Typography

Jeremiah, the prophet of impending disaster. By Rembrandt, 1690. See full version . The 1929 analog model has resurfaced. The 1929 analog is a recurring visual meme, usually a chart, that periodically plagues financial markets. All versions of this meme invariably map the bobbing and weaving of the 1929 Dow Jones Industrial Average onto movements in the present Dow, with the inevitable conclusion being that we are, by analogy, on the verge of a repeat of the 1929 crash. The most recent reincarnation originates from noted market timer Tom DeMark . His claim has been amplified by newsletter writer Tom McClellan and irresponsibly blared all over the internet by Marketwatch (see here , here , here ). I produce the chart below: Source: Marketwatch I've been following various flareups of the 1929 analog for over a decade. They usually crop up in September, just before the anniversary date of the October 29 crash. Extended bull markets are particularly fertile ground for 1929 analog beh...

Tomorrow marks the twenty-sixth anniversary of the 1987 stock market crash. On October 19, 1987 the Dow Jones Industrial Average fell 22.6%, the largest one-day decline in stock market history. The best explanation for the decline, and the least well-known one, was put forth by economist Robert Shiller. This post gives a quick rundown of Shiller's work on understanding crash phenomena, in particular the famous 1987 event. Eugene Fama, who along with Shiller and Lars Hansen shared the Nobel Prize this week, had very different reaction to the event than Shiller. In an essay penned not long after the crash, Fama, a true believer in the efficient market hypothesis, did his best to square the event with theory. The crash, wrote Fama, has the look of an adjustment to a change in fundamental values. In this view, the market moved with breathtaking quickness to its new equilibrium, and its performance during this period of hyperactive trading is to be applauded. [Perspectives on October 1...

One of the ironies of the stock market is the emphasis on activity. Brokers, using terms such as "marketability" and "liquidity," sing the praises of companies with high share turnover . . . but investors should understand that what is good for the croupier is not good for the customer. A hyperactive stock market is the pick pocket of enterprise. - Buffett Our favorite holding period is forever - Buffett While Warren Buffett may not be fond of marketability , liquidity or short holding periods, the fact that stocks have moneyness—that they have varying degrees of liquidity—is vital to understanding stock prices. In this post I'll show why analysts can't ignore the liquidity factor when they try to evaluate whether today's S&P500 is over or undervalued. With equity markets setting new highs by the day, the chorus of fundamental analysts shrieking "overvalued" is deafening. These analysts often buttress their point by an appeal to some sort ...

The following quote is a great expression of the efficient market hypothesis : ...the bulk of the statistics which the fundamentalists study are past history, already out of date and sterile, because the market is not interested in the past or even in the present! It is constantly looking ahead, attempting to discount future developments, weighing and balancing all the estimates and guesses of hundreds of investors who look into the future from different points of view and through glasses of many different hues. In brief, the going price, as established by the market itself, comprehends all the fundamental information which the statistical analyst can hope to learn (plus some that is perhaps secret from him, known only to a few insiders) and much else besides of equal or even greater importance. So who wrote these words? Fama, Malkiel, or Samuelson? Funny enough, I've pulled this quote from The Technical Analysis of Stock Trends by Robert Edwards and John Magee, the so-called bibl...

The word "moneyness" is synonymous with liquidity-premium. Both refer to that portion of an item's value that is derived from an individual's ability to sell it in the future. I wrote about bitcoin's liquidity premium here , and here I talked about how QE affects the liquidity premium of the targeted asset. Since it happens so rarely, it's always fun to see the idea of liquidity premiums pop up in academic literature. I was recently reading an old interview with Thomas Sargent in which he describes himself as “a Harrison-Kreps-Keynesian.” Here is Harrison and Kreps's paper ( pdf ), and here is the money quote: We say that investors exhibit speculative behaviour if the right to resell a stock makes them willing to pay more for it than they would pay if obliged to hold it forever. This phenomenon will not occur in a world with one period remaining (as in the capital-asset-pricing model), in a world where all investors are identical, or in a world with compl...