Monday, April 30, 2007

Tony Soprano, poster child for fast burn gamblers

Last night's new episode was called "Chasing It", and displayed Tony's seemingly out-of-control gambling penchant, which coincided with stress with his spouse, his financer, and ultimately in someone's death (don't want to spoil it).

I can't find an early post of mine, which advised folks here not to risk more than 4% of their allocated assets on any single event or contract series. If Tony only had read it. Sorry I can't find the link, but hopefully you've learned something from this.

As a risk manager (as opposed to a noise trader, speculator, or gambler), I don't mind taking other people's money, as they might be a little more irrational about risk than I am. But it doesn't serve the longterm liquidity of these prediction markets well to have people lose their money and interest forever. So remember, keep each play to 4% or less. The more you are a proven winner (a track record of profits doesn't lie), the more you can put at risk.

Race of the tortoise, baby.

Sunday, April 29, 2007

Is Randy Moss the tipping point?

The Patriots pretty much took this draft off, looking to build from next year's draft (or later ones). But once they were able to pick up Randy Moss, disgruntled to be in silver & black, the Patriots' 2008 Superbowl contract popped.

(Yes, I am long a few, and was able to take some profit on this move).

UPDATE: Considering Deion Branch is costing the Seahawks $8 mil this year (and $22 mil in the first 3 years of his $38 mil contract), having Randy Moss for $3-5 mil for just this season looks much nicer. That means the Patriots have $12 mil in cap space that they can allocate this season and next, plus the perceived upgrade from Branch to Moss this season. Win now, plus win next season.

Friday, April 27, 2007

Barack continues to gain on Hillary

Some interesting thoughts on Obama's edge because he is black, from John McWhorter at The Economist (hat tip Instapundit). I am long some Obama, Richardson, and Warner (the last position is underwater). An excerpt:

IT is reasonable to surmise that Barack Obama will be the next President.
Mr Obama has a once-in-a-lifetime charisma that Hillary Clinton could never approximate, and she also suffers from the handicap of not being black. For all of his other plusses, part of Mr Obama’s appeal lies in the fact that many whites feel that voting for a black presidential candidate would be Doing the Right Thing. Leon Wieseltier has been explicit about this; he is not unique.

Some object that white voters have often claimed to support black candidates only to refrain from actually pulling the lever for them. But does this unquestionably apply to the Obama case? Are all those swooning whites fighting their way into his appearances racists deep-down, chasing Mr Obama as a rock star but loth to vote for "one of those people" as a President? There are blacks, after all, who have designated Obama "the kind of black they’re comfortable with".

As for Republicans Mr Obama would be up against, assuming that Rudy Giuliani could not get the nomination because of his leftish background, I submit that Mitt Romney lacks the Element X to sway voters on the fence, and would only attract the party faithful. The same would be true of John McCain, looking and acting all of his 70 years. The bloom is off the rose.

It will be intriguing to see what a certain contingent makes of it if we finally have a black president. All rhetoric about America as an apartheid nation, racist to its core, will run up against the fact—which will ironically feel inconvenient to this contingent—that the man who wakes up every morning in the White House and flies on Air Force One is black.

Condoleezza Rice and Colin Powell have not really counted in this regard. Serving a Republican administration renders them to an extent "not really black" in the eyes of many, and neither devotes much effort to "identifying" with the black community. But Mr Obama would be a Democratic president, and with no war blood on his hands.

One person can, after all, be more culturally black than another one. We are trained to roll our eyes and say “What’s that all about?” when this is brought up. But if blackness is about nothing but having a certain amount of pigment, then we seem to have gone back to some assumptions that bring to mind sepia-toned photographs and words like miscegenation.

In an America with increasing numbers of biracials, it’s time to start this conversation, and a President Obama would be a useful kick off.

Thursday, April 26, 2007

FT reports fraud in the carbon offset market

Today's Financial Times (via Drudge):

■ Widespread instances of people and organisations buying worthless credits that do not yield any reductions in carbon emissions.

■ Industrial companies profiting from doing very little – or from gaining carbon credits on the basis of efficiency gains from which they have already benefited substantially.

■ Brokers providing services of questionable or no value.

■ A shortage of verification, making it difficult for buyers to assess the true value of carbon credits.

■ Companies and individuals being charged over the odds for the private purchase of European Union carbon permits that have plummeted in value because they do not result in emissions cuts.

Sure wish we had those global warming contracts to talk about.

Wednesday, April 25, 2007

Any interest in NFL Draft contracts?

I am suspecting not too much. The NFL Draft is really for die hards--quite unlike the interest in, say, March Madness or the Superbowl.

But after reading a great series by Tom Kluck over at ESPN Page 2 (he basically goes through 15 years of first round picks and determines boom or bust based on 5 healthy seasons of play), I had to suggest a First Round Draft Pick series of contracts to Tradesports.

Not holding my breath for this year. Hopefully some global warming contracts get listed, although I am wondering if there is a CFTC ban due to weather derivatives regulation.

My mayor is a dark horse for president?

I heard it from highly placed city official that Bloomberg could make a run. There has been some interest in the contract lately.

UPDATE: I bought 1 contract for 1.4. I am also long Rudy, Fred, Newt, Dick & Jeb. Those last 2 positions are underwater.

Tuesday, April 24, 2007

My friend Chris Masse alerts me to {drumroll} global warming contracts!

In Forbes:
UBS Investment Bank said it is launching the world's first global warming index based on weather futures contracts for 15 US cities traded on the Chicago Mercantile Exchange.

The contracts compare the average daily temperatures in 15 US cities against a given base, and will eventually be extended to include other major cities around the world.

UBS (nyse: UBS - news - people ) said the index, called the UBS-GWI, will allow investors most affected by the uncertainty of climate change to hedge their exposure to weather and to diversify their portfolios with an alternative asset class.

Here is my comment on Midas Oracle:

15 US Cities!?! I think West Texas Intermediate Crude is a better proxy for global crude prices (WSJ just published an article this week saying it’s not).

Thanks, but no thanks. I find the GISS to be a better proxy than 15 cities in North America. On their website is this brief on their data collection:

The Global Historical Climatology Network (GHCN-Monthly) data base contains historical temperature, precipitation, and pressure data for thousands of land stations worldwide. The period of record varies from station to station, with several thousand extending back to 1950 and several hundred being updated monthly via CLIMAT reports. The data are available without charge through NCDC’s anonymous FTP service.

Both historical and near-real-time GHCN data undergo rigorous quality assurance reviews. These reviews include preprocessing checks on source data, time series checks that identify spurious changes in the mean and variance, spatial comparisons that verify the accuracy of the climatological mean and the seasonal cycle, and neighbor checks that identify outliers from both a serial and a spatial perspective.

GHCN-Monthly is used operationally by NCDC to monitor long-term trends in temperature and precipitation. It has also been employed in several international climate assessments, including the Intergovernmental Panel on Climate Change 4th Assessment Report, the Arctic Climate Impact Assessment, and the “State of the Climate” report published annually by the Bulletin of the American Meteorological Society.

Monday, April 23, 2007

Cough, Cough, Wheeze, Wheeze: It's fodder like this that makes global warming contracts so promising

From Glenn Reynolds:
Laurie David, the producer of "An Inconvenient Truth" and global warming activist, told Texas A&M students to change their "individual behavior" in order to consume fewer resources and to help battle global warming. As an employee of Easterwood Airport, I would like to point out that Mrs. David flew to our campus in a luxurious private jet, which could be seen from 10 miles away due to the thick plume of smog it left in its wake. I am neither denying nor confirming the epidemic of global warming, I am simply pointing out that hypocrites such as Mrs. David don't care about the environment, only their own political agendas. This is proven time and again by these celebrities' and lobbyist's "do as I say, not as I do" attitude.
Even worse is David's chic but hypocritical environmentalism at her summer home in Martha's Vineyard. She was issued a "notice of apparent violations" for building a 26-foot-long barbecue station, stone-and-concrete bonfire pit, and outdoor theater on an environmentally sensitive patch of their 14-acre North Road property without the proper permits. They were also cited for tearing up protected vegetation to make way for a lush, sodded lawn, among other crimes against nature.

The commission has since ordered her to remove the offending structures and restore the area to its previous state. All these violations were allegedly done to prepare for a political fundraiser hosted by Robert F. Kennedy, Jr. (another faux Green). Alas, there's no such thing as cheap environmentalism on the Vineyard.

Laurie David has been labeled a "Gulfstream liberal" by Eric Alterman, himself a proud member of the Left and a regular columnist for the Nation. He recognizes that Ms. David's brand of environmentalism is nothing more than a facade, a distraction from the financially secure yet intellectually boring life of the fabulously wealthy. But this hobby has dire consequences for the rest of us.

You can read about Crow's touring carbon footprint here: 3 tractor trailers, 4 buses, 6 cars. Cough, cough, wheeze, wheeze, at least my grave is warmed.

The original story, via Washington Post (hat tip Drudge):
"I am floored by what I just experienced with Karl Rove," David reports. "I went over to him and said, 'I urge you to take a new look at global warming.' He went zero to 100 with me. . . . I've never had anyone be so rude."

Rove's version: "She came over to insult me and she succeeded."

Things got so hot that Crow stepped in to defuse the situation and then got into it with Rove herself. "You work for me," she told the presidential adviser, according to singed bystanders. "No," was his response. "I work for the American people."

News of the dust-up filtered quickly through the room. Some witnesses said David was very aggressive with Rove; a shaken Crow later said that Rove was "combative and unresponsive."

Jobs, jobs, jobs

A couple of interesting posts that continue to assuage recession fears and household uncertainties. First, the WSJ says this (subscription required):
This year the great jobs undercount has continued. An analysis by economists at First Trust Advisors in Chicago has found that from April 2006 through February 2007 (the latest revised numbers available), the federal government originally reported almost one-half million fewer

Americans working than actually were working. On average, the first monthly forecast for this period was 113,000 jobs; the second report from a month later counted 138,000 new jobs; and the final revision was 157,000 jobs. Whoops. So this year, one of every four new jobs flew below the government's statistical radar -- which counts as improvement, we guess.

What's the problem? Well, the Labor Department seems to be using old statistical techniques to measure the dynamics of the new economy. The government publishes two different job estimates. The one that gets big play in the media is the establishment or "payroll" survey -- which asks some 300,000 large employers about their hiring patterns. The second is the smaller household survey, which randomly calls people on the phone and asks whether the adults in the household are working.

For at least the last two years the household survey has been far more accurate. No one knows the precise reason. Former Department of Labor economist Diana Furchtgott-Roth suspects that the survey of big and established employers is failing to account for the huge increase in the number of Americans who are self-employed, contract workers, or work for start-up business ventures that are invisible to Washington.

"We know when Ford lays off 20,000 workers. We don't always detect in our sample the small start-ups, like Joe's Auto Parts, and other entrepreneurial enterprises that define the new economy," says Ms. Furchtgott-Roth. Robert Stein, senior economist at First Trust Advisors, agrees that Labor estimators seem to think "most Americans work in factories and punch time clocks."

These mistakes can have political and policy consequences. An official jobless rate that is higher than the real rate can lead Congress to spend more on jobless benefits, for example, or contribute to protectionist pressure against foreign goods. It can also influence close elections, because the media tend to play up jobs news. In retrospect, we now know that John Kerry's claims of a "jobless recovery" in 2004 were fiction. With the latest revisions, job growth in this expansion has been similar to the pace of the 1990s expansion.

..., the failure to detect nearly 1.5 million jobs -- the equivalent of ignoring every worker in North and South Dakota and Montana -- suggests there may be a problem in the government's statistical methods. And that provides an opportunity for politicians to create mischief and make policy blunders. America is working, even if the DOL's statistics don't always say so.

And from the clear and brilliant Steve Conover:
This chart shows the big picture: how the job churn compares to the total number of jobs in the private sector. Notice the growth trend in total jobs since 2003. The “creative destruction” process is working just as Schumpeter described sixty years ago. Net growth is the result.

Friday, April 20, 2007

Calm seas ahead

Recession sentiment still quite low:

Steve Conover does a great job of cutting through economic scatology. In his latest post, he takes on the inverted yield curve phobia:
Although inversion has historically signaled recession, other indicators are pointing toward sustained growth. In short, I’m still not in the interest-rate forecasting business. However, it is good to see the bellwether 10-year T-note holding reasonably steady, below 5%.

In his previous one, Steve quotes Alan Reynolds to fisk fiscal theorists (perhaps the most popular representative of this camp is Robert Rubin. I respect Rubin for his Wall Street talents, not his macroeconomics):
Fiscal theorists feel no obligation to accept any evidence as refutation of their theories, because fiscal theories can always be created or revised to explain anything that might happen. If the economy slumps, that is because budget deficits crowd out investment. If the economy booms, that is because budget deficits stimulate demand. If the dollar goes up, that is because budget deficits attract foreign investment. If the dollar goes down, that is because budget deficits create fears of inflation. If inflation goes up, that is because budget deficits are inflationary. If inflation goes down, that is because budget deficits are not large enough. The fiscalist answer is always the same; only the questions change.

Thursday, April 19, 2007

Taking on Steve Dubner, co-Freakonomics author and blogger

The Freakonomics Team of Stevens Levitt & Dubner are extraordinary. I had the great pleasure of seeing them live, at an offsite hosted by my employer last year.

Dubner is a fantastic writer. But I am not sure he checked in with his other half when it came to this recent post, on Robert Shiller's housing values, adjusted for inflationary effects, which basically tries to demonstrate a scary housing bubble since 1998, where housing has nearly doubled according to his index.

Here is my comment on that post, #17:

One thing that Shiller conveniently left out of this graph is a normalization for the increase of income and/or wealth since 1880. Real GDP per capita has jumped over 8 times* in the last 120 years. Applying that to the roller coaster would peg housing values to be 24% of real GDP per capita at the 1880 level.

Yes, we spend 2 times on housing what folks in 1880 did (forgetting, for a moment, that we have plumbing & sewage, electricity, heating, air conditioning, digital wiring, fireproofing, sump pumps …) in houses today. But we have 8 times the buying power. Ultimately, housing is deflationary to the consumer.


Wednesday, April 18, 2007

Chris Masse is losing his nerve when it comes the relevancy of prediction markets on complex questions

He asserts:

#1. The average temperature of the Planet Earth is difficult to get. Think of the difficulty to gather the data from the different points (Virginia, the North Pole, South Africa, the oceans, the French Riviera, the Canadian big lakes, Indonesia, etc.).

#2. The scientists don’t have a perfect global model, yet.

TAKEAWAY: I understand that many traders would believe in “global warming” and buy up such an event derivative, but where would they get advanced indicators on future temperatures?? Past data is not of help if you don’t know how to interpret them. You don’t just buy up a global warming event derivative just because temperatures have risen in the past and that you believe religiously in global warming.

to which I replied:

Uhh, Chris, people buy stuff all the time that is not good for them.

Look at lottery tickets–you put down a dollar to win 30 - 35 cents. First, the lottery masters keep a third of the collection for overhead and public financing. Then they payout the other two-thirds. Then they tax the two-thirds. And remember, that dollar was after-tax money.

People will buy this. If priced aggressively enough, I will sell it.

Our risk models are not perfect, either. Ever hear about LTCM or Amaranth? So don’t hide behind that shrubbery.

When things get difficult, that’s when prediction markets can inject some information. Sure, it won’t be perfect information. But, you and I agree, markets outperform polls when it comes to revealing the truth.

C'mon, Chris, grow another pair (of reasons).

Bmili's all grown up

Check out his new blog! Glad to hear that he will still be sharing his wisdom here as well.

Tuesday, April 17, 2007

My blog

I have started my own blog called Capitalism & Freedom. I will continue to post here as well.

I believe in global warming contracts, Chris Masse does not

Go visit my good friend over at Midas Oracle. Tell him what you think.

Graph courtesy of the Goddard Institute for Space Studies.

GOD.EXISTS, to be short or long?

Last November, in looking at Bryan Caplan's new book, Myth of the Rational Voter, I mentioned Pascal's Wager in the form of the GOD.EXISTS contract. Chris Masse picked up on it here, and we went a few rounds between us, Jason Ruspini, and Alex Forshaw.

Newsweek recently hosted a debate between Sam Harris, Atheist, and Rick Warren, Biblical Christian. Here is how it ends (again, with a form of Pascal's Wager):
WARREN: Can you have spirituality without a spirit?

HARRIS: You can feel yourself to be one with the universe.

WARREN: OK, then why can't you just take the next step? Because right now you're talking in extremely nonrational terms.

HARRIS: There's nothing irrational about it. You can close your eyes in meditation and lose the sense of your physical body, totally. Many people draw from that the metaphysical conclusion that "I'm just spirit, and I can transcend the body." That's not the only conclusion you have to draw from that experience, and I don't think it's the best conclusion.

WARREN: You're more spiritual than you think. You just don't want a boss. You don't want a God who tells you what to do.

HARRIS: I don't want to pretend to be certain about anything I'm not certain about.

Rick, last thoughts?
I believe in both faith and reason. The more we learn about God, the more we understand how magnificent this universe is. There is no contradiction to it. When I look at history, I would disagree with Sam: Christianity has done far more good than bad. Altruism comes out of knowing there is more than this life, that there is a sovereign God, that I am not God. We're both betting. He's betting his life that he's right. I'm betting my life that Jesus was not a liar. When we die, if he's right, I've lost nothing. If I'm right, he's lost everything. I'm not willing to make that gamble.

I am still a buyer of GOD.EXISTS (and SPX, too). The former requires more faith, the latter, more reason. In any case, there are sellers of both, and folks who are long one while short the other. How about you?

Monday, April 16, 2007

No housing bubble

according to Carl Steidtman (hat tip Felix Salmon). Here's what the US.RECESSION.07 contracts are looking like:

Sunday, April 15, 2007

Hurricane contracts? Yes!

The Category-3-or-higher by State contracts look interesting. There are Last Named contracts, too, although I'd better read up on hurricane naming conventions. They are listed under the Weather - Seasonal - Hurricane section.

Still, alas, no global warming contracts.

Tuesday, April 03, 2007

I'm up 145% in TS since March 1, but read the fine print

Thanks to NCAA basketball trading, which I found to be quite liquid over the last month, I was able to trade about 20 championship contracts as well as 2 of the 3 final four games. I never took a position greater than 50 of a single contract, and my margin was never over $1,000. But I think I could have traded 10 times the size without any market impact, given the observed flow.

The 145% is an annualized figure that I used since the March 1 TS/Intrade reorganization. The net return on the account, after fees but including unallocated capital, is 14%. I am not very active in TS--NCAA and golf majors comprise the bulk of my activity, although there is always some NFL and MLB mixed in there.

Now if only we could get the same kind of liquidity around some of the Intrade contracts. I have begged them for global warming contracts, as I think they would draw incredible interest, but to no avail (yet).