Markets in compute power, much talked about by me and others are now it seems finally here (from The Economist:)
Fundamentally, SpotCloud works like other spot markets. Firms with excess computing capacity—operators of data centres, cloud providers, hosting firms—put it up for sale. Others, who have a short-term need for some number-crunching, can bid for it. Enomaly takes a cut of between 10% and 30% depending on the size of the deal. But there is an important difference: SpotCloud is what Enomaly calls an “opaque market”, meaning that the firms offering capacity do not have to reveal their identity. Thus selling computing services for cheap on SpotCloud does not cannibalise regular offerings.
Equity markets to go up and vol to drop:S&P is now c. 1020 (up from 890 at year end, c. 15%) but traded down to 666 first. I’ve kept my individual portfolio holdings throughout (AAPL, AIRV, RMG, EWZ) but was stopped out of a leveraged long on S&P at c. 800 and did not get the trade back on. Didn’t play on VIX which has come down to c. 25 from 40 at the end of last year.
Selective Emerging Markets will outperform (in particular Brazil, India and Sub-Saharan Africa): Brazil iShares (EWZ) has outperformed S&P by about 50%, I held my long position but didn’t add to it as my limit orders were a bit too greedy. As for India and Africa, my preference was for private plays but if public markets are a proxy, directionally these seem to have done well also, with India outperforming S&P by c. 30%, whereas Africa it’s less clear.
Buy long dated calls on Oil: really angry on this one, my size was too small so my broker didn’t want the hassle of doing the trade for me. Was looking at $65 to $75 Dec 2010 calls. Even with big brokerage costs these are up 5-6x… Note to self, get new broker.
GBP will stop going down: I am structurally very long GBP so my trade here was not to hedge. So far so good as GBP is up c. 10% against the major crosses so far this year, having been even a bit higher a few weeks ago.
So, where do we go from here? I know it’s not very exciting, but I suspect we go mainly sideways in most asset markets between now and year end. If you are holding the positions above, I would continue to run them but tighten stops and look to take profits if S&P approaches 1100, Oil gets above $85 and GBP re-tests it’s August highs vs USD or EUR. Would be more patient or less nervous with positions in corporate bonds and Brazil; although both would probably suffer in a generalized market sell-off, I’d be more inclined to add on dips. Generally, I think it’s not a bad time to be raising cash again and sitting on the sidelines waiting for a better opportunity to come in: choppy sideways – which is more or less what I expect – is a very dangerous market to trade unless you are doing it full time (in which case it can be profitable and fun.) My biggest regret? Not buying AMZN when it traded below $50 like I swore I would. Have raised to $60 but not too hopeful. Otherwise I’m pretty happy with how my portfolio weathered the financial hurricane of ’08/09. Learning? Don’t overtrade: fastest way not only to lose money, but also your sanity.
(Self-)Report card: Predictions A, Trading C+, Overall B- Trading is always harder than predicting.
In the spring of 2005 I wrote the “screenplay” for AmazonBay and we launched DrKW Revolution on July 1 2005 – I still have the t-shirt to prove it. So I must admit I had to laugh when my old colleague Stu pointed me to the Morgan Stanley Matrix I nearly fell off my chair laughing: it was deja vu all over again…
Don’t get me wrong, it looks pretty useful and I completely endorse the vision. In fact I sort of have to given that it is exactly in line with the vision we had for Digital Markets at DrKW over 5 years ago! (Although not quite as comprehensive as far as I can tell…) But what I love most is that in terms of look and feel – the hexagons, the music, the video (but I can re-assure you I didn’t wear a tie or speak from a teleprompter!) – it is Son of Revolution. Amazing. Actually feel quite proud that we at least left an impact, even if it didn’t happen to be at Dresdner Kleinwort.
I just spent a few minutes digging around on the wayback machine but unfortunately couldn’t find any good links. Really too bad because the Flash intro page was very cool and would have loved to be able to look at it side-by-side with MS Matrix. (Any current Dresdner folks would be great if you could dig this code out of the archives if it still exists!) Fortunately, I did have an old marketing card brochure hanging around:
I’d be lying if I didn’t admit that I can’t help but feel a little proud seeing some of my vision start to come to life, especially at such a blue chip conservative firm like Morgan Stanley, but I would also be lying if I said I didn’t feel like screaming ‘I told you so’ to all the senior executives at DrKW who refused to stick their necks out and support what I was trying to do. Let’s just say I’m not surprised at how it all ultimately turned out there. Karma. The good thing is that this bad feeling is way more than offset by remembering all the truly exceptional people I got to work with while I was at DrKW and the support I received from so many of them especially since it wasn’t necessarily politically correct to do so. It meant and still means a lot to me. Anyhow, it would be cool if Hishaam Mufti-Bey, the guy behind MS Matrix would add us as a little historical footnote on his About Us page, as I imagine it won’t be long until all the old DrKW links have disappeared; it’s important to remember!
Just one final point though. What the hell is it with traders and black Bloomberg-looking web design??? Every bloody website I see focused on institutional capital markets customers seems to use this look. Get over it! It was fantastic for Mike (and rooted in a real engineering problem by the way) but when other people copy them, well… it just makes you all look dumb. Hire a designer. Do something original. Your content and you customers deserve it.
“The future is already here – it is just unevenly distributed.”
- William Gibson, Author
Update: Thanks to Martina for finding a slide version of the website stills / product look and feel…as you can see MS Matrix looks even more like DrKW Revolution than I remembered!
A few years ago Congressman Frank Wolf ranted in Congress that if UIGEA was not passed, people would be gambling in … (wait for it…) THEIR BATHROBES!!! Shocking I know. So many lives ruined. If they had only pulled on a t-shirt and a pair of jeans…
Anyhow, he voted for it:
In 2006, the Unlawful Internet Gambling Enforcement Act (UIGEA) was signed into law. This landmark legislation helps to cut off the flow of revenue to unlawful Internet gambling businesses. It outlaws receipt of checks, credit card charges, electronic funds transfers, and the like by such businesses. To do this, it enlists the assistance of banks, credit card issuers and other payment system participants to help stem the flow of gambling dollars.
This is about knowing all of the hard evidence about the byproducts of gambling – crime, corruption, family breakdown, suicide, bankruptcy – and not hearing our country’s leaders speaking out.
Where are the political leaders from both sides of the aisle? Religious leaders? Advocates for children, the poor and the elderly? Their silence is deafening.
It is time for Americans leaders to step forward and address the proliferation of gambling.
(Now replace gambling with banking and maybe we’re talking…UIBEA anyone? LOL)
I was also pleasantly surprised to learn from (an excellent and newly discovered blog) Zerobeta, that Delaware was thinking about legalizing sports gambling (picking up on an ESPN article):
The newly elected Markell, who has spent the past several weeks listening to proponents of gambling as well its opponents, is much more of a pragmatist than a betting revolutionary. He hasn’t been to Vegas in nearly 15 years and almost never hits the race track/casinos (called racinos) in his home state. But the way he sees it is this: Delaware already allows horse racing and slots. And with the state currently $700M in the hole, offering the Pats minus-six over the Jets when bettors come by to drop a nickel in the slots isn’t amoral. As he told me a couple months ago, “you can’t really be half-pregnant.”
How refreshing. Legalize. Regulate. Tax. The best way to address Mr. Wolf’s concerns, not prohibition. And for those of you who want to trade the probability of this outcome, head over here to InTrade(HT to Chuck for the pointer.)
(Disclaimer: As some of you may know, I am an investor in Betfair and so have an interest in a free and regulated US market (given the current legislation Betfair does not trade in the US in compliance with all federal and state regulations.) However I would hope that those who know me and even regular readers know that my views on the subject are not driven by this investment. Indeed I would say this investment was driven by my views.)
* tried but failed to find a video of a great comedy sketch (Monty Python?? not sure) where the Board of the Bank of England bets all the country’s reserves on the “1:15 at Cheltenham” and loses, very funny, if you’ve seen it and know where to find it please post in comments!
Kind of a silly thing to do after the year we’ve just finished. If I’m right it’s dumb luck and if I’m wrong, well I’m wrong and don’t look too clever… And for those of you looking for specific numerical targets on liquid tradeable instruments, you don’t need to read further as I’m not sure these are useful at the best of times and I’m quite sure that I’m not going to put my name on what essentially are lottery ticket numbers… Besides any trader worth their salt knows that path-dependency and trading strategy is very often more important than actually predicting where something is going. And if I had forgotten this, 2008 served as a violent reminder as almost all my main macros calls turned out to be big winners and yet on my trading account I ended the year (in November when I essentially gave up pretending I had the time to properly manage any market risk or positions) more or less flat, and my best estimation of my overall net worth was approximately flat to down c. 10% in GBP – not too shabby but much less flattering when considered in EUR or USD… So what were these calls in 2008? In no particular order:
Short (UK/US) Banks, winner but…(too timid, took profits too soon – head faked by mid-year rally)
Short Oil / Long Gold (mid-year), winner but…(put position on too big, too quickly @ ratio of just over 7, stopped out just before giant move to current ratio of c. 21..)
Long Brazil (Bovespa), loser… (looked brilliant for a few months then didn’t react to change in Oil market sentiment and hedge fund deleveraging post-Lehman)
Short GBP, winner but… (too timid, too early, tried to be too clever…couldn’t figure out what to short it against – USD, EUR, CHF all looked like crappy alternatives, kept getting stopped out by ridiculous volatility, and was too busy with work to get much of the big December move)
So what do I think 2009 will bring? Here are a few ideas with a (short) summary of my thinking behind each.
A recovery in institutional credit markets – smart money will start the long and difficult process of separating the wheat from the chaff: ie the bonds that deserve to be priced at 10 cents will decay into default and those that are instrinsically worth par will start moving back in that direction. In fact this has already started to happen (you can see this by looking for instance at the performance of the iBoxx investment grade corporate bond indices(you need to register to drill down into data) which are mostly up 5-10% since hitting lows in mid-October) although to make really interesting returns means sifting through individual securities and names. So for the first time in the last 10 years a corporate fixed income investment manager will actually be able to create “alpha” (as opposed to just leveraged beta masquerading as alpha…)
Equity markets go up from here (for example S&P500 @ 890), and volatility drops… I think the late November low might hold, although we could possibly see one more down trade in 2009 to lower lows, I think this is unlikely and think the market will grind mostly higher through the year. I could bore you for an hour about why I’m thinking this way but boiling it down to three points will probably frame the foundation of this view. (1) Price action: market should have gotten killed on Madoff news. It didn’t. First time we’ve seen positive price action in more than a year… (2) Wall of money: in this world of instant gratification and the constant shrill drone of a CNBC inspired financial media, when the various central bank and government interventions didn’t miraculously fix everything instantly, the downward spiral continued and often accelerated; despite everyone knowing these things take weeks and months (sometimes years) to have an effect. This time will not be different. (3) More buyers than sellers. Cash was king in 2008 because it was a very scarce commodity. It isn’t so much anymore and real returns from holding cash in 2009 will be negative. Besides – even though they will be far fewer in number – many many people will still be paid to invest and holding 50% or more in cash is not what they are paid to do.
Selective Emerging Markets will outperform. Basically the ‘de-coupling’ thesis has some merits and the baby was thrown out with the bath water in the viciousness of the last 6 months bear market. I like Brazil (so I should probably buy more…), (sub-saharan) Africa and (selectively) India. Of these three the only one you can play via public markets is Brazil; for the other two the opportunities I like are venture capital / private equity plays so not easy to access.
Better to be long Oil rather than short. Haven’t had time to check pricing but best way to play this might be to buy long-dated deep OTM calls. Volatility is at record highs so this might look stupid to start, but I think the world is exactly at the marginal supply/demand fulcrum and will be for several years. Economics 101 tells me that the price will therefore be subject to massive, violent swings as demand moves up and down with the cycle. Basically, while 2008 might (we hope!) be an outlier in terms of volatility for many markets, I’m not so sure this will be true of Oil.
GBP will stop going down. Not because the government or the economy has improved, but simply because relative to the other major economies it isn’t actually that much worse off and the shorts will get too smug and the bargain hunters will come out. Only problem is I’m not sure what level it will bounce off of…are we there already or do we go to 1.25 vs USD and 1.10 vs EUR as has been suggested to me by a friend? I’ll admit to this view perhaps being wishful thinking (see above) but have tried to guard against that and after being an extremely vocal GBP bear a year ago, I can’t believe that I’m now finding myself in the bull camp. This discomfort actually makes me feel better about my view.
The next Microsoft/Google/JPMorgan*/General Electric*/Ford* (*the originals) will be founded in the next 1-3 years. The emperor has no clothes. The existing paradigm is not just bankrupt, but has been proven so. The massive barriers of inertia and incumbency have been breached and it is only a matter of time before smart, creative, energetic entrepreneurs and innovators take advantage. Of course I’m talking my book here as we’ve set up our new business to help find, finance and advise these entrepreneurs and Amy and I hope and expect to find one or two future Gates/Edisons/Morgans… Indeed I’m pretty confident this will come true even if (especially if?) all the above views turn out to be wrong.
In any event, I hope I’m right. Obviously it will be a nice boost to my ego and probably help pay the school fees, but mainly I think it will make the world a bit nicer place, especially for the vast majority of people who had no part in the (inevitable) excesses that led to this economic cleansing and yet are suffering its consequences. And if I’m right about the last point – we won’t know for a decade or so – the world will also be a better place. But that’s for another post, another day.
Happy New Year. All the best for a healthy, successful and fulfilling 2009.
yoonew is the world’s first futures exchange for event tickets. We have created a dynamic marketplace that helps online consumers save money and time when buying and selling tickets. Our real-time trading platform gives fans, traders, and resellers a safe and transparent place to trade tickets.
We are passionate about leveling the playing field and creating a fair marketplace where everyone has equal access to tickets. Our team focuses on building new product features that will bring transparency to markets where pricing information is not universally available. We help customers make more informed purchasing decisions so they are confident that their purchase or sale concluded at a fair price.
I’m not 100% convinced that they’ve nailed it but it is certainly a very interesting step in the right direction in terms of introducing modern (and useful) markets technology into the historically moribund market for live event tickets. Essentially, they are selling call options on tickets to major sporting events. Moreover they have taken an original and clever approach by – at least initially – focusing on major sporting events (like the Super Bowl) where the terminal value of the underlying is different depending on the buyer. ie If “your” team gets through to the game, the tickets are of more value to you. Of course, with a properly functioning secondary market (irrespective of whether on yoonew’s upcoming secondary exchange or another market – StubHub, etc.) financially this should be irrelevant – the ‘market’ value of the tickets depends only on the clearing price of the event once the participants are known. (ie Super Bowl tickets on balance will be worth more if two teams with big, passionate fan bases are playing as opposed to two teams from smaller markets; NY v New England more valuable than Kansas City vs Detroit for example.) So a ‘rational’ trader would try to buy the cheapest options – not necessarily the option on his team, especially if you could re-sell the option before delivery. (I’m not sure this is allowed, if not it should be.) Nonetheless, the (marketing) focus on ‘real’ end buyers (people that hope to take delivery, rather than just make a financial profit) is a good angle as it plays to the psychology of ‘hedging’ rather than speculating and should add heterogeneity to their risk book.
Notwithstanding the ridiculous US laws proscribing trading on sporting outcomes, there would also potentially be very interesting arbitrage and hedging opportunities (for both yoonew as the market-maker and their customers) with trading sports risk. For example (using the same teams as above) going long New England and NY to make the Super Bowl to hedge the extra cost of delivering tickets to this pairing (vs a less valuable team pairing.) Or going long the team in the host city (which would also probably be more valuable on delivery if they ended up playing.) I’m not sure if they have any plans to offer markets on European (or global) events – it would have been great for the recent Rugby World Cup, imagine if England fans could have bought (what would have been) cheap options on the final in Paris – but if they did they could use Betfair to manage their price risk today.
Longer term, ideally you would hope that sports teams and leagues would embrace this kind of market to help manage their own pricing risk. Instead of just selling tickets (in the primary market), they could sell options on tickets and use secondary markets to dynamically hedge their risk. For a team that didn’t sell out systematically, it would be a good way to monetize potentially empty seats and even for teams that sold out perennially it would allow them to be more aggressive in finding the ‘true’ equilibrium clearing price for a given seat. For investors it would be another potential (uncorrelated) asset class to trade and invest in. I wonder what the implied volatility curve on the NY Giants season would look like? Gamma trading based on the weekly game results anyone? The question is do the owners and managers of these teams understand how this could work to everyone’s benefit or will they stick to the old model of static seat prices and unoptimized revenue management?
I hope yoonew succeeds and helps to develop a more enlightened and efficient market for tickets in live events. One to watch.