke’s Washington Post op-ed Mr. Hussman refers to the Chairman’s comments as “the most ignorant remarks ever made by a central banker”.  I entirely agree and believe that these same comments will forever haunt Mr. Bernanke.  Naturally, I think Mr. Hussman is right and it’s clear in my opinion that the Federal Reserve is becoming part of the problem and not the solution.

The most interesting part of the criticism is Hussman’s debunking of the “wealth effect”:

“Historically, a 1% increase in the S&P 500 has been associated with a corresponding change in GDP of 0.042% in the same year, 0.035% the next year, and has negative correlations with GDP growth thereafter (sufficient to eliminate any effect on the long-run level of GDP). Now, even if one assumes – counter to reasonable analysis – that the GDP changes are caused by the stock market changes (rather than stocks responding to the economy), the potential benefit to the economy of even a 10% market advance would be to increment GDP growth by less than half of one percent for a two year period.

Now, as of last week, the total capitalization of the U.S. stock market was at about the same as the level as nominal GDP ($14.7 trillion). So a market advance of say, 10% – again, even assuming that stock prices cause GDP – would result in $1.47 trillion of market value, and a cumulative but temporary increment to GDP that works out to $11.3 billion dollars divided over two years. Moreover, even if profits as a share of GDP were to hold at a record high of 8%, and these profits were entirely deliverable to shareholders, the resulting one-time benefit to corporate shareholders would amount to a lump sum of $904 million dollars. In effect, Ben Bernanke is arguing that investors should value a one-time payout of $904 million dollars at $1.47 trillion. Virtuous circle indeed.

So what have investors done to themselves?  They’ve added an excess risk to their portfolios purely based on Fed speak and manipulation:


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The Recklessness of Quantitative Easing

The Recklessness of Quantitative Easing

Excerpt from John Hussman’s Weekly Market Comment:

An additional fruit of careless, non-economic thinking on behalf of the Fed is the idea of announcing an increase in the Fed’s informal inflation target, in order to reduce expectations regarding real interest rates. The theory here – undoubtedly fished out of a Cracker Jack box – is that lower real interest rates will result in greater eagerness to spend cash balances. Unfortunately, this belief is simply not supported by historical evidence. If the Fed should know anything, it should know that reductions in nominal interest rates result in a lowering of monetary velocity, while reductions in real interest rates result in a lowering of the velocity of commodities (commonly known as "hoarding").

Look across history both in the U.S. and internationally, and what you’ll find is that suppressed real interest rates are not correlated with an acceleration of real economic activity, but rather with the hoarding of commodities. Importantly, when people hoard, they generally hoard items that aren’t subject to depreciation, technological improvement, or other forms of obsolescence. Look at the prices of the objects that are rising in price at present – gold, silver, oil – and you will see this dynamic in action. That said, investors should not extrapolate these advances indefinitely, because all of these commodity prices have moved up in anticipation of Fed action, and now rely on massive and sustained quantitative easing. They do not represent low risk investment opportunities at present, elevated prices.

Read the whole article here. 


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ARE YOU READY FOR EQUITY RETURNS OF -0.07%?

ARE YOU READY FOR EQUITY RETURNS OF -0.07%?

Courtesy of The Pragmatic Capitalist 

In February of 2009 John Hussman wrote a letter that stood out to me.  He discussed the very depressed valuations and the likelihood of 9-11% 10 year returns.  This was a big change for Mr. Hussman and a very healthy 10 year return by any standard.  What no one expected, however, was that we would get most of that 10 year return in just 10 months.

In his latest letter Mr. Hussman updated his valuation model.  It’s not nearly as optimistic:

Total annual return = (1+g)(Yoriginal/Yterminal)^(1/T) – 1 + (Yoriginal+Yterminal)/2

As it happens, the long-term growth rates of S&P 500 dividends, earnings (measured peak-to-peak across economic cycles) and other fundamentals have been remarkably stable for more than 70 years, at about 6% annually, with very little variation even during the inflationary 1970′s. Even if one includes the depressed yields of the bubble period, and restrict history to the post-war period, the median dividend yield is 3.7%. Thus, a reasonably good estimate of future 7-year total returns for the S&P 500 is simply:

Total annual return = (1.06)(Yoriginal/.037)^(1/7) – 1 + (Yoriginal + .037)/2

At a 2% dividend yield, this estimate is currently -0.07%.

For historical perspective, the chart below presents the 7-year projected total returns obtained in this manner in blue. The actual subsequent 7-year total return for the S&P 500 is depicted in green. Notice that the performance of this method deteriorated significantly after about 1988, reflecting the fact that terminal yields 7 years later began to depart dramatically from prior historical norms.

The last 15 years have been skewed to the upside as the U.S. government has attempted to generate a capitalist market where losers never lose.  In other words, valuations have been inappropriately bolstered by the government’s constant tinkering in the markets:

“The difference between the green line and the red line represents the effect of bubble valuations. Had it not been for a period of sustained bubble valuations (which ultimately proved themselves to be bubble valuations by creating a 13 year period of dismal subsequent returns), we find that the yield-based model above would have extended its admirable historical record.

This creates a terrible problem for investors here. Given that the yield on the S&P 500 is now below 2%, it is essential for investors


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Debating the Flat Earth Society about Hyperinflation

Debating the Flat Earth Society about Hyperinflation

Courtesy of Mish 

Anglo-Saxon map of 900s showing a flat earth and the ocean that was thought to surround it. British Museum

Over the past few weeks, many people have asked me to comment on John Hussman’s August 23, 2010 post Why Quantitative Easing is Likely to Trigger a Collapse of the U.S. Dollar.

Most wanted to know how that article changed my view regarding deflation. It didn’t.

Several others went so far as to tell me that Hussman was calling for hyperinflation. They were point blank wrong.

Here is the pertinent section from Hussman’s September 6, 2010 post The Recognition Window.

A note on quantitative easing

One of the things I’m increasingly dismayed to learn is that no matter how much detail, data, and qualification I might include in these commentaries, my conclusions will often be summed up by writers or bloggers in a single sentence that often bears no relation to my point. For instance, my view that quantitative easing will trigger a "jump depreciation" in the dollar has evidently placed me among analysts warning of hyperinflation and Treasury default (a club whose card is nowhere in my wallet).

To clarify once again – I emphatically do not anticipate inflationary pressures until the second half of this decade. As I’ve repeatedly emphasized, the primary driver of inflation – historically and across countries – has been growth in government spending for purposes that do not expand the productive capacity of the economy.

Quantitative easing does not pressure the dollar by fueling inflation. It has a much more subtle effect (but one that can be expected to be amplified if fiscal policy is long-run inflationary as it is at present). Normally, equilibrium in capital flows between countries is achieved through changes in interest rates. As a result, countries with greater capital needs or higher long-run inflation tendencies also have higher interest rates. If interest rates can adjust, exchange rates don’t have to. But notice what quantitative easing does: by sitting on long-term bond yields (and creating a negative real interest rate differential versus other countries), quantitative easing prevents bond prices from acting as an adjustment factor, and forces the burden of adjustment on the exchange rate.

While some observers have noted that the value of the Japanese yen did not deteriorate dramatically over the full course of quantitative easing by the Bank of Japan – from its beginning until it was finally wound down


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The Question “Are Stocks a Screaming Buy Relative to Bonds?” Creates False Premises

The Question "Are Stocks a Screaming Buy Relative to Bonds?" Creates False Premises

Courtesy of Mish

Josh Lipton writing for Minyanville is asking the question Are Stocks a Screaming Buy Relative to Bonds?

Dr. Ed Yardeni of Yardeni Research takes one side of the debate and says "stocks are cheap" according to a model, now dubbed the “Fed’s Stock Valuation Model”.

I am quoted in the article, taking a different view of course, but I want to add to the thoughts I expressed in the article.

First a few snips from Lipton’s article …

Certainly, by employing some basic measures to compare the relative value of stocks and bonds, equities appear attractive. Dr. Ed Yardeni of Yardeni Research made the case this morning that stocks seem cheap and bonds seem expensive according to a simple model that compares the market’s earnings yield to the US Treasury bond yield.

Yardeni first started studying this model after seeing it mentioned in the Federal Reserve Board’s Monetary Policy Report to the Congress dated July 1997. The strategist dubbed it the “Fed’s Stock Valuation Model” (FSVM), and that’s what it’s been called ever since.

During the week of August 13, Yardeni says, the forward P/E of the S&P 500 was 11.8. The forward earnings yield, which is just the reciprocal of the P/E, was 8.5%. The 10-year Treasury bond’s yield is 2.60% this morning. So its P/E, which is the reciprocal of the yield, is 38.5.

According to the FSVM, that means stocks are 64.8% undervalued relative to bonds.

James Swanson, chief investment strategist at MFS Investment Management, agrees that stocks now look cheap relative to bonds and that, as an asset class, equities boast more opportunity for investors looking ahead.

In short, the stock market is now priced for an economic future that Swanson thinks remains unlikely. “This only makes sense if the world is going into a deflationary scenario,” the strategist says. “Otherwise, this is a mispricing.”

Yes, stocks might look cheap relative to bonds, but that’s because the economic outlook remains bleak. Mike Shedlock, a well-known registered investment adviser for Sitka Pacific Capital Management, argues that the economy is already mired in deflation, a dangerous downward spiral in prices that will prove lethal for corporate profits.

"Why are Treasury yields low?" Shedlock asks. "It’s because the economy is in recession."

Furthermore, Shedlock argues that investors are ultimately best advised


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REGARDING THOSE “STRONG” CORPORATE BALANCE SHEETS

REGARDING THOSE “STRONG” CORPORATE BALANCE SHEETS

Courtesy of The Pragmatic Capitalist 

Calculator and pencil on top of balance sheet

Brett Arends had an excellent piece on MarketWatch yesterday regarding the true state of US corporations.  You’ve probably heard the argument before that corporations are sitting on record piles of cash – their balance sheets are in immaculate condition. Right?  Wrong!  These comments are generally made without accounting for both sides of the ledger.  What is often ignored is that the total debts of these companies has also skyrocketed.  Admittedly, I’ve been guilty of this in the past when discussing corporate cash levels and Arends (rightfully) sets the record straight.  He notes that corporations are even worse off today (in terms of debt levels) than they were when the crisis began:

“American companies are not in robust financial shape. Federal Reserve data show that their debts have been rising, not falling. By some measures, they are now more leveraged than at any time since the Great Depression.

You’d think someone might have noticed something amiss. After all, we were simultaneously being told that companies (a) had more money than they know what to do with; (b) had even more money coming in due to a surge in profits; yet (c) they have been out in the bond market borrowing as fast as they can.

Does that sound a little odd to you?

A look at the facts shows that companies only have “record amounts of cash” in the way that Subprime Suzy was flush with cash after that big refi back in 2005. So long as you don’t look at the liabilities, the picture looks great. Hey, why not buy a Jacuzzi?

According to the Federal Reserve, nonfinancial firms borrowed another $289 billion in the first quarter, taking their total domestic debts to $7.2 trillion, the highest level ever. That’s up by $1.1 trillion since the first quarter of 2007; it’s twice the level seen in the late 1990s.”

This will also sound familiar to readers of John Hussman who has debunked the cash on the sidelines story more than once:

Interestingly, some observers lament that corporations and some individuals are holding their assets in “cash” rather than spending and investing those balances, apparently believing that this money is being “held back” from the economy. What


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RARE INTERVIEW WITH JOHN HUSSMAN: WHY HE IS BEARISH RIGHT NOW

RARE INTERVIEW WITH JOHN HUSSMAN: WHY HE IS BEARISH RIGHT NOW

Courtesy of The Pragmatic Capitalist

In a rare interview with Morningstar John Hussman recently elaborated on his recession call and details why he is turning even more cautious than the has been. Hussman says the March 2009 lows are likely to be broken and that stocks are grossly overvalued right now:


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23 Doomsayers Who Say We’re Heading Toward Depression In 2011

23 Doomsayers Who Say We’re Heading Toward Depression In 2011

Paul Krugman Leonard Lopate

By Michael Snyder writing at The Business Insider/Clusterstock 

Micheal Snyder is editor of "The Economic Collapse Blog"

Could the world economy be headed for a depression in 2011?

As inconceivable as that may seem to a lot of people, the truth is that top economists and governmental authorities all over the globe say that the economic warning signs are there and that we need to start paying attention to them.  The two primary ingredients for a depression are debt and fear, and the reality is that we have both of them in abundance in the financial world today.

Meet The New Doomsayers >

In response to the global financial meltdown of 2007 and 2008, governments around the world spent unprecedented amounts of money and got into a ton of debt.  All of that spending did help bail out the global banking system, but now that an increasing number of governments around the world are in need of bailouts themselves, what is going to happen?  We have already seen the fear that is generated when one small little nation like Greece even hints at defaulting.  When it becomes apparent that quite a few governments around the globe cannot handle their debt burdens, what kind of shockwave is that going to send through financial markets? 

The truth is that we are facing the greatest sovereign debt crisis in modern history.  There is no way out of this financial mess that does not include a significant amount of economic pain. 

When you add mountains of debt to paralyzing fear to strict austerity measures, what do you get?


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JOHN HUSSMAN ISSUES A RECESSION WARNING

JOHN HUSSMAN ISSUES A RECESSION WARNING

Courtesy of The Pragmatic Capitalist

John Hussman is officially sounding the double dip siren.  He issued a similar call in November of 2007:

Based on evidence that has always and only been observed during or immediately prior to U.S. recessions, the U.S. economy appears headed into a second leg of an unusually challenging downturn.

A few weeks ago, I noted that our recession warning composite was on the brink of a signal that has always and only occurred during or immediately prior to U.S. recessions, the last signal being the warning I reported in the November 12, 2007 weekly comment Expecting A Recession. While the set of criteria I noted then would still require a decline in the ISM Purchasing Managers Index to 54 or less to complete a recession warning, what prompts my immediate concern is that the growth rate of the ECRI Weekly Leading Index has now declined to -6.9%. The WLI growth rate has historically demonstrated a strong correlation with the ISM Purchasing Managers Index, with the correlation being highest at a lead time of 13 weeks.

wmc100628a JOHN HUSSMAN ISSUES A RECESSION WARNING

Taking the growth rate of the WLI as a single indicator, the only instance when a level of -6.9% was not associated with an actual recession was a single observation in 1988. But as I’ve long noted, recession evidence is best taken as a syndrome of multiple conditions, including the behavior of the yield curve, credit spreads, stock prices, and employment growth. Given that the WLI growth rate leads the PMI by about 13 weeks, I substituted the WLI growth rate for the PMI criterion in condition 4 of our recession warning composite. As you can see, the results are nearly identical, and not surprisingly, are slightly more timely than using the PMI. The blue line indicates recession warning signals from the composite of indicators, while the red blocks indicate official U.S. recessions as identified by the National Bureau of Economic Research.

Read the full article here.

Source: Hussman Funds 


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Kimble Charting Solutions

Nasdaq 100 Relative Strength Testing 2000 Highs

Courtesy of Chris Kimble

The tech bubble didn’t end well. BUT it did tell us that the world was shifting into the technology age…

Since the Nasdaq 100 bottomed in 2002, the broader markets have turned over leadership to the technology sector.

This can be seen in today’s chart, highlighting the ratio of Nasdaq 100 to S&P 500 performance (on a “monthly” basis).

As you can see, the bars are in a rising bullish channel and have turned sharply higher since the 2018 stock market lows. This highlights the strength of the Nasdaq 100 and large-cap tech stocks.

...

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Zero Hedge

Israeli Leaders Say West Bank Annexation Must Wait Due To COVID-19

Courtesy of ZeroHedge View original post here.

What was surely supposed be the most controversial and provocative move in all recent Israeli-Palestine conflict history was supposed to be initiated yesterday, July 1st, according to prior target date statements of Prime Minister Benjamin Netanyahu to annex up to one-third of West Bank territory, including the Jordan Valley.

Netanyahu and other top Israeli officials claimed to have a 'green light' from the Trump administration, but at this point it's anything but certain. “We are in discreet talks with US officials here,” Netanyahu ...



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Phil's Favorites

Which drugs and therapies are proven to work, and which ones don't, for COVID-19?

 

Which drugs and therapies are proven to work, and which ones don't, for COVID-19?

We are slowly figuring out which drugs and therapies are effective against the new coronavirus. Anton Petrus / Getty Images

Courtesy of William Petri, University of Virginia

I am a physician and a scientist at the University of Virginia. I care for patients and conduct research to find better ways to diagnose and treat infectious ...



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Biotech/COVID-19

Which drugs and therapies are proven to work, and which ones don't, for COVID-19?

 

Which drugs and therapies are proven to work, and which ones don't, for COVID-19?

We are slowly figuring out which drugs and therapies are effective against the new coronavirus. Anton Petrus / Getty Images

Courtesy of William Petri, University of Virginia

I am a physician and a scientist at the University of Virginia. I care for patients and conduct research to find better ways to diagnose and treat infectious ...



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ValueWalk

FedEx Corp.: Fundamentals Support the Price Increase

By F.A.S.T. Graphs. Originally published at ValueWalk.

Introduction

After reporting better than 4th quarter results on Tuesday, the stock price of FedEx Corporation (NYSE:FDX) has been on a tear. With this article, I plan to demonstrate that the fundamentals support the current price rise. Moreover, the fundamentals also suggest that it is not too late to take a long-term position in this leading air freight and logistics company.

Q1 2020 hedge fund letters, conferences and more

Yesterday, FedEx reported a surge in quarterly adjusted earnings of $2.53 per share compared to expectations of $1.52 per s...



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The Technical Traders

Long-Term Consumer Discretionary Winners

Courtesy of Technical Traders

I was live on TD Ameritrade TV talking about consumer discretionary, staples, and utility sectors. Explained is a unique crossover on how some discretionary stocks are also becoming a consumer staple.

Get My ETF Trade Signals, Entry, Targets, and Stop Levels – CLICK HERE ...

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Chart School

US Dollar with Ney and Gann Angles

Courtesy of Read the Ticker

Where is price going, is there strength or weakness in the chart?


Previous Post on the US Dollar : Where is the US Dollar trend headed ?


The question is always what will the future price action look like ?


This post will highlight the use of lines generated by angles. Not trend lines, as trend lines require two known points on a chart, where as angles require only one known point and a angle degree to draw a line. The question then becomes how is the angle degree determined.



There are two theories: ...

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Lee's Free Thinking

These Charts Show COVID 19 Is Spreading in the US and Will Kill the Economy

 

These Charts Show COVID 19 Is Spreading in the US and Will Kill the Economy

Courtesy of  

The COVID 19 pandemic is, predictably, worsening again in much of the US. Only the Northeast, and to a lesser extent some Midwestern states, have been consistently improving. And that trend could also reverse as those states fully reopen.

The problem in the US seems to be widespread public resistance to recommended practices of social distancing and mask wearing. In countries where these practices have been practi...



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Digital Currencies

Blockchains can trace foods from farm to plate, but the industry is still behind the curve

 

Blockchains can trace foods from farm to plate, but the industry is still behind the curve

App-etising? LDprod

Courtesy of Michael Rogerson, University of Bath and Glenn Parry, University of Surrey

Food supply chains were vulnerable long before the coronavirus pandemic. Recent scandals have ranged from modern slavery ...



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Members' Corner

Coronavirus, 'Plandemic' and the seven traits of conspiratorial thinking

 

Coronavirus, 'Plandemic' and the seven traits of conspiratorial thinking

No matter the details of the plot, conspiracy theories follow common patterns of thought. Ranta Images/iStock/Getty Images Plus

Courtesy of John Cook, George Mason University; Sander van der Linden, University of Cambridge; Stephan Lewandowsky...



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Insider Scoop

Economic Data Scheduled For Friday

Courtesy of Benzinga

  • Data on nonfarm payrolls and unemployment rate for March will be released at 8:30 a.m. ET.
  • US Services Purchasing Managers' Index for March is scheduled for release at 9:45 a.m. ET.
  • The ISM's non-manufacturing index for March will be released at 10:00 a.m. ET.
  • The Baker Hughes North American rig count report for the latest week is scheduled for release at 1:00 p.m. ET.
...

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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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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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