Quantitative Methods – Page 29

Fat Fed Profits Do Not Create a Healthy Economy

Posted on 13 January 201013 January 2010 by David Merkel

1) Inflate the size of my balance sheet by 2.5x over last year, all through borrowing at really low rates.

2) Increase my interest spreads by ~50% over last year.

means:

3) I only increased my profits by ~50% over last year??!? :(? I would have thought that profits would have more than tripled.

Such is life for the Fed.? The crisis was a time that led me to write pieces like The Liquidity Monopoly, where the Fed, FDIC, and Treasury played favorites in the economy, and starved the portions of the economy not dominated by large firms, particularly with banks and autos.

My main point is that the Fed should have earned a lot more.? Where did it all go?? It will be interesting to see a detailed rendering of the Fed’s finances when this is done.? Did they realize losses on some of the assets that they bought?

My friend Peter Eavis of the Wall Street Journal agrees.? Or, read Felix, and then read the exchange between my two friends Alea and Kid Dynamite.? Alea knows more, but I like KD’s spirit.

The Fed has become more like the banks that it regulates.? They are taking on credit risk, duration risk, convexity risk, etc.? And being a government institution, they don’t have good incentives for knowing how to price risk.

So, when I see the Fed’s seniorage profits up only 50%, I am not impressed.? The Fed doesn’t mark to market, so we really don’t know the true performance.? Also, remember that seniorage profits are a hidden tax on savers, would earn a higher yield if the government provided less financing.

Part of why we end up in an economic funk is that we finance dud assets at favorable rates, so capital does not get redeployed to better uses.? Aside from that, cheap leverage creates a yield frenzy over healthy assets, so that they can become over-levered as well.? Examples are numerous:

The corporate bond market continues to be on fire.
Investors? including PIMCO, are flocking to European corporates, though generally only the stronger countries, not Greece, Italy, Ireland, Portugal or Spain.? (Note: PIMCO will exit the trade at a better time than most imitators.)
Average people are willing to fund all of this as well, accepting low rates of return for the duration and credit risks that they take on.? If the Fed wanted people to bid up bond prices to unsustainable levels, they have succeeded.
Finally, I suppose if one pours enough jet fuel on a soggy, rotten log, I suppose one could get it to burn.? If the prices of non-GSE mortgage debt are rising rapidly, to me, that means speculation is getting out of hand.? Financial leverage is even coming back to these markets.? As with junk bonds, the markets are subject to two risks — that the cheap financing disappears, or that the likelihood of defaults becomes more obvious.

To me it is no great achievement that the financial markets are doing well while the real economy is in the tank (Unemployment, Production).? That is the nature of what happens when credit is force-fed into an economy, even leaving aside the problems of cronyism.? There should be no optimism over the large profits realized by the Fed; it may defray our taxes, but on net, the policies have not helped create a healthier real economy.

Where Can I Learn the Investment Math? The Bond Math?

Posted on 25 December 2009 by David Merkel

I was recently asked where to look for how to understand quantitative investing, fixed income, etc.? Let me try to explain.

I have reviewed in the past Investing by the Numbers (Frank J. Fabozzi Series).? This is a good book that covers a wide number of areas in quantitative investing without getting too technical.? I learned a lot from it, and I don’t think the lessons there are out of date.

As for Fixed Income, the main book is Handbook of Fixed Income Securities 7th Edition, edited by Frank Fabozzi.? Fabozzi gets practical experts to write for him and he edits the book so that it reads well.? The result is a readable book that gives all of the qualitative information about the market, but does not deliver the math.? That’s a good thing.? Most people don’t want the math.

But… what if you are a misfit like me who does want the math.? Where do you go? Buy the Theory of Interest.? And, don’t buy it new.? Buy it used, or get it through interlibrary loan.? Same for Fabozzi’s book.? Don’t overpay.? And, if you can understand it well, maybe you would like to become an actuary.? The actuarial profession has done many good things for me; maybe it will do so for you also.

I have learned a lot from all three of these books.? You can too.

On Contrarianism

Posted on 23 December 200924 December 2009 by David Merkel

With markets, it doesn’t matter what people say.? What matters is what they rely upon.

Face it, people have opinions, and when asked only the most cautious or prudent won’t give an answer.? Talk is cheap.

But money talks.? What will people or institutions risk some of their financial well-being in order to make money?

Turning points are exceptionally difficult to call with time precision.? Anyone can say that a trend is going to break for a long while before it breaks; the trick is to be able to make the change within a short distance of the inflection point.? I’ve done it a few times, but I have little confidence in whether I can do it regularly.

Examples:

Five months before the crest of the housing bubble, I wrote a piece on why it would pop soon.
A few months before the subprime mortgage crisis hit, I wrote a piece on why it would end badly.
In March of 2000, I told the investment department that I worked in that financing for tech companies was unwinding, and that the tech bubble would deflate.
In October 2002, I sensed that the bear market was over and began taking risk in my own portfolio, as well as my main client?s portfolio.
In May 2003, I told my boss that we were in a liquidity rally and that shorting lower grade companies was suicidal, because financing was becoming available for marginal ideas.? In early 2004, I confirmed that by writing a piece showing that the bull market had a way to go.
And recently, I made predictions on munis, mortgage bonds, agency bonds, and investment grade and junk corporates.

Now part of this is that if you predict enough things, you will have some right ones to point to.? I am obviously picking and choosing here, but when I made these predictions, there was a method to my madness.? I am not like Cramer, who makes predictions every day.? I wait for points where markets are out of kilter, and then I act, and sometimes predict.

Calling turning points is very difficult.? I want to offer two bits of advice to those to try to do so.

1) Look for situations where the yield is unsustainable on the high side or on the low side.

Examples:

Earnings yield too low during the tech bubble.? Also workers were relying on stock to rise, because they were getting much of their pay through options.
Net yield on much residential investment real estate negative in 2005-7, without even factoring in maintenance costs.? When someone is relying on price appreciation in order to break even something is wrong.
Toward the end of the commercial real estate bubble, the same was true.? Equity investors began to rely on price appreciation in order to break even.
When spreads on high yield blew out, at its worst the market was assuming that half of all high yield issues would die, with low recoveries.? Even the Great Depression wasn?t that bad.? The same was true in a faint echo for BBB Corporates.
During the recent bottom in March 2009, high quality companies could be bought for less than their net worth and at earnings yields unseen since 1973-74.

2) Look for a qualitative change when you think we might be near a turning point.

Chatter changes at/near turning points.? Certainty gives way to uncertainty.? Uncertainty gives way to worry.? Worry gives way to panic.? In October 2005, Googlebots that I created tipped me off to the change in the residential real estate markets way ahead of most parties.
Inflection points tend to be times of stasis as far as economic variables go, but confusion in terms of chatter.? During the tech bubble in early 2000, the chatter became decidedly less certain.

Inflection points are times of change, and chatter should reflect that.

Coming back to contrarianism, ask yourself, ?What are people relying on to be true, that may not be true??? That is what it means to be a contrarian.? Mere disagreement means little.? Where have men placed their bets?? Betting against the consensus is what a contrarian does.

My TIPS, Treasuries, and Inflation Model

Posted on 23 December 200923 December 2009 by David Merkel

I finished the first phase of a project today.? But first let me tell you a story.? It was 1990, and the Society of Actuaries Investment Section was holding a conference.? It was a great conference; I still have the binder from it.? There are few meetings from twenty years ago that still have relevance for me.

One of the presentations was by Stanley Diller, a managing director of Bear Stearns, who insulted all of the actuaries at the conference by telling them the the insurance industry was dead wrong for talking about yields and spreads.? Everything was duration and convexity, and those that did not understand that would lose.

He ended his presentation suddenly, did not take questions, and stormed out of the room.? I’m not sure why, but I had a seat in the back, and intercepted him.? I said, “You can’t just say this and not give any justification for your views, how do you back it up?”? He thrust a business card into my hand and said, “Call my secretary, she will send you the info.”? He stormed away.

The next day I called the secretary, and she told me she would send the information.? Two days later, I had it, and a few days later, I had replicated it in my own model.

Since then, I have used the model profitably many times.? Today I use it to describe the yields in Treasury Notes and TIPS.? I have used it to produce an estimate of future inflation expectations.

Using closing prices, here is my estimate of the coupon-paying yield curve:

And here is the spot curve (estimating where zero coupon bonds would price):

And finally, the forward curve, which estimates the expectations of future short-term rates, inflation, and real rates:

Pretty neat, huh?? Let me tell you a little about the model:

Values are as of the close 12/22/2009, but the model can be run in real time.
It is estimated from the full coupon-paying Treasury Note and Bond markets — over 200 bonds in the model.
The model estimates a nominal spot curve, fitting prices with 4 parameters, over 99% R-Squared.
The model estimates a forward inflation curve, fitting TIPS prices with 4 parameters, over 99% R-Squared.
The two models are estimated jointly, through nonlinear optimization.
The model has one constraint — nominal spot yields must be positive after 4 months.
Every other curve is derived from those two curves.

What are the useful things that we learn from the model?

There are mispricings in the Treasury and TIPS curves, but they are typically small, and would be hard to make money off of.? That’s? demonstrated by the high R-Squareds.
The Fed has achieved its goal of making real rates negative in the short term.
And, has made made nominal rates negative for some very short instruments inside 6 months of maturity.
Inflation expectations start low, and peak around 2022, then tail off.
Long term inflation expectations are still under 3.5% — ignore the portion of the inflation and real curves after 23 years, they are extrapolations.
Implied short-term real yields go positive in 2011, peak in 2024 and tail off thereafter.
The nominal forward curve is steep as a mountain on both sides.? Though there is a lot of fear over what will happen over the next 12-14 years, those fears have not been built into the prices of longer-dated Treasury securities.
The nominal spot curve peaks after 22 years — in my experience, that is normal, and is a reason why longer nominal note yields decline.? US Treasury — take note.
Inspecting the differences between coupon-paying yields on Treasuries and TIPS makes inflation expectations look more tame than they really are.? Federal Reserve — take note.
30-year TIPS would likely fund cheaper than 20-year TIPS — US Treasury, take note.? The scarcity value would help as well.

This is just the beginning.? I’m not planning on writing about this every day, but I should be able give you some updates every now and then.? Hopefully the firm I work for should be able to benefit through research that this enables me to create for institutional clients.

Full disclosure: I own shares in Vanguard’s TIPS fund.? And truth, we all own Treasuries somewhere if we look deep enough. 😉

Notes on Fed Policy and Financial Regulation

Posted on 16 December 2009 by David Merkel

I’m not likely to be able to comment when the FOMC announces its lack of action today.? The Fed will continue to keep policy loose, while slowly closing down ancillary lending programs, and bloating their balance sheet with mortgage backed securities [MBS] guaranteed by Fannie and Freddie, and ultimately by the Federal Government, which gets the profit or loss from the Fed’s financing (of the mortgages at 0% interest for now).

Going back to last night’s post, strip away the complexity, and what you have is the Federal Government intervening in the MBS market, and forcing down yields, at a cost of indebting future generations (should they decide to make good on those).? This will eventually fail as a strategy.? Unless the Fed wants to keep its balance sheet permanently larger, yields on MBS will rise when they stop buying.? And, the moment that they hint that they will start unloading, rates will back up significantly.? They are too large relative to the MBS market.

They can engage in fancy strategies where they try to remove policy accommodation either through rates or the size of the balance sheet, but one thing Fed history teaches us is that the Fed doesn’t know what will happen when a tightening cycle starts, but usually it ends with a bang — some market blowing up.

Two more notes: it doesn’t matter who the Fed Chairman is.? The structure of the Fed matters more than the man.? That said, Bernanke has promised transparency but has not given it at the most crucial times — those dealing with the bailouts.? All of the talk to audit/limit/shrink/end the Fed comes from abuse of those powers, which should be done by the Treasury and Congress, so that voters can hold them accountable.

Finally, one quick note on regulation of financials.? Laws don’t mean squat if regulators won’t enforce them.? There was enough power in prior laws for regulators to have curbed all of the abuses.? The regulators did not use their powers then; what makes us think that they will use expanded powers?? Regulatory capture has happened in the banking industry; regulators will have to get ugly with those that they regulate if they genuinely want to regulate.

This includes changing risk-based capital formulas to remove the advantage of securitizing debt.? I’m not saying penalize securitization, but put it on a level playing field so that the inherent leverage involved in securitization gets a higher capital charge relative to straight debt of a similar risk class.

That also includes not letting banks fudge asset values to give the appearance of solvency, but more on that tonight.? I gotta fly now on business.

Book Reviews of Two Very Different Books

Posted on 15 December 200915 December 2009 by David Merkel

Tonight’s book reviews are of two very different, yet very similar books: Fire Your Stock Analyst!: Analyzing Stocks On Your Own (2nd Edition) and, Far from Random: Using Investor Behavior and Trend Analysis to Forecast Market Movement.

Why different?? Well, the first relies on fundamental analysis, and the second on technical analysis.? Why similar?? They are both very single-minded in the way they present how to win in investing.

There are other differences, though.? Fire Your Stock Analyst, by Harry Domash, is a very complete fundamental investing guide for both value and growth investors.? Very complete, to the degree that most average investors will not be able to do all that Harry recommends.? There is a lot to do, and not all of it is of highest importance in my opinion.? Many professional investment shops ignore steps that he prescribes.? I don’t do half of what he prescribes, and I do better than most.? Also, much of what he prescribes is not applicable to financial stocks, but he does not seem to realize that.

Far from Random has a different flaw.? It spends 75% of the book talking about what does not work, and only 25% on what he thinks works.? In the last quarter of the book, the author asserts that trend channel analysis works? through giving stylized examples.? There are no academic studies to prove the point, or, audited track records, as Michael Covel is fond of.? (This makes me want to recommend Trend Following (Updated Edition): Learn to Make Millions in Up or Down Markets; there is more logic behind it than Far from Random.)

Who could benefit from these books:

With Fire your Stock Analyst, someone who wants an introduction to fundamental analysis could benefit.? Far from Random, I’m not sure anyone could benefit.? There are much better books on technical analysis.

Full disclosure:? Publishers send me books for free.? I review some of them, the ones that I think are most interesting.? If you enter Amazon through my site and buy anything, I get a small commission.? Don’t buy anything you don’t want.? I do this as a service to readers, and am not looking for remuneration as much as tips for what I have written more generally.

Book Review: Dynamic Asset Allocation

Posted on 12 December 200912 February 2011 by David Merkel

James Picerno writes the popular blog? The Capital Spectator. One of his main topics is asset allocation.? He has a book coming out in February called Dynamic Asset Allocation: Modern Portfolio Theory Updated for the Smart Investor.

Asset allocation is important.? It determines much of the returns investors will receive.

This book goes into a long discussion of modern portfolio theory, and the author finds MPT to be valuable, but needs to be supplemented by other factors other than the market portfolio.? Market capitalization, individual stock valuation, and overall market cheapness/dearness plays a role in asset allocation.? This rectifies the main complaint of value investors regarding asset allocation, in that relatively lower prices should lead investors to allocate more to an asset class.

There are elements of my own view here, which says that asset allocation should look at sustainable yield levels adjusted for the likelihood of those yields occurring, and the potential for downside risk.

Also, the author spends time on the special situations of asset allocation for the individual or institution — how old you are, or, what industry you are in.? I experienced that at one firm I was at where I managed the profit sharing assets.? We underweighted financials because our firm did well when financials did well.? We did not want employees worrying about their assets if the firm was having a bad year.

I recommend the book, but it is not a popular book.? Average people will not get a lot out of it.? The book requires a moderate knowledge of finance to make it valuable to the reader.

Who would benefit from this book: those who have a strong interest in asset allocation, and like or are willing to tolerate a decent amount of academic discussion of modern portfolio theory.? As academic views go, this is a better one.? That said, many people will find this book a tough slog because they don’t want to deal with the academic arguments.

If you want to buy it, you can get it here: Dynamic Asset Allocation: Modern Portfolio Theory Updated for the Smart Investor.

Full disclosure: I earn a small commission from Amazon for anyone entering Amazon through my site, and buying anything there.? Your price does not rise from my commission.? Don?t buy anything you don?t want to buy if you want to reward me for my writing.? Only buy what you need if Amazon offers you the best deal.

<a href=”http://www.amazon.com/gp/product/1576603598?ie=UTF8&tag=thalbl-20&linkCode=as2&camp=1789&creative=9325&creativeASIN=1576603598″>Dynamic Asset Allocation: Modern Portfolio Theory Updated for the Smart Investor</a><img src=”http://www.assoc-amazon.com/e/ir?t=thalbl-20&l=as2&o=1&a=1576603598″ width=”1″ height=”1″ border=”0″ alt=”” style=”border:none !important; margin:0px !important;” />

Beating the Mogul Game — An Exercise in Applied Mathematics

Posted on 10 December 200920 June 2017 by David Merkel

I have often wondered about how to rank sports teams.? This goes way back to when I was 10 years old, when I ran across a magazine at summer camp that purported to do this for NFL football.? And so I wondered for many years, looking at similar problems and wondering how a ranking of teams could be generated from a win-loss history.? I finally came to a conclusion when I played the Mogul Game.

The Mogul Game has 148 rich people, and they vary from the super-rich (Gates, Buffett, Ellison) to the not-so-rich (I think they got a kick out of putting Donald Trump at/near the bottom of the list, much as he boasts to Forbes that he is much wealthier than they calculate).

After playing the game idly for a little while, I concluded that if I wanted to win, I would have to capture and analyze data from the game in order to win it.? And so I did, recording who was richer than whom.? I went through four phases:

Doing qualitative comparisons when I wasn’t certain of who was richer.? Who had the two parties beaten and lost to?
Comparing the trial ranks when the difference was greater than 10.
Looking at the highest ranked persons that a given set of contestants had won against, and the lowest ranked that they had lost to.
Looking at the average of the highest rank won against and the lowest rank lost to as the best proxy for a contestant’s own rank, unless it violated the results of an actual contest.? In hindsight, I should have adopted that rule much earlier.

It took three days of off-and-on playing to master the game.? Not all that important, but as I mentioned above, the method can be applied with some modifications for ranking sports teams in an unbiased way.? The same could be applied to any competitive activity where there is a win/loss result.? There are two changes for other activities, though.? Games are not necessarily transitive.? Rich person A is richer than B.? B is richer than C.? A will always be richer than C.? In competitions, Team A can beat team B one day, and lose the next.? Also, Team A can beat team B, which can beat Team C, but C can beat A.? So, if I were doing this for baseball teams, my ranks would drive probabilities of one team beating another.

Why would this be necessary when one can simply inspect the win-loss percentages?? Teams with good records may have weak schedules, and this takes account of the strength of the teams played in assessing the strength of a team.? I’m not sure what they do with ranking College Football or Basketball teams, but this would be a more bloodless way of making the comparison.? Granted, it takes a certain number of contests before there is enough density of information to create a ranking, but given a list of wins and losses from an entire season, this method should be capable of ranking an entire league.

I know this is an odd post for me, but I found it to be an interesting project, and it does have other applications.? Thoughts?

On Sovereign and Quasi-Sovereign Risks

Posted on 1 December 2009 by David Merkel

I like investing internationally, because of the diversification it offers, both in stocks and bonds.? Or, think of it as a hedge.? Will the American Experiment continue to prosper?? We have come a long way from the Founding Fathers, and more than half of it is not good.

But there are some place in our world that I will not invest in.? I have two requirements.

Contract law must be close to that in the US, or better.
Accounting practices must be close to the quality of the US, or better.

Sounds simple, but foreign tales are beguiling.? There is an exclusiveness about them, and a sense of greater knowledge for the one who has bothered to learn a trifle.? My acid test is watching over a long period and seeing how they treat foreign shareholders.? That is a good measure of the morality of management.? If they cheat foreign shareholders, they will eventually cheat domestic shareholders as well.

So, what don’t I invest in?

Russia
China
Most of the Middle East.
Venezuela
And other places that do not protect foreign shareholders on a level that is at least close to that of citizens.

The idea is to avoid situations where your rights as a shareholder might be ignored.? It does not matter how cheap an asset is; if the ability of the asset to be liquidated is low, so should the valuation of the asset be low.? Don’t buy pigs in pokes.

This has application today with Dubai.? The Dubai government is telling creditors that it will not stand behind Dubai World, and nor will the UAE, but Abu Dhabi will stand behind UAE banks.? This is tough on foreign creditors because foreign creditor rights in Dubai have not been tested until now.? Even domestic rights are unclear.

A Note on Debt Risks

Much Islamic debt, because of the prohibition on interest, acts like an extremely volatile hybrid bond during times of stress.? This incident will prove instructive on how these bonds keep or lose value in a reorganization.? What happens here will probably have an impact on how much money will be willing to flow into these vehicles in the future.? Personally, I never found them compelling, and probably won’t in the future.? There is something compelling about straight senior unsecured debt that pays interest.? I think the guarantees involved, together with straightforward reorganization processes, create a fair game where it is easier to decide whether lending or borrowing makes sense.

Complexity in bonds is usually a loser for the lender — whether complexity of the borrower’s finances, complexity of holding company structures, complexity of the governing laws, or even enforcing a complex contract where the lender duped the less-knowledgeable borrower.

What applies to corporate debt — long term buy and hold investors do okay with investment grade debt, but less well with junk debt, and worse the junkier it gets.? Layer on top of that the difficulty of being able to psychologically buy and hold during a crisis.? Even if you personally have the fortitude to do so, there may be others that influence you that don’t.? (E.g., the rating agencies come along near the trough of the crisis, and tell the CEO that they will downgrade you if you don’t sell bonds with the risk du jour.? Or, your clients look at their statements, and see the unrealized losses and beg you to sell — it doesn’t matter, the screaming is always the loudest at the bottom (in hindsight).

A Final Note on Sovereign Risks

Sovereign and quasi-sovereign risks like Dubai World may play a larger role in overall credit risk as the broader crisis plays out.? When I was younger, I thought the great risk of the Euro was that it would be too weak.? Bite my tongue.? The risk is that it could be too strong, and marginal European countries (Greece, Iceland, Ireland, Spain, Portugal, and many Eastern European countries) that have too much Euro-denominated debt relative to their ability to tax and pay will find themselves pinched — and they can’t inflate their way out.

When I first came to bond investing (early 90s), sovereign risks were viewed? skeptically, excluding the large Western nations — bond managers had been taught by the greyheads who had seen sovereign defaults, and the difficult of recovering money in default, still had a bias against sovereign and quasi-sovereign risks.? That bias is largely gone today, after a period of few sovereign losses.? Yes, Mexico, Russia and Argentina have given their share of heartburn, but the significant growth in the emerging markets has made bondholders forgiving.? Add in the long term structural deficits of the US and Japan, and it makes for a really interesting investment picture.

Be aware.? If you hold sovereign debts, look at the ability of the government to tax and pay over the long haul.? On quasi-sovereigns, analyze the explicit guarantees, if any, and the governing law — as you can see with Dubai World, in a crisis, only the guarantees matter, and only to the degree that they are enforceable under law.? With Dubai World, it will be judged in Dubai courts by a judge appointed by the ruling family of the emirate, which owns the equity of Dubai World.? Not a strong bargaining position in my opinion.? The only thing worse than relying on the kindness of strangers, is relying on the kindness of adversaries.

A Final Aside

I knew about how dodgy the investments were that Dubai and its corporations were undertaking, so I was always a skeptic, though I never wrote about Dubai, because it is so far afield for me.? What I did not know was the near slavery of foreign workers tricked to go to Dubai, and then forced to work with little to no rights.? Read the story, it is not pretty, but reinforces a belief of mine that governments and corporations willing to cheat one group of people, will cheat other groups of people as well.? Character is important in any credit decision, and the government of Dubai does not have good character in my book.

Book Review: Market Indicators

Posted on 28 November 2009 by David Merkel

Every one one us has limited bandwidth for analysis of data.? We pick and choose a few ideas that seem to work for us, and then stick with them.? That is often best, because good investors settle into investment methods that are consistent with their character.? But every now and then it is good to open things up and try to see whether the investment methods can be improved.

For those that use market indicators, this is the sort of book that will make one say, “What if?? What if I combine this market indicator with what I am doing now in my investing?”? In most cases, the answer will be “Um, that doesn’t seem to fit.”? But one good idea can pay for a book and then some.? All investment strategies have weaknesses, but often the weaknesses of one method can be complemented by another.? My favorite example is that as a value investor, I am almost always early.? I buy and sell too soon, and leave profits on the table.? Adding a momentum overlay can aid the value investor by delaying purchases of seemingly cheap stocks when the price is falling rapidly, and delaying sales of seemingly cheap stocks when the price is rising rapidly.

Looking outside your current circle of competence may yield some useful ideas, then.? But how do you know where you might look if you’re not aware that there might be indicators that you have never heard of?? Market Indicators delivers a bevy of indicators in the following areas:

Options-derived (VIX, put/call)
Volume and Price driven (Money flow, rate of change, 90% up/down days, and more)
Where the fast money invests (money in bull vs bear funds, sector fund sizes, and more)
Analyzing the likely motives of other classes of investors (margin balances, short interest, etc.)
Price Momentum and Mean-Reversion
Measuring asset classes and sectors using fundamental metrics? (Fed model, sector weightings, Q-ratio, etc.)
Investor sentiment surveys
How to use analyst opinions, if at all?
News reporting and reactions of stocks to news
Odd bits of news (CEO behavior, little things that indicate a qualitative change in the life of a company)
Insider buying and selling
Commodity market data (COT, etc.)
Bond market behavior (credit cycle, Fed moves, Credit Default Swaps, and more)
Changes in the capital structure (M&A, equity/debt issuance, etc.)
Monitoring the greats (13F filings)

No one can use all of these indicators.? You can probably only use a fraction of these indicators.? But being aware of how others view the market can widen your perspective, and help to reduce negative surprises on your part.

Quibbles

By its nature, since the book cuts across a wide number of areas in 216 short pages, you only get a taste of everything.? I liked this book, but there is room for a second book in this area — one of additional indicators passed over (I have a bunch!), or going into greater depth on the indicators covered.

Who will benefit from this book?

You have to have a quantitative bent, at least to the level of being willing to go out and collect simple data in order to benefit here.? Now, most serious investors do that, so I would say that serious investors can benefit from the “cook’s tour” of market indicators that this book gives, unless they are so serious that they know all of these indicators.? (Like me.)

If you would like to buy the book, you can buy it here: Market Indicators: The Best-Kept Secret to More Effective Trading and Investing.

Full disclosure: This book is unusual for me in two ways.? First, the author (not the PR flack) sent me a copy, with a nice handwritten letter thanking me for my blog and my assistance.? That is why there is the second reason.? Pages 80-81 summarize the longer argument made in my blog post, The Fed Model, where I take the so-called Fed model, and rederive it using the simple version of the Dividend Discount Model, giving a more robust model with reasonable theoretical underpinnings.

I earn a small commission from Amazon for anyone entering Amazon through my site, and buying anything there.? Your price does not rise from my commission.? Don’t buy anything you don’t want to buy if you want to reward me for my writing.? Only buy what you need if Amazon offers you the best deal.