More on Economics & Investing
Cody Collins
3 years ago
The direction of the economy is as follows.
What quarterly bank earnings reveal
Big banks know the economy best. Unless we’re talking about a housing crisis in 2007…
Banks are crucial to the U.S. economy. The Fed, communities, and investments exchange money.
An economy depends on money flow. Banks' views on the economy can affect their decision-making.
Most large banks released quarterly earnings and forward guidance last week. Others were pessimistic about the future.
What Makes Banks Confident
Bank of America's profit decreased 30% year-over-year, but they're optimistic about the economy. Comparatively, they're bullish.
Who banks serve affects what they see. Bank of America supports customers.
They think consumers' future is bright. They believe this for many reasons.
The average customer has decent credit, unless the system is flawed. Bank of America's new credit card and mortgage borrowers averaged 771. New-car loan and home equity borrower averages were 791 and 797.
2008's housing crisis affected people with scores below 620.
Bank of America and the economy benefit from a robust consumer. Major problems can be avoided if individuals maintain spending.
Reasons Other Banks Are Less Confident
Spending requires income. Many companies, mostly in the computer industry, have announced they will slow or freeze hiring. Layoffs are frequently an indication of poor times ahead.
BOA is positive, but investment banks are bearish.
Jamie Dimon, CEO of JPMorgan, outlined various difficulties our economy could confront.
But geopolitical tension, high inflation, waning consumer confidence, the uncertainty about how high rates have to go and the never-before-seen quantitative tightening and their effects on global liquidity, combined with the war in Ukraine and its harmful effect on global energy and food prices are very likely to have negative consequences on the global economy sometime down the road.
That's more headwinds than tailwinds.
JPMorgan, which helps with mergers and IPOs, is less enthusiastic due to these concerns. Incoming headwinds signal drying liquidity, they say. Less business will be done.
Final Reflections
I don't think we're done. Yes, stocks are up 10% from a month ago. It's a long way from old highs.
I don't think the stock market is a strong economic indicator.
Many executives foresee a 2023 recession. According to the traditional definition, we may be in a recession when Q2 GDP statistics are released next week.
Regardless of criteria, I predict the economy will have a terrible year.
Weekly layoffs are announced. Inflation persists. Will prices return to 2020 levels if inflation cools? Perhaps. Still expensive energy. Ukraine's war has global repercussions.
I predict BOA's next quarter earnings won't be as bullish about the consumer's strength.
Ray Dalio
3 years ago
The latest “bubble indicator” readings.
As you know, I like to turn my intuition into decision rules (principles) that can be back-tested and automated to create a portfolio of alpha bets. I use one for bubbles. Having seen many bubbles in my 50+ years of investing, I described what makes a bubble and how to identify them in markets—not just stocks.
A bubble market has a high degree of the following:
- High prices compared to traditional values (e.g., by taking the present value of their cash flows for the duration of the asset and comparing it with their interest rates).
- Conditons incompatible with long-term growth (e.g., extrapolating past revenue and earnings growth rates late in the cycle).
- Many new and inexperienced buyers were drawn in by the perceived hot market.
- Broad bullish sentiment.
- Debt financing a large portion of purchases.
- Lots of forward and speculative purchases to profit from price rises (e.g., inventories that are more than needed, contracted forward purchases, etc.).
I use these criteria to assess all markets for bubbles. I have periodically shown you these for stocks and the stock market.
What Was Shown in January Versus Now
I will first describe the picture in words, then show it in charts, and compare it to the last update in January.
As of January, the bubble indicator showed that a) the US equity market was in a moderate bubble, but not an extreme one (ie., 70 percent of way toward the highest bubble, which occurred in the late 1990s and late 1920s), and b) the emerging tech companies (ie. As well, the unprecedented flood of liquidity post-COVID financed other bubbly behavior (e.g. SPACs, IPO boom, big pickup in options activity), making things bubbly. I showed which stocks were in bubbles and created an index of those stocks, which I call “bubble stocks.”
Those bubble stocks have popped. They fell by a third last year, while the S&P 500 remained flat. In light of these and other market developments, it is not necessarily true that now is a good time to buy emerging tech stocks.
The fact that they aren't at a bubble extreme doesn't mean they are safe or that it's a good time to get long. Our metrics still show that US stocks are overvalued. Once popped, bubbles tend to overcorrect to the downside rather than settle at “normal” prices.
The following charts paint the picture. The first shows the US equity market bubble gauge/indicator going back to 1900, currently at the 40% percentile. The charts also zoom in on the gauge in recent years, as well as the late 1920s and late 1990s bubbles (during both of these cases the gauge reached 100 percent ).
The chart below depicts the average bubble gauge for the most bubbly companies in 2020. Those readings are down significantly.
The charts below compare the performance of a basket of emerging tech bubble stocks to the S&P 500. Prices have fallen noticeably, giving up most of their post-COVID gains.
The following charts show the price action of the bubble slice today and in the 1920s and 1990s. These charts show the same market dynamics and two key indicators. These are just two examples of how a lot of debt financing stock ownership coupled with a tightening typically leads to a bubble popping.
Everything driving the bubbles in this market segment is classic—the same drivers that drove the 1920s bubble and the 1990s bubble. For instance, in the last couple months, it was how tightening can act to prick the bubble. Review this case study of the 1920s stock bubble (starting on page 49) from my book Principles for Navigating Big Debt Crises to grasp these dynamics.
The following charts show the components of the US stock market bubble gauge. Since this is a proprietary indicator, I will only show you some of the sub-aggregate readings and some indicators.
Each of these six influences is measured using a number of stats. This is how I approach the stock market. These gauges are combined into aggregate indices by security and then for the market as a whole. The table below shows the current readings of these US equity market indicators. It compares current conditions for US equities to historical conditions. These readings suggest that we’re out of a bubble.
1. How High Are Prices Relatively?
This price gauge for US equities is currently around the 50th percentile.
2. Is price reduction unsustainable?
This measure calculates the earnings growth rate required to outperform bonds. This is calculated by adding up the readings of individual securities. This indicator is currently near the 60th percentile for the overall market, higher than some of our other readings. Profit growth discounted in stocks remains high.
Even more so in the US software sector. Analysts' earnings growth expectations for this sector have slowed, but remain high historically. P/Es have reversed COVID gains but remain high historical.
3. How many new buyers (i.e., non-existing buyers) entered the market?
Expansion of new entrants is often indicative of a bubble. According to historical accounts, this was true in the 1990s equity bubble and the 1929 bubble (though our data for this and other gauges doesn't go back that far). A flood of new retail investors into popular stocks, which by other measures appeared to be in a bubble, pushed this gauge above the 90% mark in 2020. The pace of retail activity in the markets has recently slowed to pre-COVID levels.
4. How Broadly Bullish Is Sentiment?
The more people who have invested, the less resources they have to keep investing, and the more likely they are to sell. Market sentiment is now significantly negative.
5. Are Purchases Being Financed by High Leverage?
Leveraged purchases weaken the buying foundation and expose it to forced selling in a downturn. The leverage gauge, which considers option positions as a form of leverage, is now around the 50% mark.
6. To What Extent Have Buyers Made Exceptionally Extended Forward Purchases?
Looking at future purchases can help assess whether expectations have become overly optimistic. This indicator is particularly useful in commodity and real estate markets, where forward purchases are most obvious. In the equity markets, I look at indicators like capital expenditure, or how much businesses (and governments) invest in infrastructure, factories, etc. It reflects whether businesses are projecting future demand growth. Like other gauges, this one is at the 40th percentile.
What one does with it is a tactical choice. While the reversal has been significant, future earnings discounting remains high historically. In either case, bubbles tend to overcorrect (sell off more than the fundamentals suggest) rather than simply deflate. But I wanted to share these updated readings with you in light of recent market activity.
Quant Galore
3 years ago
I created BAW-IV Trading because I was short on money.
More retail traders means faster, more sophisticated, and more successful methods.
Tech specifications
Only requires a laptop and an internet connection.
We'll use OpenBB's research platform for data/analysis.
Pricing and execution on Options-Quant
Background
You don't need to know the arithmetic details to use this method.
Black-Scholes is a popular option pricing model. It's best for pricing European options. European options are only exercisable at expiration, unlike American options. American options are always exercisable.
American options carry a premium to cover for the risk of early exercise. The Black-Scholes model doesn't account for this premium, hence it can't price genuine, traded American options.
Barone-Adesi-Whaley (BAW) model. BAW modifies Black-Scholes. It accounts for exercise risk premium and stock dividends. It adds the option's early exercise value to the Black-Scholes value.
The trader need not know the formulaic derivations of this model.
https://ir.nctu.edu.tw/bitstream/11536/14182/1/000264318900005.pdf
Strategy
This strategy targets implied volatility. First, we'll locate liquid options that expire within 30 days and have minimal implied volatility.
After selecting the option that meets the requirements, we price it to get the BAW implied volatility (we choose BAW because it's a more accurate Black-Scholes model). If estimated implied volatility is larger than market volatility, we'll capture the spread.
(Calculated IV — Market IV) = (Profit)
Some approaches to target implied volatility are pricey and inaccessible to individual investors. The best and most cost-effective alternative is to acquire a straddle and delta hedge. This may sound terrifying and pricey, but as shown below, it's much less so.
The Trade
First, we want to find our ideal option, so we use OpenBB terminal to screen for options that:
Have an IV at least 5% lower than the 20-day historical IV
Are no more than 5% out-of-the-money
Expire in less than 30 days
We query:
stocks/options/screen/set low_IV/scr --export Output.csv
This uses the screener function to screen for options that satisfy the above criteria, which we specify in the low IV preset (more on custom presets here). It then saves the matching results to a csv(Excel) file for viewing and analysis.
Stick to liquid names like SPY, AAPL, and QQQ since getting out of a position is just as crucial as getting in. Smaller, illiquid names have higher inefficiencies, which could restrict total profits.
We calculate IV using the BAWbisection model (the bisection is a method of calculating IV, more can be found here.) We price the IV first.
According to the BAW model, implied volatility at this level should be priced at 26.90%. When re-pricing the put, IV is 24.34%, up 3%.
Now it's evident. We must purchase the straddle (long the call and long the put) assuming the computed implied volatility is more appropriate and efficient than the market's. We just want to speculate on volatility, not price fluctuations, thus we delta hedge.
The Fun Starts
We buy both options for $7.65. (x100 multiplier). Initial delta is 2. For every dollar the stock price swings up or down, our position value moves $2.
We want delta to be 0 to avoid price vulnerability. A delta of 0 suggests our position's value won't change from underlying price changes. Being delta-hedged allows us to profit/lose from implied volatility. Shorting 2 shares makes us delta-neutral.
That's delta hedging. (Share price * shares traded) = $330.7 to become delta-neutral. You may have noted that delta is not truly 0.00. This is common since delta-hedging means getting as near to 0 as feasible, since it is rare for deltas to align at 0.00.
Now we're vulnerable to changes in Vega (and Gamma, but given we're dynamically hedging, it's not a big risk), or implied volatility. We wanted to gamble that the position's IV would climb by at least 2%, so we'll maintain it delta-hedged and watch IV.
Because the underlying moves continually, the option's delta moves continuously. A trader can short/long 5 AAPL shares at most. Paper trading lets you practice delta-hedging. Being quick-footed will help with this tactic.
Profit-Closing
As expected, implied volatility rose. By 10 minutes before market closure, the call's implied vol rose to 27% and the put's to 24%. This allowed us to sell the call for $4.95 and the put for $4.35, creating a profit of $165.
You may pull historical data to see how this trade performed. Note the implied volatility and pricing in the final options chain for August 5, 2022 (the position date).
Final Thoughts
Congratulations, that was a doozy. To reiterate, we identified tickers prone to increased implied volatility by screening OpenBB's low IV setting. We double-checked the IV by plugging the price into Options-BAW Quant's model. When volatility was off, we bought a straddle and delta-hedged it. Finally, implied volatility returned to a normal level, and we profited on the spread.
The retail trading space is very quickly catching up to that of institutions. Commissions and fees used to kill this method, but now they cost less than $5. Watching momentum, technical analysis, and now quantitative strategies evolve is intriguing.
I'm not linked with these sites and receive no financial benefit from my writing.
Tell me how your experience goes and how I helped; I love success tales.
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Alex Mathers
3 years ago
12 habits of the zenith individuals I know
Calmness is a vital life skill.
It aids communication. It boosts creativity and performance.
I've studied calm people's habits for years. Commonalities:
Have mastered the art of self-humor.
Protectors take their job seriously, draining the room's energy.
They are fixated on positive pursuits like making cool things, building a strong physique, and having fun with others rather than on depressing influences like the news and gossip.
Every day, spend at least 20 minutes moving, whether it's walking, yoga, or lifting weights.
Discover ways to take pleasure in life's challenges.
Since perspective is malleable, they change their view.
Set your own needs first.
Stressed people neglect themselves and wonder why they struggle.
Prioritize self-care.
Don't ruin your life to please others.
Make something.
Calm people create more than react.
They love creating beautiful things—paintings, children, relationships, and projects.
Don’t hold their breath.
If you're stressed or angry, you may be surprised how much time you spend holding your breath and tightening your belly.
Release, breathe, and relax to find calm.
Stopped rushing.
Rushing is disadvantageous.
Calm people handle life better.
Are aware of their own dietary requirements.
They avoid junk food and eat foods that keep them healthy, happy, and calm.
Don’t take anything personally.
Stressed people control everything.
Self-conscious.
Calm people put others and their work first.
Keep their surroundings neat.
Maintaining an uplifting and clutter-free environment daily calms the mind.
Minimise negative people.
Calm people are ruthless with their boundaries and avoid negative and drama-prone people.
Gareth Willey
3 years ago
I've had these five apps on my phone for a long time.
TOP APPS
Who survives spring cleaning?
Relax. Notion is off-limits. This topic is popular.
(I wrote about it 2 years ago, before everyone else did.) So).
These apps are probably new to you. I hope you find a new phone app after reading this.
Outdooractive
ViewRanger is Google Maps for outdoor enthusiasts.
This app has been so important to me as a freedom-loving long-distance walker and hiker.
This app shows nearby trails and right-of-ways on top of an Open Street Map.
Helpful detail and data. Any route's distance,
You can download and follow tons of routes planned by app users.
This has helped me find new routes and places a fellow explorer has tried.
Free with non-intrusive ads. Years passed before I subscribed. Pro costs £2.23/month.
This app is for outdoor lovers.
Google Files
New phones come with bloatware. These rushed apps are frustrating.
We must replace these apps. 2017 was Google's year.
Files is a file manager. It's quick, innovative, and clean. They've given people what they want.
It's easy to organize files, clear space, and clear cache.
I recommend Gallery by Google as a gallery app alternative. It's quick and easy.
Trainline
App for trains, buses, and coaches.
I've used this app for years. It did the basics well when I first used it.
Since then, it's improved. It's constantly adding features to make traveling easier and less stressful.
Split-ticketing helps me save hundreds a year on train fares. This app is only available in the UK and Europe.
This service doesn't link to a third-party site. Their app handles everything.
Not all train and coach companies use this app. All the big names are there, though.
Here's more on the app.
Battlefield: Mobile
Play Store has 478,000 games. Few can turn my phone into a console.
Call of Duty Mobile and Asphalt 8/9 are examples.
Asphalt's loot boxes and ads make it unplayable. Call of Duty opens with a few ads. Close them to play without hassle.
This game uses all your phone's features to provide a high-quality, seamless experience. If my internet connection is good, I never experience lag or glitches.
The gameplay is energizing and intense, just like on consoles. Sometimes I'm too involved. I've thrown my phone in anger. I'm totally absorbed.
Customizability is my favorite. Since phones have limited screen space, we should only have the buttons we need, placed conveniently.
Size, opacity, and position are modifiable. Adjust audio, graphics, and textures. It's customizable.
This game has been on my phone for three years. It began well and has gotten better. When I think the creators can't do more, they do.
If you play, read my tips for winning a Battle Royale.
Lightroom
As a photographer, I believe your best camera is on you. The phone.
2017 was a big year for this app. I've tried many photo-editing apps since then. This always wins.
The app is dull. I've never seen better photo editing on a phone.
Adjusting settings and sliders doesn't damage or compress photos. It's detailed.
This is important for phone photos, which are lower quality than professional ones.
Some tools are behind a £4.49/month paywall. Adobe must charge a subscription fee instead of selling licenses. (I'm still bitter about Creative Cloud's price)
Snapseed is my pick. Lightroom is where I do basic editing before moving to Snapseed. Snapseed review:
These apps are great. They cover basic and complex editing needs while traveling.
Final Reflections
I hope you downloaded one of these. Share your favorite apps. These apps are scarce.
Bastian Hasslinger
3 years ago
Before 2021, most startups had excessive valuations. It is currently causing issues.
Higher startup valuations are often favorable for all parties. High valuations show a business's potential. New customers and talent are attracted. They earn respect.
Everyone benefits if a company's valuation rises.
Founders and investors have always been incentivized to overestimate a company's value.
Post-money valuations were inflated by 2021 market expectations and the valuation model's mechanisms.
Founders must understand both levers to handle a normalizing market.
2021, the year of miracles
2021 must've seemed miraculous to entrepreneurs, employees, and VCs. Valuations rose, and funding resumed after the first Covid-19 epidemic caution.
In 2021, VC investments increased from $335B to $643B. 518 new worldwide unicorns vs. 134 in 2020; 951 US IPOs vs. 431.
Things can change quickly, as 2020-21 showed.
Rising interest rates, geopolitical developments, and normalizing technology conditions drive down share prices and tech company market caps in 2022. Zoom, the poster-child of early lockdown success, is down 37% since 1st Jan.
Once-inflated valuations can become a problem in a normalizing market, especially for founders, employees, and early investors.
the reason why startups are always overvalued
To see why inflated valuations are a problem, consider one of its causes.
Private company values only fluctuate following a new investment round, unlike publicly-traded corporations. The startup's new value is calculated simply:
(Latest round share price) x (total number of company shares)
This is the industry standard Post-Money Valuation model.
Let’s illustrate how it works with an example. If a VC invests $10M for 1M shares (at $10/share), and the company has 10M shares after the round, its Post-Money Valuation is $100M (10/share x 10M shares).
This approach might seem like the most natural way to assess a business, but the model often unintentionally overstates the underlying value of the company even if the share price paid by the investor is fair. All shares aren't equal.
New investors in a corporation will always try to minimize their downside risk, or the amount they lose if things go wrong. New investors will try to negotiate better terms and pay a premium.
How the value of a struggling SpaceX increased
SpaceX's 2008 Series D is an example. Despite the financial crisis and unsuccessful rocket launches, the company's Post-Money Valuation was 36% higher after the investment round. Why?
Series D SpaceX shares were protected. In case of liquidation, Series D investors were guaranteed a 2x return before other shareholders.
Due to downside protection, investors were willing to pay a higher price for this new share class.
The Post-Money Valuation model overpriced SpaceX because it viewed all the shares as equal (they weren't).
Why entrepreneurs, workers, and early investors stand to lose the most
Post-Money Valuation is an effective and sufficient method for assessing a startup's valuation, despite not taking share class disparities into consideration.
In a robust market, where the firm valuation will certainly expand with the next fundraising round or exit, the inflated value is of little significance.
Fairness endures. If a corporation leaves at a greater valuation, each stakeholder will receive a proportional distribution. (i.e., 5% of a $100M corporation yields $5M).
SpaceX's inherent overvaluation was never a problem. Had it been sold for less than its Post-Money Valuation, some shareholders, including founders, staff, and early investors, would have seen their ownership drop.
The unforgiving world of 2022
In 2022, founders, employees, and investors who benefited from inflated values will face below-valuation exits and down-rounds.
For them, 2021 will be a curse, not a blessing.
Some tech giants are worried. Klarna's valuation fell from $45B (Oct 21) to $30B (Jun 22), Canvas from $40B to $27B, and GoPuffs from $17B to $8.3B.
Shazam and Blue Apron have to exit or IPO at a cheaper price. Premium share classes are protected, while others receive less. The same goes for bankrupts.
Those who continue at lower valuations will lose reputation and talent. When their value declines by half, generous employee stock options become less enticing, and their ability to return anything is questioned.
What can we infer about the present situation?
Such techniques to enhance your company's value or stop a normalizing market are fiction.
The current situation is a painful reminder for entrepreneurs and a crucial lesson for future firms.
The devastating market fall of the previous six months has taught us one thing:
Keep in mind that any valuation is speculative. Money Post A startup's valuation is a highly simplified approximation of its true value, particularly in the early phases when it lacks significant income or a cutting-edge product. It is merely a projection of the future and a hypothetical meter. Until it is achieved by an exit, a valuation is nothing more than a number on paper.
Assume the value of your company is lower than it was in the past. Your previous valuation might not be accurate now due to substantial changes in the startup financing markets. There is little reason to think that your company's value will remain the same given the 50%+ decline in many newly listed IT companies. Recognize how the market situation is changing and use caution.
Recognize the importance of the stake you hold. Each share class has a unique value that varies. Know the sort of share class you own and how additional contractual provisions affect the market value of your security. Frameworks have been provided by Metrick and Yasuda (Yale & UC) and Gornall and Strebulaev (Stanford) for comprehending the terms that affect investors' cash-flow rights upon withdrawal. As a result, you will be able to more accurately evaluate your firm and determine the worth of each share class.
Be wary of approving excessively protective share terms.
The trade-offs should be considered while negotiating subsequent rounds. Accepting punitive contractual terms could first seem like a smart option in order to uphold your inflated worth, but you should proceed with caution. Such provisions ALWAYS result in misaligned shareholders, with common shareholders (such as you and your staff) at the bottom of the list.