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Sunday, May 27

27th May - Weekender: Trading & Markets

Weekend's reading package on Trading and Markets, happy hunting.
 

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Previously on MoreLiver's:

STOCK MARKETS
Above the noise: 20 US stocks to consider in volatile timesSaxo Bank
Quantitative analysis: stocks that correlate least to certain factors

European Stocks On Verge Of 50%-Off Greek Light SpecialZH
SocGen: Greek exit alone would drop European stocks by 10%, but with contagion even 50%

Go Your Own Way: Correlation Breakdown in the MarketMinyanville
A look at how correlations have been changing. Conclusion: US stocks are not a bad place to be, when everything else is even worse.

The Biggest Driver Of Equity Returns Since 1970BI
SocGen: Invest in high quality companies with sustainable dividends. Dividends are the most important component of total equity returns.

Dividend Yield Doesn’t Work, What Does? Three Key ConclusionsGreenbackd
…the stunning claim that dividend yield doesn’t predict future returns, but more complete measures of shareholder yield might hold some promise.

How To Beat Most Active Managers: A Performance Analysis of Fundamental Indexation With Different Price RatiosGreenbackd
Most investors, pro’s included, can’t beat the index. Therefore, buying an index fund is better than messing it up yourself or getting an active manager to mess it up for you. If you’re going to buy an index, you might as well buy the best one.

Global Shiller CAPEsWorld Beta
Data table: those Euro countries I’m getting ready to visit are getting cheap(er)…

The seeds of a new secular bull market are being sownAbnormal Returns
I noted the unusual fact that the dividend yield on the S&P 500 then exceeded the yield-to-maturity on the ten-year US Treasury note as it does now. This hadn’t happened in earnest since the 1950s. The question is why?

Here Is What The Real Fear Index Is SayingZH
Currently, implied correlation is rising rapidly - a worrying trend - and has broken back above 70% (a critical threshold from last September when capital market risk became epic)

Minimum Volatility: A New Approach to Equity InvestingiShares Blog
To me, the value of a relatively low-risk investment like a minimum volatility portfolio is not its low risk, but how its returns can compare with those of a capitalization-weighted equity portfolio, or a so-called market portfolio.

Do Cash-Adjusted P/E Ratios Work?Turnkey Analyst
I followed up with this comment and googled around a bit to find articles on the subject. As expected, there is a belief that cash-adjusted P/E ratios are important for stock performance. This certainly seems like a reasonable idea.

Advisor DisconnectAbove The Market
Schwab has issued the results of an interesting new survey examining the views of high net worth investors (those with at least $1 million in investable assets) and their advisors. Some particularly noteworthy findings follow.  Note the frequent disconnect between advisors and their clients.

UBS Morning Call – Cyclical Bull, Secular BearThe Big Picture

Goldman Sachs Very Important Short Positions For Hedge Funds: Q1 2012market folly

Goldman Sachs VIP List: Most Important Stocks To Hedge Funds: Q1 2012market folly

VALUE
The Superinvestors of Graham-and-Doddsville RevisitedGreebackd
compared the performance of a group of “true-blue, walk-the-walk value investors” (the “Goldfarb Ten”) and “a group of large cap growth funds” (the “Group of Fifteen”).

Searching for Rational Investors In a Perfect Storm: Value Investing Through 1999-2003Greenbackd

Nardin Baker on the low volatility anomaly: part twoAbnormal Returns
Part 1 here.

Calculating Value Portfolios – Why Details MatterTurnkey Analyst
both the book and price data used to form B/P and value portfolios are always between 6 to 18 months old… the standard method of constructing HML can be improved by using more timely price data.

TRADING
The Rules, Part XXXIIThe Aleph Blog
The recent case of JP Morgan’s hedging activities bring to light an observation that should be clear to all but isn’t.  Hedging only works when you are small relative to the markets in which you hedge.

Happy People Make Terrible TradersThe Psy-Fi Blog
People who are happy are more confident and expect to make more money by trading, and anticipate taking lower risks in doing so. This result ought to be enough to depress most people, but most people are optimistic and don’t depress easily. This is especially true if they make money on their random trades, because that makes them happier, more optimistic and more prone to trading.

There is a difference between a good trade and good tradingFactor
Many novice pedestrian traders focus on the next position. Consistently success traders focus on the process and care little about the outcome of the next trade. The distinction is enormous.

Should Stocks Trade in Increments of $.0001?Marginal Revolution
Chris Stucchio, a high-frequency trader, argues that the sub-penny rule, SEC Rule 612, “essentially acts as a price floor on liquidity – it is illegal to sell liquidity at a price lower than $0.01.” As a result, traders compete on speed (latency) rather than on price.

Compound Experience, Not Just InterestThe Reformed Broker
Start early – you have less to lose and a lot to learn.

Mutual Funds Promised Haven From SpeedstersWSJ
The group says it is seeking to protect fund managers by excluding so-called high-frequency trading firms, which use powerful computers to jump in and out of markets at lightning speeds.

HEDGE FUNDS
Five Questions: D. E. Shaw’s Peter BernardInstitutional Investor
Long before even some of the largest financial services firms put sophisticated risk mitigation programs into place, Peter Bernard, chief risk officer of the D.E. Shaw group, was blazing a trail at his firm with an innovative approach to analyzing what can go wrong.

May Hedge Funds Performance Update: Red Is BadZH

Book Review: The Alpha MastersThe Aleph Blog
The Alpha Masters: Review of Maneet Ahuja's Bookmarket folly
A must-read book on some of the top hedge fund managers in the game.

OTHER
The Big List of Behavioral BiasesThe Psy-Fi Blog
Ever-growing list of irrational or, at least, slightly odd behaviours in the sphere of investment

Banking Burnouts Blow Away Myths of Wall Street GlamourView / BB

Is Insider Trading Part of the Fabric?NYT
Ted Parmigiani, an analyst at the former Lehman Brothers, spent two and a half years giving the S.E.C. information about what he contended was insider trading at the firm. But the S.E.C. ultimately decided against filing a case.

good derivativesresearch puzzle
Sandor talked about what makes for a “good derivative.”  As befits his key role in the development of financial futures, his answer was straightforward:  “Transparent, regulated, and centrally cleared.”  And bad ones are “opaque, unregulated, and have insufficient capital” backing them up.

Derivatives need a priestMacro Business
The assumption is that the global financial markets are there to serve capital, not people (if it benefits people, fine, but that is after the fact). It is conceived as a giant piece of machinery whose behaviour can be successfully interpreted by those clever enough. Of course, it is an illusion. The machinery is impelled by people trying to interpret the machinery; that is why forecasts and predictions have such a poor track record.

UBS Pair Banned For Unauthorised TradingHITC
The Upper Tribunal has directed the Financial Services Authority (FSA) to fine ex-UBS professionals Sachin Karpe £1.25m and Laila Karan £75,000 and ban them both from performing any role in regulated financial services for failing to act with integrity and for not being fit and proper persons.

My Speech to the Finance GraduatesProject Syndicate
Robert J. Shiller: Beyond compensation, the next generation of finance professionals will be paid its truest rewards in the satisfaction that comes with the gains made in democratizing finance – extending its benefits into corners of society where they are most needed.

The Whiskey Breath of Wall Street: What the Invention of Bourbon Has to Do With Credit DerivativesMinyanville

Davis and Nairn, Templeton’s Way with Moneyreading the markets
Book review: Sir John Templeton was one of the most successful fund managers of the twentieth century. At his peak, during the two decades after his move from New York to the Bahamas in the late 1960s, he outperformed the market by 6% per annum. Over his career he outperformed by 3.7% per annum.

Blood in the WaterVanity Fair
The op-ed heard round the world—Greg Smith’s scathing New York Times attack on Goldman Sachs, his employer of nearly 12 years—dealt another blow to the firm’s reeling reputation. Now the questions are louder than ever: Will C.E.O. Lloyd Blankfein have to go? Who might succeed him? And does it matter?

What Gamblers and Weather Forecasters Can Teach Us About RiskSlate
An interview with the creator of the “risk quotient” intelligence scale.

101 ETF Lessons Every Financial Advisor Should LearnETFdb

Trading System Backtesters and UpdatesWorld Beta

The Costs of Active ManagementTurnkey Analyst
It is strange how in light of evidence, people continue to pay these outlandish performance fees in the hope that they will beat the market.

Shadow Banking by RepoWatch